Negotiating and Drafting Restaurant...
Transcript of Negotiating and Drafting Restaurant...
Negotiating and Drafting Restaurant Leases Tenant Improvements, Operational Issues, Franchises, Good Guy Guaranties and More
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Negotiating & Drafting Restaurant Leases
Maximizing Tenant Positions, Tenant Improvements, Franchises, Transfers,
Good Guy Guaranties & More
Presented by Jeffrey A. Margolis, Esq.
The Margolis Law Firm, New York City
NOTE: These materials are based on materials prepared by the author in connection with a presentation at the ICSC (International Council of Shopping Centers) Law Conference, Phoenix, AZ, October, 2015.
© 2016-18, Jeffrey A. Margolis
Basic Matrix Overview
Type of
Premises/tenant
Retail-dry Retail-dry major
Retail-dry Mom- and-pop
Rest. National
Rest. Destination
Rest. local
local
Shopping center—mall
Shopping center—mall—food court
Shopping center-strip
Shopping center-- out parcel (pad site)
Shopping center out parcel—big box tenant
Urban—hi-rise office/residential
Urban—low rise office/residential
+landmark status issues
Type of
restaurants/
cuisines
Sit-down
white
table
cloth-
Fine
dining
Popular
priced—
Family
Dining
Café-
Bistro-
Pub-
Coffee
House
Fast
food
Buffet-
Cafeteria
Ethnic Fast
Casual
Food
Court-
Food
Hall
Snack
bar
Pop-
up
Food
Truck
French, Italian
Chinese, etc.
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A Basic Guide to Special Lease Provisions LL = Landlord T=Tenant TS= SC Tenants SC=Shopping Center
Issue LL
Point of
View
T Point of View Typical compromises/notes
Lease
Commencement
Date
Fixturing &
Permitting Period
Rent
Commencement
Date
“Drop dead” date
Need lead time to
do work, coordinate
construction—
inventory—staffing –
opening promotion
and advertising
considerations
Opening conditions
satisfaction of co-tenancy requirements
grand opening (all stores to open simultaneously) considerations
T: black-out dates (don’t want to open off season, or with
insufficient time to max seasonal sales)
“drop dead” date if L cannot deliver premises, as required, by a
date certain, T can cancel.
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Issue LL
Point of View
T Point of View Typical compromises/notes
Fixed Rent When does rent commence?
Conditions precedent: LL has completed LL’s work, T work
completed
free rent periods
co-tenancy requirements
Percentage rent—
“gross sales”
defined
Broad definition of
gross sales, on
and off premises
Limit—add
exceptions and
exclusions
Shopping centers context:
T pays a % of sales above a certain amount (called the “break-point”)
Calculation of “natural” break-point:
divide fixed rent by an agreed %, T then pays that % of sales above the
breakpoint $ amount
Example:
base rent = $100,000
% = 3%
“natural breakpoint is $100,000 divided by 3% = $3,333,333
so T will pay 3% of gross sales above $3,333,333
typical % rents:
retail 3-6%
food court 8-10%
fine dining 6-8%
theater: 12-15%
exclusions
wide ranging list: comps (customer returns), credit card fees, taxes,
refunds and similar
See Sample Tenant Rider A, ATTACHED
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Issue LL
Point of
View
T Point of
View
Typical compromises/notes
Use Limit –highly
define—draft
with specificity
“…and for no
other purpose”
Open-flexible-allow
for evolution of
concept-change
Common law principle allows T to do anything it wants, provided
legal
lease language must define and restrict this common law
right
provide for evolution of T’s retail or rest. concept—ancillary
(incidental) uses such as sale of merchandise
also, allow for later flexibility if T seeks to assign/sublet
