Before signing a lease at a retail center or mixed use development, check to make sure you have some protection against potential competitors.
You are all smiles as you drive up to your restaurant. A year after the grand opening, lines are still out the door and your gourmet burger concept is the talk of the town. As you get out of your car and glance across the parking lot, your smile fades when you spot a “coming soon” sign for a new gourmet burger joint on the other side of the shopping center.
Can a competitor really open in the same complex and cash in on the same concept and your success? Upon reviewing your lease, you discover that it does not prohibit the landlord from leasing to a competitor. What could you have done differently to prevent this from happening?
One way to avoid this pitfall is to negotiate an “exclusive use provision” with the landlord prior to signing your lease. Typically, this provision in a restaurant lease is hotly negotiated because the shopping center landlord wants flexibility to lease to tenants of its choice, while the restaurant owner wants to prevent competitors from operating in the same shopping center.
In negotiating an exclusive use provision, a tenant and landlord first need to agree to the scope of the tenant’s exclusive right. Depending on a number of factors, including the size of the shopping center and the uniqueness of the concept, defining the scope can be simple or complex. For example, a restaurant that specializes in Indian cuisine may not have difficulty convincing the landlord of its exclusive right because of its unique use; however, a restaurant that has burgers as its main menu item may need to be more creative in framing its exclusive rights. Since many restaurants may include the incidental sale of hamburgers, the landlord will likely require that your exclusive use rights do not extend to a restaurant deriving less than a certain percentage of gross sales from burgers.
You can negotiate other factors to help satisfy the landlord’s desire for a narrower exclusive use. A square footage threshold can be added to exclude restaurants that fall under or above that set scope. You may also suggest limiting the restriction to the restaurant classification, such as full service, fast casual, quick service or buffet. At a larger shopping center, your restriction may be negotiated to only apply to sections of the complex within a defined proximity to you restaurant. Another consideration is nonfood items that are essential to your concept. For example, a sports bar may not be concerned about another restaurant with a similar menu as long as that restaurant does not have more than a couple of televisions.
When negotiating your exclusive use rights, be aware that the landlord will try to preserve flexibility to lease to future tenants by making the provision contingent upon continuous operation, meaning that the tenant either uses it or loses it. Bottom line: You, as the tenant, need to determine the aspects of your concept that are essential to your restaurant and warrant protection from competition so you can negotiate such protections into your restaurant lease.
In addition to defining the scope of your restaurant’s exclusive use right, it is crucial to address what happens if it is breached. You and your landlord will need to agree on remedies, such as abated rent, damages and your ability to terminate the lease should a breach occur. Typically, a landlord will insist that your remedies not be effective if the breach is the result of another tenant violating the use provisions in its own lease, as long as the landlord gives such tenant notice of the violation and uses good faith efforts to enforce its rights under such lease. For example, should the aforementioned sports bar find out that the restaurant six doors down with a similar menu expanded the number of televisions and remodels to a sports theme in violation of its lease, the landlord will not want to be held liable for that tenant’s breach; however, you’ll want to ensure that your lease requires the landlord to take good faith efforts to remedy the situation with the violating tenant.
Keep in mind that exclusive use provisions only apply to the shopping center where your restaurant resides. They will not protect you from competitors opening in the shopping center across the street. Before signing a lease, be sure to conduct due diligence on the surrounding area to determine the proximity of existing competitors and the potential for new ones.
Many factors go into determining what exclusive use rights and remedies are appropriate for a restaurant tenant. Exclusive use provisions do not come in a one-size-fits-all and they should be carefully thought out and negotiated with the assistance of capable legal counsel.Alan Christenson is a member of Jennings, Strouss & Salmon’s real estate practice group. His practice focuses on all aspects of real estate law. (H/T restaurant-hospitality.com)