Negotiating and Drafting Restaurant...

Negotiating and Drafting Restaurant Leases Tenant Improvements, Operational Issues, Franchises, Good Guy Guaranties and More

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.

THURSDAY, APRIL 5, 2018

Presenting a live 90-minute webinar with interactive Q&A

Jeffrey A. Margolis, Founder, Margolis Law Firm, New York

Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-866-873-1442 and enter your PIN when prompted. Otherwise, please

send us a chat or e-mail [email protected] immediately so we can address

the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen,

press the F11 key again.

FOR LIVE EVENT ONLY

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your

participation in this webinar by completing and submitting the Attendance

Affirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email

that you will receive immediately following the program.

For additional information about continuing education, call us at 1-800-926-7926

ext. 2.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

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.

6

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.

7

8

Issue LL

Point of View


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

9

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

10

Issue LL

Point of

View

T Point of

View


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

11

Issue LL

Point of View


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

12

Issue LL

Point of View

T Point of

View


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

13

Issue LL

Point of View


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)

14

Issue LL

Point of View


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

15

Issue LL

Point of View


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…”

16

Issue LL

Point of View


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

17

Issue LL

Point of View


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

18

Issue LL

Point of View


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

19

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

20

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

21

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?

22

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

24

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

25

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

26 26

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

29

“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.

30 30

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

34 34

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!

35

mailto:[email protected]

http://www.margolislawfirm.com/

Negotiating and Drafting Restaurant...

Documents

Transcript of Negotiating and Drafting Restaurant...