allow T to operate “substantially as other T stores are
operating from time to time”
Exclusives
(T will have the
exclusive right
to sell certain
lines and or
items, in the
SC)
Resists Insist Focus on categories, rather than specific products
note issue of what land is burdened by the exclusive: entire
shopping center? Adjacent land owned by same or related
entities
Practice Pointer: cover portions of the property that may be
later sold by LL, add provision re covenants in deed
acknowledging exclusive or record memorandum of lease
Continuous
Operations
(mandatory
days and hours
that T is
required to be
open, fully
stocked and
operating its
premises)
T must operate,
not simply pay
rent and go dark
—a “dark” store
diminishes foot
traffic in the mall
and is bad PR—
also means no
% rent—try to
keep all the Ts
in line
Major T: will not
agree to a
continuous
operation clause
Relates to other clauses such as exclusives granted to T
if T not operating , then T should not have benefit of the
exclusive
right to “go dark” under certain circumstances—see below
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Issue LL
Point of
View
T Point of
View
Typical compromises/notes
Go-dark
(T has right to
stop operating
under defined
circumstances)
No Yes If co-tenancy covenants are not being met , or location is not
working for T: go dark—or continue operating and pay % rent only
tie in with assignment and subletting and % rent (clearly if T
not operating, LL receives no % rent)
right to close (go dark) for repairs, renovations, inventory (not
deemed to violate use or continuous operation clauses)
Kick-out
(T has right to
terminate lease
under defined
circumstances)
No Need if biz is failing Use measurable parameters such as % decrease in sales
if T rolls out many stores in street locations, T may want to
cheery pick as to which underperforming stores to close (e.g.
a Starbucks that saturates an urban commercial district)
Co-tenancy
(T’s obligations
are subject to
the opening/
operating of
other Ts in the
SC)
Resist
Landlord will say
no penalty for
co-tenancy
“default” as in
“don’t blame me,
I’m trying my
best to keep this
Center fully
leased. If there’s
a closing, it’s not
my fault.”
Needed to assure
flow of
customers—also
relate to opening
requirements
T: I need anchor X
to be open and
operating, or a
remedy if less than
a specified % of in
line Ts are open
and operating
LL may also insist on a sales % decline test, with T getting relief
only if it can objectively establish a loss
allow T to pay % rent only
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Issue LL
Point of View
T Point of View Typical compromises/notes
Radius restrictions
(T is prohibited
from operating
other stores within
a defined
geographic area)
Yes—limit
competing venues
Resist-- Involves uses which are “similar or competing” with proposed T use
Narrow geographically
Limit to the shopping center or a few miles
More important where you have a destination restaurant (rare in
urban leasing setting)
CAM charges
(reimbursement to
LL of “expenses”
incurred in
common area
maintenance)
Broadly defined
“Any and all costs
and expenses of
any kind incurred
by LL in
connection with
the management
and operation of
the SCs ‘common
areas’ ”
--as to audits limit
time frame, scope
--Also disqualify
any auditor whose
fee are on a
contingent basis
Important carve-outs
T: carve out capital
costs
T: audit rights as to
ll’s books and
records
L to pay cost of t’s
audit if discrepancy
of x% or more
Try to avoid certain overreaching by LL
Examples
Leasing agent’s office party and entertaining prospective ts!
