How to deal with restaurant/food court leases in shopping centres

You are a casual dining, QSR or fast-food operator. You have been trying to get into a shopping centre for a while and have finally been offered a coveted place in the food court.

What to expect?

You will be offered a lease to sign unless you have a pop-up type concept when you might be offered a short-term licence. This article focuses on leases.

What to concentrate on?

Apart from checking that the financial terms (such as the rent and length of the lease) are correct, concentrate on the main issues. Shopping centre landlords issue leases in standard form and do not take kindly to lawyers redlining them for the sake of it.

What are the main issues to watch out for?

User clause

Make sure it is not too narrow and that it fits your operation. So, if you sell fried chicken but also offer stir fry and noodles, make sure that those are covered. Shopping centres have an interest in protecting each tenant’s offering to minimise tenants competing with each other and they enforce any overstepping of the user clause.

Menu

The landlord will ask for your menu to be attached to the lease and the user clause will further prohibit you from selling anything not on the menu. In this way the landlord exercises tighter control over the types of food sold by each tenant. Make sure that your menu encompasses everything that you plan to sell and is as wide as possible whilst still being true to your product offering as landlords do check in practice what is sold, particularly where there is a conflict issue or complaint. Remember to include drinks and dessert!

Restrictive covenants

Other food-court tenants may have clauses in their lease preventing the landlord from allowing the sale of competing foods. Leaving aside the legality of these (and any Competition Act issues which may affect enforcement in practice), you can expect to find in your lease a raft of prohibited uses. Where there is a cinema in the shopping centre, for example, it is common to find a prohibition in other leases on popcorn sales. Other common protections are preventing the sale of burgers, pasta or sushi to protect the relevant operators. So, your lease will no doubt contain a list of prohibited products which must not be sold. Go through these carefully to make sure you will not infringe these.

Non-compete covenants

You might think that you yourself would benefit from such a covenant preventing competition. If you are a new operator, however, it is unlikely you will secure a similar covenant in your favour from the landlord, but it could be worth a try. You can try asking for a limited time period or just to protect a specific distinguishing part of your operation. For example, while the landlord may not agree to prohibit all other Asian food operators to protect you, they may agree to prohibit “chef theatre” style operations or Vietnamese or Japanese (or whatever is your particular speciality) as they are unlikely to want two such close competing uses.

Fit-out

If you are used to high-street properties, even those with active engagement from the landlord, you will nevertheless be surprised at the level of detail required by the shopping centres. Expect to be asked to pay a deposit against damages, a contribution to the landlord’s consideration of your fit-out and a very fine toothcomb to go over your fit-out plans in detail. It is likely you will have to either appoint approved contractors or that you will have to upscale your own contractors. A tenant’s handbook will detail all the fit-out requirements and compliance is a must. Many beginners can get bogged down with this so make sure you get good help and advice on board from the start. This will help establish your suitability for the food court to your shopping-centre landlord.

Turnover rent/liquidated damages

Rents that are partially linked to your turnover are very common. The sting in the tail is the liquidated damages provision that comes with it, meaning you must pay the landlord a certain amount daily if you close (other than for a genuine reason such as you are actively selling the business). Not doing well is not a genuine reason.

There is not much you can do about these provisions, although we have successfully managed to negotiate them out or down on occasion and in practice, engaging with the landlord if you do find yourself in difficulty is key.

Forfeiture provisions

One other oddity in shopping-centre leases is that many contain a “three strikes and you’re out” provision. This is different to the vast majority of leases which have forfeiture rights (rights to end the lease by the landlord) only on the usual non-payment of rent, breach of covenant or insolvency.

The “three strikes and you’re out” rule is designed to assist centre management to get rid of persistent offenders. It usually works so that if you have been served with a notice three times about a particular incident (however minor it might be) or three separate incidents, the landlord is able to forfeit the lease. In that way landlords ensure quality control and suitability of the tenant for that particular shopping centre.

It is something to watch out for (it cannot usually be negotiated out of the lease) and any notices or communications from a landlord must be promptly dealt with.