Food service lease and exclusive clauses

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

III. DRAFTING USE CLAUSES TO FIT THE PARTIES' GOALS

Where do food service lease negotiators go, after discarding the "food for on-premises consumption" limitation format? How can a food service tenant's rights be limited to achieve a landlord's goals? How can a food service tenant's rights be expanded to achieve the tenant's goals?

These questions can be answered only by exploring the food service industry, the significant economic and social factors that influence food service landlord needs, and the way food service tenants conduct their businesses.

Significant economic and social factors influence food service lease use clause negotiations. They include the needs of building projects and their respective geographic markets, variations in food service tenants' business methods, traditions of the food service industry and the individual companies comprising it, food service tenants' aversion to direct competition from neighbors, and exclusive use clauses in existing food service leases that prohibit landlords from leasing space to direct competitors.

IV. FULFILLING PROJECT NEEDS

A. Food Service Is Not Always Wanted

It is not unusual for a food service operator to outbid all other potential tenants for a busy location. Many landlords are principally interested in dealing with food service tenants because the landlords are tempted by the prospect of charging the food service operation more than a retail tenant would be willing to pay. Downtown central business district landlords are particularly susceptible to this kind of temptation. Many of these landlords deal with food service tenants reluctantly, and are willing to lease space to food service tenants only to maximize their rent roll. These landlords would prefer a nonfood occupant if there was one willing to pay as much rent as the food service operator.

Why do some landlords find food service tenancies objectionable? Food service operations attract people, which is not always desirable for a property owner. Although increased pedestrian and vehicular traffic is a boon for many kinds of property, particularly shopping centers, some landlords prefer less traffic. Downtown central business district landlords tend to believe that excessive public traffic makes an office building less desirable to prospective corporate tenants. As a result, these landlords prefer retail tenancies to food service tenancies for their grade floor space.

Restaurants and other food service operations also attract pests such as mice, rats, and cockroaches. Unfortunately, these unwanted guests do not recognize boundaries between one leased premises and another. The creatures tend to migrate to food service establishments in search of shelter, comfort, and sustenance. From there, it is only a hop, skip, and a crawl to the rest of the building. Consequently, some landlords fear that candidates for vacant leasable space might be repelled by a food service cotenant.

Other problems inherent with food service operations include the potential for unpleasant odors, increased garbage volume, and greater demand on sewage disposal systems. Despite these burdens, the prospect of a higher rent roll softens the hearts and soothes the fears of many downtown central business district landlords. It motivates some of them to overcome their concerns and look more favorably on food service tenancies. Even so, these landlords would not lose sleep if the food service tenant skipped town and, without skipping a monthly rent payment, assigned its leasehold estate to an elegant woman's apparel store. As a result, a use clause that rules out a conversion to retail operations would be inappropriate in these circumstances. Such a clause might provide the landlord with a reason to squeeze money out of the tenant if the tenant actually wanted to change the use of the premises, but it would not serve any legitimate business purpose. The landlord would, in effect, be using the clause to demand compensation for an event for which the landlord had fervently prayed since the lease execution.