Definition of “pro-rata” share
GLA of T space over GLA of entire shopping center
Use “leasable” not “leased” as denominator
Circumscribe what is included in the “common areas”
T: deduct: repairs under warranty, work, brokerage, legal fees,
incurred for other T spaces
Also deduct leasing costs, lease enforcement costs, cost of new
buildings and costs reimbursed by insurance
See Sample Tenant Rider B, ATTACHED
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Issue LL
Point of View
T Point of
View
Typical compromises/notes
Signage
LL wants approval
rights
Vital to T’s
visibility
Get LL approval in advance of lease signing
make sure signage rights are assignable to transferee
Access LL to conduct repairs etc during non-business hours
Alterations No LL consent required for non-structural repairs—
try for a certain $ amount that will not require LL consent--& amount
should increase per CPI to account for inflation
Promotional
Fund
(SC Ts
contribute to
fund for
seasonal and
state holiday
promotions)
Already spending
substantial sums
in its own
advertising,
marketing and
promotion
programs
Limit to proven marketing and advertising programs
try for an annual cap
Trade name T must operate
under Trade name
Right to change if
changing name of
other stores in
chain
Provide for right to use different name esp if lease is assigned or there
is a sublet
Option to renew Better to have a five year term with two options
some insurance if business is failing
if the lease has a shell corp. T, then T will want to max. years on
initial term and option
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Issue LL
Point of View
T Point of View Typical compromises/notes
Description of premises Legal descriptions, esp in a multilevel complex must be
carefully thought out
Use diagrams (3D can be helpful)
Detail basement space for example
Are patios included? Impact on rent/sales—also
check zoning codes as to permitted outdoor area seating
permits
roof as to signage, satellite and cable TV
installations
exterior walls as to advertising signage
define exactly what’s included
Use Type of restaurant—
menu limits--
liquor as limited % of
sales
tie Rest use to items
on menu attached as
an exhibit to lease
Try to be descriptive,
rather than specific—
types of food rather
than specific menu
items
flexibility
Use--zoning-liquor license In Manhattan, for
example, LL: no
contingency for liquor
license unless
inherent problem with
the premises/building
Esp. as to premises being “licensable” for liquor, beer,
wine sales
the key to Rest. profitability
ties in with numerous other clauses esp. rent
commencement date (very costly to be required to
operate without liquor license in place)
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Issue LL
Point of View
T Point of View Typical compromises/notes
Use—incidental purposes
limit
flexibility
Sale of merchandise
ancillary sales of novelties and wearables
Exclusive SC can only support so many pizza parlors and taco
stands (distinguish from retail clothiers)
Rent Commencement
Date
Permitting Period
Rent starts at some
earliest possible date
(x days after Landlord
has completed any
LL’s work, for
example)
No rent unless Rest. is
fully operational-
including liquor license
avoid fixed dates
need to cover
contingencies
Sliding date to account for domino effect of certain key
tenants not opening and consequences thereof
with long Rest. construction schedules, free rent
period will end prior to completion of construction
Urban LLs may not give liquor license contingency
clause
Initial Construction
Alterations
Much more extensive for a restaurant than a retail T
many more issues
greater investment/lead time
special issues where space is in a landmarked
building
Lease Commencement
Date—
Fixturing permitting period
Rent Commencement Date
If urban/street
location: all on T’s
shoulders
Construction issues
possibility of LL delay
time for T to obtain licenses required
also co-tenancy opening /rent commencement
date issues
a restaurant lease might provide no required
opening until adjacent movie theater has opened
Utilities
Electric
Sewer
Water
Gas
sprinkler
Host of special issues
for Rest. T
In shopping center context
LL usually provides
investigate adequacy (engineer can develop specs
as to min capacity required for restaurant’s
operations; also architect can perform field
inspection to determine exactly what
capacity/availability exists)
location, availability, quantity
separate meters preferable
Venting—getting to the roof
can be major headache/expense, esp in multilevel
SC or hi rise
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Issue LL
Point of View
T Point of View Typical compromises/notes
Trade fixtures All become LL’s
property
Valuable
improvements
paid for by T
T should have right to
sell or remove
Define broadly, include all kitchen equipment
note no LL’s lien in NY, but contra other
jurisdictions
provide for right of T to finance trade fixtures, with
LL to cooperate with financing arrangement
Signage Restaurant signage on wall of SC
pylon type signs
make sure rights are transferable
Assignment/sublet Limit consent Flexible on consent Typically: consent not to be unreasonably withheld or
delayed, with numerous LL carve outs limiting T’s ability
to transfer
at minimum, make sure right to assign/sublet in
connection with mergers, acquisitions, affiliated
entities or to franchisee without LL’s consent—also
provide LL to agree to give franchisor notice of
default, etc.
