Include 15 Protections in Food Court Lease
If you're like many owners of shopping centers or office building complexes, you're eager to find new ways to generate income. One solution may be to add a food court—that is, a special area dedicated to small restaurant tenants selling a diverse selection of carry-out or ready-to-eat food customers can consume in a common seating area. At shopping centers, a food court not only can generate additional income for you but can help extend the length of shopping excursions; and when customers stay longer at a center, they're more likely to buy more. It's also a desirable amenity for tenants of an office complex.
While a food court has its good points, it also carries certain risks. For instance, if you don't carefully control the food court tenants' use and operations, the food court may look unattractive and dirty, and serve low-quality food. Instead of helping your center or office complex, it could create a negative impression for customers, potential tenants, and existing tenants, warns Chicago attorney Carole L. Pechi. Plus, maintaining a well-run and clean food court can be expensive if you must shoulder the cost yourself, she adds.
To reduce these risks, we'll give you a checklist of 15 protections to include in your lease with a food court tenant. The first 11 protections concern the use and operation of the food court. The remaining four protections concern the costs of maintaining the food court. We'll give you Model Lease Language that you can use in your leases to give yourself these protections. CLLI0091
11 Use and Operation Protections
Put the following 11 protections into each lease with a food court tenant to control the tenant's use and operations at its spaces. But first, make sure the lease clearly says the tenant is renting space in the food court and then defines “food court,” advises Pechi. For example, Pechi suggests that the definition say: “As used herein, the term ‘Food Court’ means the section of the [Center/Complex] cross hatched on Exhibit [insert #] attached hereto which is designated for small restaurant operations, including the Premises, the premises of other small restaurant tenants, the seating areas, and the maintenance and service areas exclusively serving such section.”
Limit Tenant's Use of Space
Require the food court tenant to use its space only as a “carry-out” or ready-to-eat food establishment whose food the customers can eat only off-premises or in the food court's seating area, says Pechi. You don't want the food court tenant operating as a full service, sit-down restaurant. And make it clear that if you allow the tenant to serve alcoholic beverages (and the tenant gets all the necessary permits and licenses to do so), the alcohol must be consumed at the food court, not in other areas of the center, she adds.
Model Lease Language
Tenant shall use the Premises solely for the preparation, sale, and delivery of food to the public for “carry-out” or for consumption in the common seating area adjacent to the Premises which is made available for the non-exclusive use of customers and patrons of Food Court tenants (“Food Court Seating Area”). In the event that Landlord permits Tenant to serve alcoholic beverages and Tenant obtains all applicable governmental approvals, permits, and licenses to do so, Tenant shall be permitted to serve alcohol for consumption in the Food Court Seating Area only.
Limit Which Food Items Tenants Can Sell
Limit the food items that each food court tenant can sell from its space, says Pechi. This is important because food court customers like having a variety of foods to choose from. Without any limits, the food court tenants' offerings might overlap too much. Or a food court tenant might begin selling food items or a cuisine that violates the exclusive you gave to a full service restaurant elsewhere in the center or office complex.
To effectively limit which food items a food court tenant can sell, review its proposed menu and then, if the menu is acceptable, attach it to the lease. Make the food court tenant agree in the lease to sell only those items listed on the attached menu, advises Pechi. And require the food court tenant to maintain the “highest standards” in the quality and preparation of those menu items, she adds. Otherwise, it might set its standards too low and alienate customers, she warns.
Model Lease Language
Tenant agrees to sell only those food items specifically enumerated on the menu attached hereto as Exhibit [insert #] (the “Menu”) and to maintain the highest standards in quality and preparation of such food items.
Say Tenant Defaults if It Drops Menu Item Without Your Consent
If the food court tenant decides without your consent to stop selling any of the foods on the menu attached to its lease (and doesn't offer a substitute that you've approved), say in the lease that it will have caused an “event of default,” says Pechi. Then, you can resort to your lease remedies—such as terminating the lease.
Why is this drastic measure necessary? Because if a food court tenant doesn't sell all of its menu items—for instance, if the sole pizzeria stops selling pizza in favor of pasta dishes—it could end up severely hurting your food court's success, Pechi warns.
