Commercial Leases for Restaurants and Franchise Operations

by Mark E. Dall, Noble Carter Hatfield

Overview

A lawyer can substantially increase a client’s chance of success in a restaurant lease—or at least minimize the risk of failure—in two ways: first, by reviewing and negotiating the lease of the restaurant’s premises, identifying and evaluating the risks and negotiating changes, and secondly, through the careful review and negotiation of the franchise agreement if the client pursues that option.

Franchised operations are popular for people investing in restaurants as this purchase can give restaurateurs a head start in terms of brand recognition, marketing, consistency of food quality, and service. However, signing a boilerplate franchise agreement is not necessarily a recipe for success. It is essential that the franchise agreement and the commercial lease harmonize so that adherence to one document does not cause a violation with the other.

Among the topics covered in the restaurant section are:

• Computation of rental charges and rent offsets
• Operational issues: hours, go dark provisions, definition of premises, and more
• Construction
• The emerging category of "grocerants"

This section concludes with an extensive array of restaurant leasing clauses, from CPI increases and rent stabilization clauses to language for premises issues such as lighting, valet parking, and more.

Chapters focused on working with a restaurant franchise consider issues related to the client, choosing a landlord and location, management, architect and general contractor, he franchisor and the franchise agreement, and the lender.

Product Details

ISBN-13:	9781641051514
Publisher:	American Bar Association
Publication date:	04/07/2021
Pages:	208
Product dimensions:	7.00(w) x 10.00(h) x (d)

About the Author

Mark Dall has been practicing law since 1978. He is admitted to practice in both Indiana and Arizona. Since 1984, he has worked as a real estate attorney for the largest shopping center developer in the United States, with a focus on retail and restaurant leasing. He has made presentations on commercial leasing to various continuing legal educations programs, including the International Conference on Shopping Centers, the National Business Institute, and the Indiana Continuing Legal Education Forum. He is the coauthor of Commercial Retail Leases and Outlot Purchases, which was first published by the American Bar Association in 2014.

Noble Hatfield has been practicing law for over 25 years and is admitted to practice in Indiana. He obtained his JD in 1992 from Indiana UniversitySchool of Law – Indianapolis (cum laude) and his Master of Science in Industrial Administration (MBA-style) degree from Krannert Graduate School of Business at Purdue Universityin 1976. As an attorney, he continues to focus on strip center development and leasing and has extensive enclosed mall background. Prior to earning his JD, he worked in the printing field, including owning his own business. Currently, he is co-owner of 3 fast-casual franchised restaurants. He is the coauthor of Commercial Retail Leases and Outlot Purchases, which was published by the American Bar Association in 2014.

Table of Contents

Preface vii

About the Authors ix

Part 1 Restaurants 1

Chapter 1 Computation of Rental Charges and Rent Offsets 3

Base Rent 3

Percentage Rent 5

Ancillary Lease Charges 9

Utilities and HVAC Charges 10

Unique Charges for Pad Deals 12

Rent Abatements, Offsets, and Termination Clauses 13

Co-Tenancy 19

Chapter 2 Operational Issues for Restaurants 25

Defining the Use 25

Hours of Operation 30

Go Dark Provisions 32

Definition of Premises 37

Patios, Sampling, and Food Courts 38

Radius Clauses 41

Exclusives 44

Chapter 3 Construction Issues for Restaurants 51

Condition of Premises 51

Due Diligence 57

Title and Survey 62

Plan Approval by Landlord 63

Completion Date for Tenant's Work 66

Construction Allowances 69

Repairs and Maintenance of the Premises 72

Surrender of the Premises 76

Chapter 4 Exhibits for Restaurants Leases 79

Access and Visibility 79

Protected Zones 80

Parking 82

Staging, Loading, Trash, Storage, and Temporary Areas 85

Chapter 5 The Emergence of Grocerants 89

Appendix Restaurant Leasing Clauses 91

Computation of Rental Charges and Rent Offsets 91

CPI Increases 91

Rent Stabilization Clause 91

Fair Market Rental Value 92

Gross Sales Exclusions 95

Historical Tip Percentage 95

Sales Tax on Rents 96

Fixed CAM Charge 96

Landlord Right to Redistribute Utilities 97

Check Meter 97

Direct Metering of Utilities 98

Separate Tax Parcel 98

Ring Road Maintenance Fee 99

Self-Help 100

Rent Abatement for Non-Payment of Construction Allowance 100

Opening Co-Tenancy 100

Operating Co-Tenancy 101

Operational Issues for Restaurants 102

Sample Use Clause 102

National Chain Use Clause 102

Minimum Hours of Operation 104

Go Dark Provision 104

Patio Area 104

Sampling 106

Exclusive Use 107

Construction 109

As-is Condition 109

Description of Shell Condition 110

Vanilla Box Condition 112

Article II-Tenant's Work at Tenant's Expense 114

Pad Deal 115

Definitions 116

Conditions Precedent 116

Completion Date 121

Cash Allowance 121

Free Rent Allowance 124

Exhibits for Restaurant Leases 125

Access, Visibility, and Protected Zones 125

To-Go Parking 125

Late Lighting 126

Valet Parking 126

Staging Area 126

Trash Area 128

The Emergence of Grocerants 128

Grocerant Use Clause 128

Food Hail Use Clause 129

Part 2 Franchises 131

Chapter 6 Your Client 133

Chapter 7 Choosing a Landlord and Location 135

Examples 139

Example A: Assignment to a Franchisor 139

Example B: Assignment to a Franchisee 140

Example C: Franchisor's Right to Inspect the Premises 140

Example D: De-identification Clauses 141

Chapter 8 Experienced Manager 143

Employment Agreement 146

Recitals 146

Chapter 9 Architect and General Contractor 155

Construction Contract 161

Exhibit "A-1" 167

Exhibit "A-2" 169

Exhibit "B" 170

Chapter 10 The Franchisor and the Franchise Agreement 171

Simple Rider: Rider to Lease Agreement 176

Complex Rider: Rider to Lease 179

Recitals 179

Agreement 179

Chapter 11 The Lender 183

Part Two Conclusion 188

Index 191