in urban leasing scenario, the more desirable the
location, the more LL has the negotiating edge
SEE detailed discussion in accompanying article,
“The Savvy Restaurant Lawyer…”
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Issue LL
Point of View
T Point of View Typical compromises/notes
Continuous operation-
special operating hours
Special hours
need flexibility
-no breakfast
or a 24 hour
restaurant
if multistore chain, T
wants all to have
same days and hours
of operation
If multi-store chain—T wants to make sure LL agrees to
keep parking areas lit during restaurant’s special hours—
also adjacent common areas
Trash removal
Main issue is storage pending removal (location of
storage facility)
proper containerization of wet trash, etc.
refrigerated garbage storage to stop odors
Odors/venting Major issue for urban
(hi-rise commercial
building) LL
Venting
getting to the roof
can be major headache/expense, esp in multilevel
SC or hi rise
Grease traps/waterproof
floor membranes
Yes Yes Specs as to installation and cleaning
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Issue LL
Point of View
T Point of View Typical compromises/notes
Ingress/egress/deliveries Concern about
appearances
esp in a high-end
mall, or office
building—
unsightly to have food
deliveries/removal –
aesthetics--
Frequent, daily, odd
hours
don’t restrict
timing/frequency
Different rules for restaurants with street level access
and for restaurants with access only from interior of
building
Alterations Liberal In light of potential concept change—min consent not to
be unreasonably withheld or delayed
Ownership of
improvements
Becomes LL’s
property upon
installation
T retains ownership T will need to retain ownership if it hopes to sell rest
business
make sure trade fixtures are clearly carved out
Co-tenancy As to Anchors
Open?
What if an anchor closes? As to % of other in line
Ts—need min % of same open and operating
Some special emphasis for restaurant T where, for
example, having movie theater open and operating
is essential to T’s biz
if co-tenancy criteria not met, T remedies:
convert over to % rent only--
go dark-- terminate lease
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Issue LL
Point of View
T Point of View Typical compromises/notes
Parking In free standing
suburban location
(pad), need rep from
LL that parking
allocations meet
municipal codes
Never too much
successful restaurant is a parking hog
typical SC ratios are inadequate and there will be
spill-over parking issues to deal with, for ex. after-
regular mall hours lighting issues
Insurance T to cover any
increase in premiums
due to its occupancy
Rest. is special—
acknowledge that
Typically a live kitchen operation presents an increased
risk of fire and water hazards
Radius Really necessary? Typically only needed if Rest. is a
“destination” Rest.
—who cares if another Chick-Fil-A opens in the food
court in a nearby SC
Roof rights Starbucks et al providing wi-fi
rest Ts, esp sports bar concept, need TV
antenna/dish on roof
End of term Bar, vents, hoods, partitions, etc.
major installations—bottom line: it’s very expensive to
remove everything including the kitchen sink
SAMPLE Tenant Riders A. Gross sales
There shall be excluded from “gross sales”:
1. Intercompany transfers of merchandise
2. Miscellaneous sales such as cigarettes, candy
3. Returns to shippers or manufacturers
4. Sales of trade fixtures which are not a part of Tenant's stock-in-trade and not sold in the regular course of Tenant's business
5. Cash or credit refunds or credit sales not collected, on transactions included in Gross Sales previously reported by Tenant, but not exceeding the selling price of merchandise returned by or credited to the purchaser and accepted by Tenant
6. The amount of any City, County, State or Federal sales tax, luxury tax, or excise tax on sales, if the tax is added to the selling price and separately stated and actually paid to the taxing authority by Tenant, provided, however, that no franchise or capital stock tax and no income or similar tax based upon income, profits, or Gross Sales as such shall be deducted from Gross Sales in any event
7. Uncollectible accounts, but if later collected, said accounts shall be included in Gross Sales
8. Meals served to employees
9. Meals provided by way of promotions
10. The costs to Tenant for the use of credit cards
11. Cigar, cigarette, tobacco, candy, gum or other miscellaneous sales and/or sales from vending or service machines
12. (For restaurants) sales from apparel
13. (For restaurants) proceeds from video or similar games
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B. Common Area Maintenance--CAM Exclusions
The following shall not be included in the calculation of common area maintenance (CAM):
