The 12 Dos & Don'ts of Food Hall Leasing

Although the restaurant business is notorious for fads, the food hall has demonstrated that it’s more than just the flavor of the month. Like its cousin the mall food court, the food hall is a mix of retail eateries sharing space within a larger facility. The difference is that food halls offer not just fast food and shared seating but a curated, high-end “foodie” experience supplied by local farmers, artisanal vendors, gourmet chefs, restaurateurs, cooking supplies sellers, etc. The other big difference is that food halls don’t just accommodate traffic; they drive it—and not just in malls but also mixed-use, office, multifamily, and other non-retail properties. Here’s a look at the key leasing challenges you’ll face if you’re thinking of venturing into food halls.

How to Structure the Deal

The first thing the owner must consider is how to structure its food hall leasing operation. There are two basic approaches:

Direct leasing. Under this model, you manage the food hall and lease the units to the vendors. The advantage is that you retain maximum control over vendor selection and day-to-day management. The downside is that you need the experience, resources, and business savvy to perform these functions effectively.

Indirect leasing. The alternative approach is to hire a food hall management company to operate the food hall and curate the vendor mix (similar to how hotels hire a single company to coordinate the operation of multiple in-house restaurants within a facility). Under this model, your likely role is to approve—rather than draft and negotiate—the vendor leases.

Instead of leasing, you can license space to food hall vendors. The difference: A license gives the licensee a temporary, non-exclusive and revocable privilege to go on your premises for a certain purpose without conveying any title or interest in the property. By contrast, a lease conveys exclusive possession of the property for a specific period of time in return for rent payments. Leases provide for more stability, whereas licenses offer flexibility since they’re relatively easy and cheap to revoke. In this article, we’ll focus on leasing.

GET 12 LEASE PROTECTIONS

Typical food court and restaurant leases won’t work with food hall tenants. Here are 12 important dos and don’ts of leasing space for use as a food hall, as well as model lease language you can ask your attorney to adapt for your leases.

1. Provide for Short Terms

Keeping the vendor mix fresh is crucial to maintaining customer interest in food halls. Accordingly, leases should have short terms typically ranging from one week to one year, including seasonal offerings.

2. Get Right to Recapture and Relocate

To maintain the optimal vendor mix, you may want to weed out or at least relocate underperforming or poorly operated tenants. Easy revocability is one of the advantages of a license. But if you structure the deal as a lease, you should try to make underperformance a trigger for exercising broader recapture and relocation rights.

Model Lease Language

Landlord shall at all times have the right to determine the nature and extent of the Food Hall, and make such changes, rearrangements, additions, or subtractions from time to time which it deems, in its sole discretion, to be desirable and in the best interests of a significant number of persons using the Food Hall, or which are made as a result of any federal, state, or local environmental or other law, regulation, rule, guideline, judgment, or order. This right includes, but is not limited to, terminating the Lease or requiring the Tenant to relocate from the Premises to a different part of the Food Hall.  

3. Don’t Include Co-Tenancy Provisions

Because of the constant turnover and fluidity of the vendor mix, food hall leases should not include traditional co-tenancy provisions entitling tenants to rent breaks and other concessions if shopping center/building occupancy levels drop below a specific threshold.

4. Limit Tenant’s Use of Space

Require food hall tenants to use the space only to sell “carry-out” or ready-to-eat food and beverages (or related wares such as cookbooks or cooking supplies) in or near the common seating area. Require the tenant to seek your approval for additional uses.

Model Lease Language

Tenant shall use the Premises solely for the preparation, sale, and delivery of food and beverages to the public for “carry-out” or consumption in or adjacent to the common seating area that is made available for the non-exclusive use of customers and patrons of Food Hall tenants (“Permitted Use”). In the event Tenant desires to use the Premises for any purpose other than the Permitted Use (including selling an item or service outside the scope of the Permitted Use), Tenant must submit a request to Landlord. Landlord may, in its sole and absolute discretion, approve or deny such request. Any such decision shall be binding on Tenant.

5. List Impermissible Uses

You should also expressly ban uses that are illegal, immoral, disruptive, destructive, or harmful to the food hall or the center/building’s reputation, including (among others):

• Advertising smoking products;
• Holding a distress, fire, bankruptcy, liquidation, or going-out-of-business sale;
• Serving or selling alcohol without a proper license;
• Having pinball machines, videogames, or other amusement or recreation devices or equipment or any vending machines on the premises;
• Uses that create a nuisance, interfere with the rights of others, or cause the center/building’s insurance rates to go up; and
• Placing any loads on the floor, walls, or ceiling that endanger the structure or obstruct the sidewalk, passageways, stairways, or escalators, in front of, within, or adjacent to the center/building.

6. Don’t Grant Exclusives

The dynamic vendor mix of food halls makes temporary overlap in menu offerings all but impossible to avoid. Thus, the exclusive use provisions commonly used in restaurant and food court leases are ill-suited to food halls unless they’re strictly limited in scope.