Model Lease Language
Any failure to sell any of the items on the Menu or any substitution for or addition to such Menu without Landlord's specific written approval shall be deemed an Event of Default pursuant to Clause [insert #] of this Lease, and in addition to any other rights or remedies pursuant to this Lease, Landlord shall specifically have the right to terminate this Lease if Tenant violates this Paragraph.
Require Tenant's Employees to Wear Uniforms
To keep the food court looking professional, have food court tenants require their employees to wear uniforms and to be well-groomed, says Pechi. Poorly dressed and badly groomed employees could give customers a bad impression of your food court. Get the right to approve the uniforms, she says. But let each food court tenant make its own arrangements with its employees about buying the uniforms, she adds.
How do you police the requirement that food court employees always wear their uniforms while on duty? Get the right to have the tenant require an employee who doesn't cooperate to change into uniform or leave the food court, says Pechi.
Model Lease Language
a. Tenant's employees shall at all times be required to present a clean and well-groomed appearance. Tenant's employees shall be required to wear uniforms, the color and style of which are to be subject to Landlord's prior, written approval. Tenant may make such arrangement with its own employees as it deems appropriate regarding the purchase and maintenance of standard uniforms.
b. Tenant shall require the standard uniform to be worn by all of its employees at all times while on duty in the Premises. Landlord may, at any time, direct Tenant to require any of its employees not so attired to immediately conform to these requirements or leave the Food Court.
Require Use of Disposable Goods and Utensils
Make sure that the food court tenant offers only paper or plastic goods and utensils with its food, says Pechi. Paper and plastic are easier to clean up and less hazardous than china or glassware if they break, she explains. Plus they can be recycled. So get the right to specify what kind of paper and plastic goods and utensils the food court tenants can use, since those goods and utensils vary in quality and cost, she adds. You may also want the right to use some kind of uniform design on the goods used—such as your center's or office complex's name or logo, says Pechi.
Model Lease Language
a. For the purpose of serving food and beverages to the public, Tenant agrees to use only disposable plastic or paper goods and utensils, including, but not limited to, cups, wrap materials, plates, trays, boats, straws, bags, napkins, spoons, forks, knives, stir sticks, and the like. Tenant also agrees to use only disposable plastic and paper goods of the type, size, material, and color approved by Landlord.
b. Landlord shall have the right to develop a uniform design for all such disposable plastic or paper goods as may be required in the operation of the Food Court and/or Food Court Seating Area.
Practical Pointer: A savvy tenant may argue that it shouldn't have to buy plastic and paper goods with your approved design, or buy them only from you, especially if it can find those goods elsewhere for less. That's a fair argument, says Pechi. Consider permitting the food court tenant to buy those goods from its own supplier, as long as they meet your design requirements, she advises.
Limit Tenant's Use of Master Systems
Limit the food court tenant's use of the food court's “master systems” so that they don't become overloaded, says Pechi. The master systems include all mechanical, electrical, venting, drainage, and grease trap systems in the food court, she explains. Each food court tenant will want to connect to those master systems—but their capacity may be limited. For instance, the master systems may only have enough capacity to permit a food court tenant to warm food or use a convection oven instead of a full stove or standard oven.
Address the food court tenant's use of the master systems in a construction exhibit that's then attached to the lease, Pechi suggests. Among other things, the construction exhibit should list how many volts the tenant can use, indicate whether gas will be supplied to the tenant's space, and discuss the size and location of all other utilities, she says.
Require Regular Trash Removal
To keep insects and rodents from becoming a problem, require the food court tenant to regularly collect and remove its trash from its space and to use special trash containers, says Pechi. Keep the right to set the schedule for trash removal. And make it clear that the food court tenants will pay all trash removal costs, she says.
Model Lease Language
Tenant shall store its garbage, trash, and other refuse in rat-proof and insect-proof containers inside 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 are designated by Landlord, all at Tenant's sole cost and expense.
Get Right to Clean and Maintain Seating Area
Properly cleaning and maintaining the food court's seating area is vital, not only to reduce hazards and pest infestations but to make the food court a more inviting location for potential customers. To ensure proper cleaning and maintenance, give yourself the right to clean and maintain—as well as police and repair—the food court's seating area, in a manner that you find appropriate, advises Pechi.
Model Lease Language
Landlord shall clean, police, repair, and maintain the Food Court Seating Area during business hours and otherwise, in a manner deemed by Landlord to be appropriate and in the best interests of the [Center/Office Complex].
