Food service lease and exclusive clauses

Real Property, Probate and Trust Journal, Fall 1997 by Halper, Emanuel B

A "one size fits all" formula is insufficient also for sophisticated food service tenants. Some food service establishments do more than just sell food for on-premises consumption. Sometimes these establishments entertain their guests with live or recorded music, drama, or movies. Occasionally, food service establishments sell souvenirs and novelty items, such as tee shirts, books, toys, or compact disks.4 Worse still some even give away the same type of merchandise that their cotenants attempt to sell.

Food service use clauses must reflect the needs of chain and franchise operations. Many contemporary food service tenants conduct business on regional, national, and even international scales. For the most part, products are standardized throughout the chain. Most food service operations cannot conduct business one way in Kansas City and another way in Nashville. They need use clauses that permit a substantially uniform operation. These particular food service operators also need flexible use clauses that permit variation from the formula that allows only food for on-premises consumption.

Landlords have less use clause flexibility when the project has room for more than one food service tenant. Both landlords and food service tenants prefer avoiding excessive duplication among cotenants' food service operations. Food service tenants dislike direct competition from cotenants as much as most retail tenants dislike direct competition from their neighbors. Two or three hamburger fast food operations rarely coexist in a single project. This is partly because they do not want to be together. Being together materially reduces their chance of profitable operations. Likewise, landlords should not want cotenants in direct competition for many reasons. One reason is that consistently unprofitable tenants usually become consistently delinquent tenants.

Nevertheless, both landlords and food service tenants recognize that many buildings and building complexes can, and should, support more than one food service operation. For a landlord to lease space to more than one food service tenant in a large building or building complex and still avoid destructive, direct competition for a limited market, food service lease negotiators must focus on characteristics that distinguish a prospective new food service tenant's business from the business operations of the existing food service tenants.

D. Generalized Use Clauses Ignore Most Landlord and Tenant Needs

Generalized use clauses ignore landlord and tenant motivations, differences among buildings, differences in neighborhood, and almost every other factor a thoughtful lease drafter should consider. They seldom work well for tenants. Usually, generalized use clauses satisfy only landlords with free-standing, single-occupancy buildings. These landlords may be interested only in the tenant's credit and rent obligation. Because these clauses do not work for any other type of landlord, they should be discarded. Food service use clauses must do much more than merely limit the tenant's activities to the sale of food and nonalcoholic beverages for on-premises consumption. Food service use clauses should carefully distinguish a permitted food service operation from a prohibited food service operation.