7. Require Minimum Buildout Investment

Food hall tenants generally involve a relatively modest buildout because of the short lease terms and the landlord’s need to turn over and re-lease the property quickly after the tenant vacates. Even so, you should require tenants to make a minimum investment to refurbish and make the necessary improvements to the space before taking occupancy.

Model Lease Language

Prior to the Rent Commencement Date, Tenant, at Tenant’s sole cost and expense, shall refurbish, redecorate, and modernize the interiors and exteriors of the Premises, and otherwise complete the initial improvements necessary and appropriate to commence operations in the Premises, at a minimum cost of [specify costs] (the “Minimum Investment Amount.”). Within [specify] days after substantial completion of the Initial Improvements, Tenant shall provide Landlord an electronic PDF file and a hard copy set of as-built drawings and an affidavit, signed under penalty of perjury by both Tenant and Tenant’s general contractor, architect, or construction manager, stating the hard construction costs paid by Tenant to complete the Initial Improvements, together with copies of paid invoices and lien waivers substantiating the costs stated in the affidavit.

8. Set the Rent

In its report on the state of the food hall business, Cushman & Wakefield lists four basic retail rent models that are mostly commonly used in food hall leases:

Triple net (NNN) rents passing all expenses related to the space to tenants work well for not only food courts but also food halls to the extent they’re generally cheaper for tenants, with rents typically ranging from $15 to $200 per square foot, depending on geographic region, facility, and space.

Gross rent structures in which tenants pay a fixed rent regardless of the landlord’s expenses provide for higher rents but offer tenants greater certainty.

Rent-plus-percentage made up of a flat rate and percentage of gross sales (typically 10 percent) over a natural breakpoint have become increasingly popular for food halls but saddle tenants with the burden of reporting their sales.

Percentage rent based on a percentage of the tenant’s gross sales. Landlords can command higher percentage rent rates for food hall leases with rents typically ranging from 15 percent to 30 percent, according to Cushman & Wakefield. The downside is that percentage rent arrangements require accurate reporting and entail risks—for example, low monthly sales as a result of bad weather.

9. Provide for Trash Removal and Recycling

One of the biggest operational challenges of leasing to food hall tenants is controlling the trash they generate. Make sure the lease gives you control over waste collection and disposal arrangements and schedules while requiring the tenant to:

• Regularly collect and dispose of its trash in designated areas and containers;
• Comply with all shopping center/building recycling rules and procedures; and
• Pay all trash removal costs.

Model Lease Language

Tenant shall store its garbage, trash, debris, and other refuse in insect- and rat-proof containers in designated areas of the Premises, and remove the same frequently and regularly and, if directed by Landlord, by such means and methods and at such times and intervals as Landlord designates, all at Tenant’s sole cost and expense. Tenant may not place or leave, or permit to be placed or left, in or upon any part of the common areas or corridors adjacent to the Premises any garbage, debris, or refuse. Tenant shall comply with all rules and procedures established by Landlord for collecting, storing, and removing of recyclables in the Premises.

10. Provide for Maintaining Common Seating Areas

Like food courts, most food halls have common seating areas that need to be kept clean and inviting to customers. So, require tenants to clean, maintain, and police the seating area or establish your right to do it yourself as you see fit, within the costs passed along to the food hall tenants.

Model Lease Language

Landlord shall clean, maintain, repair, and police the Food Hall Seating Area during business hours and otherwise, at times and in a manner that Landlord deems appropriate and in the best interests of the Premises.

11. Provide for Crowd and Queue Control

Food halls tend to draw crowds and lines that can become noisy, unruly, and disruptive to other tenants and their customers. Although landlords are generally responsible for security in the common areas, you should also require food hall tenants to take measures to control their own customers.

Model Lease Language

Tenant shall maintain all queuing that occurs and all crowds that gather as a result of their use of the Premises in accordance with this Lease in an orderly fashion regardless of whether such queuing occurs and such crowds gather inside or outside the Premises or [Center/Building]. Tenant shall also follow Landlord’s directions regarding orderly queuing and crowd control.  

12. Provide for Common Marketing and Promotion

Food halls are typically marketed by the property owner, food hall operator, or a third-party marketer. In all scenarios, the lease should require food hall tenants to participate in and contribute to the costs of these collective marketing efforts and programs, such as ethnically based events like Cinco de Mayo festivals or 10 percent “happy hour” discounts.

Model Lease Language

Landlord or its representatives may, at its sole discretion, conduct advertising, promotional, and public relations programs for the general purpose of promoting the [Center/Building], the Food Hall and [Center/Building], or Food Hall businesses and tenants. Tenant shall participate in, cooperate in the implementation of, and contribute its share of the costs of all such advertising, promotional, and public relations programs and cause its store manager to attend program planning meetings. The obligation to participate includes, but is not limited to, adjusting the prices it charges in accordance with advertising, promotional, and public relations programs.