1. Costs attributable to repair or replacement of items under warranty
2. Costs of alterations, decorations and the like performed in individuals tenant’s spaces
3. Cost of any new buildings
4. Cost of removal or remediation of hazardous substances
5. Cost of repair for which landlord is reimbursed by insurance
6. Reserves
7. Any item of repair or replacement which by standard accounting practice is required to be capitalized
8. Any expense for which landlord receives condemnation proceeds
9. Structural repairs of roof and others
10. Mortgage principal and interest payments
11. Financing costs
12. Ground rent and related costs
13. Costs reimbursed by tenants
14. Costs reimbursed by insurance
15. Costs reimbursed by government authorities such as in the case of condemnation
16. Special services billed to specific tenants.
17. Legal fees related to leasing or enforcing other tenant's leases
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B. Common Area Maintenance--CAM Exclusions, continued
18. Artwork in, or on any part of, the building
19. Off-site management personnel and overhead
20. Operation of any services or amenities for which landlord collects a fee or charge
21. Any remedy of construction defects
22. Costs incurred in leasing tenants’ space and retaining existing tenants, including brokerage commissions
23. Fines or penalties incurred due to violations by landlord of any governmental laws and regulations
24. Costs incurred due to violations by landlord of any of the terms of any leases or other agreements affecting the
shopping center
25. Salary and benefits of personnel above level of shopping center manager
26. Management fees in excess of three percent of gross receipts
27. Depreciation and amortization of the entire building and any equipment used in connection therewith
28. Cost of complying with government regulations, including, but not limited to, any environmental mandates, e.g.,
costs of correcting any code violations existing as of the date of lease
29. Interest or penalties resulting from late payments by landlord
30. Advertising costs
31. Brokerage leasing commissions
32. Tenant alterations and alterations made to leasable space
33. Capital improvements other than those primarily for the purpose of reducing operating costs
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Dirt Dictionary: F is for Franchise Leasing I. Franchise statistics
II. The players
A. Landlord: stability and uninterrupted rental stream
1. Minimal changes to lease
2. Careful review of franchise agreement
a. Security
b. Termination rights of franchisor and franchisee
c. Franchisor rider (more below)
3. Well known franchisors
a. Reputation/brand identity
b. Marketing support to franchisee?
c. Financial support to franchisee?
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B. Tenant/Franchisee: flexibility within long-term franchise relationship
1. Location and retention of location (other tenants)
2. Cooperative advertising with franchisor
3. Right to terminate either agreement
a. Termination consequences
b. Reimbursement for improvements C. Franchisor
1. Franchise-related lease a. Use clauses b. Landlord notifications c. Right of consent over material changes to lease
2. Franchise rider a. Exclusivity; complementary radius circle
b. Branding accommodations i. Changes to franchise format ii. Debranding
3. Renovation/remodel rights; right to close 23
‘S’ is for SNDA Subordination, Non-Disturbance and Attornment I. SNDA defined
A. Mortgaged leased property A. Default of LL mortgage: Lease subordinates to lender B. Foreclosure of LL property: Lender’s right to cancel
leases
II. SNDA – Lender perspective A. Major T with rent below market – termination right
exercised to renegotiate terms B. Terms favorable to lender:
1. Lender not liable for acts or omissions of prior, foreclosed LL
2. Lender not subject to offsets or defenses in T’s favor 3. Lender not bound by lease
amendments/modifications made w/o Lender consent
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II. SNDA – Lender perspective, continued B. Terms favorable to lender, continued
4. Shift underwriting risk to T 5. Lender not bound by prepaid rent, beyond current 5. Collateral issues for T counsel to protect: security deposit, premise improvement and rent concessions LL promised
III. SNDA – T perspective A. T is not responsible for acts/omissions of foreclosed LL B. Lender is subject to offsets/defense in T’s favor C. Lender not bound by lease amendments/modifications, but only where material impact on LL’s rights & remedies 1. Provision – consent not “unreasonably withheld, delayed conditioned D. Ensure T’s security deposit forfeited/reduced only for cause E. T improvement allowance or LL’s work promised – Options: 1. Remove provision from SNDA 2. If pre-foreclosure, LL posts bond or escrow to meet promises 3. LL gives T right of offset against rent due in future F. Casualty insurance proceeds – provision that lease language prevails
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Good Guy Guaranty (Who wants to be known as a bad guy, anyways?)