Get Ownership of Furniture, Fixtures, and Equipment in Seating Area
Typically, you'll be responsible for supplying furniture, fixtures, and equipment in the food court's seating area, notes Pechi. This will probably include tables, chairs, lighting and decorative fixtures, vacuums, and mops, she says. Each food court tenant will be responsible for supplying furniture, fixtures, and equipment only for its space. To avoid potential ownership disputes, clarify that you—not the food court tenant—own all of the furniture, fixtures, and equipment in the food court's seating area, she says.
Model Lease Language
Landlord shall furnish and install the following property in the Food Court Seating Area: tables, chairs, accessories, floor coverings, lighting fixtures, decorative and permanent fixtures, ceilings, and equipment. Landlord shall be the sole owner of such property.
Get Right to Change Food Court
Get the right to change the size and nature of the food court, says Pechi. This is important because you may be required to increase or shrink the food court, or make other changes, to comply with customer demand or federal, state, or local laws, she explains.
Model Lease Language
Landlord shall at all times have the right and privilege of determining the nature and extent of the Food Court, and making such changes, rearrangements, additions, or reductions therein and thereto from time to time which in its opinion are deemed to be desirable and in the best interests of a significant number of the persons using the Food Court, or which are made as a result of any federal, state, or local environmental or other law, rule, regulation, guideline, judgment, or order.
Get Right to Change Food Court's Seating Area
Even though you'll have the right to change the food court, Pechi advises specifying that you also have the right to change the size, shape, or location of the food court's seating area and the amount of equipment and property located in that area. This will help you avoid disputes with food court tenants if you decide to relocate, enlarge, or reduce the seating area, she adds.
Model Lease Language
Landlord shall have the right to make changes from time to time in the size, shape, and/or location of the Food Court Seating Area and in the number, type and style of any or all aspects of the facilities, equipment and other property therein.
Practical Pointer: For even more control over the food court's look, set specific design criteria for the food court tenants' storefronts and signage, says Pechi. To ensure that your criteria are met, you may want to build the storefronts and supply the signage yourself—and charge the food court tenants for your costs, she says.
Four Maintenance Cost Protections
To properly pass through to the food court tenants the costs of maintaining, operating, and promoting a food court, include these four protections:
Charge Food Court Maintenance Costs
Require each food court tenant to pay a share of “food court maintenance costs,” says Pechi. Food court maintenance costs are separate amounts you incur in addition to your center's CAM costs or your office complex's operating expenses. They include the costs of operating, maintaining, repairing, cleaning, and securing the food court's seating area, and promoting the food court, plus insurance premiums, salaries for security personnel, capital improvements to the food court's seating area, and salaries and other expenses for administrative staff to keep track of all of these costs, Pechi explains.
Model Lease Language
a. All Food Court Maintenance Costs (as hereinafter defined) incurred by Landlord for services in excess of the level of services provided and paid for as part of the Landlord's [CAM Costs/Operating Expenses] shall be charged to the Food Court tenants and prorated in a manner set forth herein.
b. As used herein, the term “Food Court Maintenance Costs” means all sums incurred by Landlord in connection with the operation, policing, maintenance, and repair of the Food Court including, but not limited to, the costs and expenses of:
(i) Cost of all supplies and materials used in the operation, maintenance, repair, and cleaning of the Food Court Seating Area;
(ii) Cost of busing and janitorial services for the Food Court Seating Area;
(iii) Cost of all management, maintenance, and service agreements for the Food Court Seating Area and the equipment and machinery used therein, including, without limitation, alarm service, security service, window cleaning, and elevator and escalator maintenance;
(iv) Cost of operating, maintaining, and repairing the mechanical, electrical, heating, ventilating, and air conditioning systems, and other items;
(v) Cost of maintenance, repair, and depreciation of all machinery and equipment used in the operation and maintenance of the Food Court Seating Area, and all personal property taxes and other charges incurred in connection with such machinery and equipment;
(vi) Premiums for insurance to the extent provided by Landlord, including without limitation, so-called “dram shop” or liquor liability insurance should Landlord in its sole discretion elect to obtain such insurance;
(vii) Maintenance and repair of grease traps and grease trap lines;
(viii) Salaries and wages of all personnel, including without limitation, supervisory personnel engaged in the cleaning, policing, repairing, maintaining, and securing of the Food Court and/or Food Court Seating Area;
(ix) Costs and expenses associated with programs for promoting and marketing the Food Court;
(x) Amortization of capital improvements made to the Food Court Seating Area which will improve operating efficiencies (including legal, architectural, and engineering fees incurred in connection therewith) or which may be required by governmental authorities, including the cost of complying with laws or regulations of any authorities having jurisdiction for purposes of environmental protection; and
(xi) Landlord's administrative costs in an amount equal to [insert %, e.g., 15%] of the total aggregate cost of maintaining, repairing, and securing the Food Court and/or Food Court Seating Area, including, but not limited to, items (i) through (x) above.
Practical Pointer: Specify in the lease how you'll estimate each food court tenant's proportionate share of food court maintenance costs, says Pechi. Although there are many ways to do that, Pechi suggests that you multiply your initial estimate of the per square foot charge of the maintenance costs by a fraction—the numerator is the floor area of the food court tenant's space and the denominator is the floor area of the food court.
Keep Tenant on Hook for Center's or Complex's Other Costs
Make sure the food court tenant understands that it must pay its full share of your center's CAM costs or your office complex's operating expenses in addition to its share of food court maintenance costs, says Pechi. Otherwise, it might claim that the food court maintenance costs should be offset against the CAM costs or operating expenses it must pay.
Model Lease Language
Tenant understands the Food Court Maintenance Costs are not included in the Landlord's [CAM Costs/Operating Expenses] set forth in the Lease, and Tenant's obligation to pay its proportionate share of the Food Court Maintenance Costs shall in no way reduce Tenant's obligations to pay its share of Landlord's [CAM Costs/Operating Expenses] in the manner set forth in this Lease.
Get Right to Adjust Food Court Maintenance Costs
Get the right to adjust the tenant's food court maintenance costs at the end of a month, says Pechi. This will protect you against unexpected cost increases, says Pechi. Otherwise, you'll have to pay those cost increases yourself and wait until the end of the year to get reimbursed, she warns.
Model Lease Language
Landlord may adjust Food Court Maintenance Costs at the end of any calendar month on the basis of Landlord's experience and reasonably anticipated costs.
Detail What Happens if Tenant Overpays or Underpays
Give yourself enough time—say, at least 180 days—at the end of each calendar year to deliver a statement of the food court maintenance costs covering the year that just ended. Say that if the statement shows the food court tenant paid too much for that year, the tenant will get a credit against minimum rent, rather than a refund, says Pechi.
If the statement shows the food court tenant didn't pay enough, require the tenant to pay the deficiency quickly—say, within 30 days—after getting the statement. And label the payment “additional rent.” Then, if the tenant drags its feet in paying the deficiency, you can use the remedies the lease gives you for a nonpayment of rent.
Model Lease Language
Within [insert #, e.g., 180] days following the end of each calendar year, Landlord shall furnish to Tenant a statement covering the year just expired, showing the Food Court Maintenance Costs and the amount of Tenant's proportionate share of such costs and the payments therefor made by Tenant with respect to such year. If Tenant's aggregate monthly payments of such costs with respect to such year are greater than Tenant's proportionate share of such costs, Tenant shall receive a credit for the excess against monthly Minimum Rent payments next becoming due to Landlord; if said payments are less than said proportionate share, Tenant shall pay to Landlord as Additional Rent the difference within [insert #, e.g., 30] days after receipt of such statement.
Practical Pointer: Expect a savvy tenant to demand that you credit its overpayment against both minimum rent and additional rent so it gets its money back faster. You may have to give in on this point, says Pechi.
CLLI Source
Carole Pechi, Esq.: Of Counsel, Holland & Knight, LLP, 131 S. Dearborn St., 30th Fl., Chicago, IL 60603; (312) 263-3600, carole.pechi@hklaw.com.
Sidebar
Send Your Comments or Questions to CLLI
We'd like to hear from you. Write or call us with your opinions, perspectives, or questions on commercial leasing or your comments on CLLI articles.
You can:
Send a letter to Wendy B. Starr, Esq., Editor Vendome Group, LLC 149 Fifth Ave., NY, NY 10010;
Fax (212) 228-1308;
Call (212) 812-8434, and speak with the editor; or
E-mail wstarr@vendomegrp.com