Old days: general (full) guaranty, payment and performance and collection
morphed into the good guy guaranty, which motivates the troubled Tenant
to be a “good guy” by promptly vacating and surrendering possession
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The basic “good guy”
“Ok, four months security deposit and we’ll need the ‘standard’
good guy from Joe.”
Q: Who and what is the “standard” “good-guy” ? A: It depends.
The “good guy” a form of limited guaranty designed to assure the
Landlord a dependable cash flow
“and we’ll add payment and performance”
Through the completion of certain negotiated limitations: Get the
space back to Landlord vacant, clean and with all amounts due
paid by Tenant up to expiration/surrender.
27 27
“Good guy” continued Why the “good guy” ?
Hybrid nature
Appeals to the Landlord by motivating the Tenant to vacate and avoid
protracted L&T litigation
The space can be shown to a new Tenants, thus limiting the Landlord’s
losses
In response to inherent limitations of security deposits and general
guarantees:
Do not prevent the Tenant from engaging in drawn out litigation
No true incentive for Tenants to vacate asap once they determine it
is not economical for them to stay in the space
28 28
How does a Landlord protect himself after a significant financial investment?
The amount and degree of security
Scope
Payment
Performance\\broom clean
Conditional requirements under the lease could mean removing initial
alterations
Restoring the premises
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“Good guy” continued
29
Origin of the “Good Guy” Guaranty
The “Blue Meanie” Tenant that stayed on without paying rent
Basics:
Defined: a limited guaranty covering rent and performance of Tenant’s
obligations thru the date Tenant surrenders the premises vacant, broom clean
(in the condition required by the lease), with the keys also turned over to
Landlord’s agent. Upon surrender guarantor's liability ends.
“Bad guy” is a Tenant/guarantor who refused to be a good-guy.
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What makes “Good Guy” unique?
Guarantor can control his liability
Liability ceases to accrue when Tenant has vacated and surrendered in
accordance with guaranty
Good Guy Tenant defined: A Tenant who vacates rather than stays in
possession without paying rent and the principal who has guaranteed
his company's lease
It’s really two good guys (Tenant and guarantor)
31 31
Evolution of the Good Guy
Ever increasing requirements and restrictions
Scope of liability
Fixed rent
Fixed rent, operating expenses and taxes
32 32
“Good guy” continued
As the market goes up and down negotiating positions change
As today’s economy is booming Landlords have more leverage, which
leads to imposing more conditions on the due exercise of the good
guy.
33 33
Relationship between Good Guy and Tenant
The good guy guarantee is not a clause in the lease, but rather a distinct
agreement
The defaulting Tenant receives no benefit
Typically the security deposit is taken by the Landlord (post-surrender)
so no credit is given to the guarantor
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Should you wish to discuss any of the above- or anything else of interest- feel free to call.
Jeff Margolis The Margolis Law Firm 11 East 44th Street, Suite 1505 New York, NY 10017 212-490-0900 212-490-0700 (fax) [email protected] www.margolislawfirm.com
Thanks for attending the seminar, and Good Luck!
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