Food Courts and Their Leasing Issues

It has become common in food courts for each restaurant tenant to offer passers-by food and beverages at no cost, in hopes of drawing them in to purchase the restaurant's products. While the idea of sampling is generally positive and well received by the public, it does present certain issues and problems within the food court area.

First, landlords should remember to establish a distance from each tenant's premises within which they may present their wares for sampling. Otherwise, a tenant may begin offering its products throughout the food court area, leading to unintended consequences. For example, having employees of a tenant milling around outside that tenant's premises can create congestion, hampering traffic flow within the food court area. To avoid this, a landlord should establish a distance of no more than five to 10 feet from each tenant's premises within which the tenant may offer samples to prospective customers.

Landlords should reserve the right to discontinue sampling if it is being performed in an aggressive, “hawking,” manner or in some other way that is disruptive to the passing public. This might include causing garbage accumulation within the food-court area (such as when customers dispose of containers in an inappropriate manner), or causing spills that pose tripping hazards.

Landlords should also attempt to prevent territorial problems between the tenants by restricting restaurants from offering samples within a certain distance from adjacent tenants (e.g., no closer than four feet from any other restaurant tenant). This will prevent tenants from attempting to solicit customers from other restaurant tenants, a not uncommon problem: Some have even been known to offer samples to customers already in line to purchase from competitor restaurants.

One final point regarding sampling: Since the sampling occurs in the common area and not within the individual tenant's premises, there should be a statement in the lease that requires the tenant's insurance to cover the tenant's employees while they are located in the common areas providing sampling services. That way, if the sampling creates a “slip and fall” hazard, or if there is a negative interaction between the tenant's employee performing the sampling service and the members of the public, the insurance maintained by the tenant will cover those situations.

The idea is to produce a restaurant environment that allows customers to sample products from various restaurant tenants without materially affecting traffic flow within the food court area, detracting from sales by other restaurant tenants, or creating liability concerns for the landlords.

Cleaning Costs

While generally the cost of cleaning a shopping center is included within the definition of “operating costs,” with such costs being shared by all tenants at the shopping center, cleaning within the food court area is treated in a unique manner. The costs (often referred to in leases as “Food Court Operating Costs”) are generally shared only among the food-court tenants, since the benefit of keeping that area of the shopping center clean is generally for the sole benefit of those few tenants within the food court.

While there are many ways to divide the costs for maintaining and cleaning the food court area, landlords usually attempt to place a fixed or adjustable dollar amount on the cost to perform these cleaning services, which may include redelivering trays to individual restaurant tenants' premises; removing trash and other refuse; cleaning the food court area floors; cleaning particular spills; and disposal of napkins, cutlery or other food service-related products. Tenants should be very careful to analyze the cost for maintaining the food court area. Tenants should attempt to cap these costs (either as a percentage of sales or as a fixed percentage limitation on increases, e.g., no more than a 3% increase per year), to protect themselves from excessive costs that were not anticipated. Further, tenants should establish certain rights, like self-help, in the event the landlord is not maintaining the food court area in a clean and presentable manner.

Storage

Since food court premises are quite small (often between 500 and 1000 square feet), restaurant tenants generally need storage for food and beverage products, as well as a place for refrigeration equipment, that may not fit within the premises being leased. What issues could this situation present?

Often, landlords want the right to be able to relocate the storage area from time to time during the term of the lease. Although, generally, tenants will agree to allow landlords the right to relocate the storage area, issues may arise, especially if the tenant is using the storage space for refrigeration equipment. Frequently, the relocation of that refrigeration equipment requires inspection by the health department, which can add several days to the job of relocation. Further, if the move must be made to a location much farther from the premises than the original storage location, the added inconvenience may interrupt the tenant's business operation, as its employees will be forced to travel a much greater distance to retrieve products from the storage space throughout the day. In addition, tenants will not want to be prohibited from accessing the storage area for any period of time, since same will impact the tenant's business operations.

As a result, the tenant should make sure the lease states that the tenant will not be obligated to relocate from the original storage space until the new storage space is available for use by the tenant. In addition, the tenant should require that the relocated storage space be of a substantially similar configuration and substantially similar size as the original storage space — otherwise, certain of the tenant's fixtures, refrigeration equipment or storage items may not fit within the relocated storage space.

Also, a tenant should attempt to restrict the number of times that the storage space can be relocated during the term, and restrict the timing of such relocation. For example, a demand might be made that such relocation not occur during peak times of the year, like November and December, or at peak times of the day, like lunch or dinner time.

Finally, a tenant should establish that all utilities that serve the new storage space, and the general condition of the new storage space, will be substantially the same as in the original storage space.

Grease and Trash Disposal

Restaurant tenants generate grease and also more garbage and “wet” trash than other tenants of an enclosed regional mall. Therefore, landlords often attempt to pass through to the restaurant tenants the cost of grease traps and grease disposal systems, as well as increased trash removal costs. Tenants would be wise to determine the method of grease disposal that the landlord intends to utilize as well as the means by which the tenant will be charged for trash removal. Often, these grease traps and their maintenance and upkeep are very expensive and can require several clean-outs per year. Further, the cost for trash removal can prove to be extremely pricey; the food-court tenant should be aware of these costs, which can greatly affect the net operating income for the restaurant tenant.

Conclusion

By carefully evaluating the issues that are indigenous to food-court restaurant tenancies in regional shopping centers, landlords and tenants can address them during lease negotiations. With foresight and planning, unpleasant disputes and costly surprises may be avoided down the road.

*****
Glenn A. Browne, a member of this newsletter's Board of Editors, is a shareholder in the law firm Braun, Browne & Associates, P.C., Riverwoods, IL.

We've all been to food courts. In the typical food court, landlords group several restaurant tenants and other food service providers in one area, incorporating a centralized seating area for customers to eat in once they have purchased their food from the various restaurants. Food courts create interest and excitement in enclosed regional malls, and they serve as a means of extending the visit time of each customer to the shopping center. Thus, they are a great boon for the mall owners and tenants alike.

But although the concept has been very successful in the retail industry, a collection of tenants serving food and beverages in one location presents several issues and problems for both landlords and tenants. Those issues suggest certain aspects of food-court tenancy that should be discussed and addressed during lease negotiations, so that both landlords and tenants end up receiving what they expect to receive from the food court experience.

Sampling

It has become common in food courts for each restaurant tenant to offer passers-by food and beverages at no cost, in hopes of drawing them in to purchase the restaurant's products. While the idea of sampling is generally positive and well received by the public, it does present certain issues and problems within the food court area.

First, landlords should remember to establish a distance from each tenant's premises within which they may present their wares for sampling. Otherwise, a tenant may begin offering its products throughout the food court area, leading to unintended consequences. For example, having employees of a tenant milling around outside that tenant's premises can create congestion, hampering traffic flow within the food court area. To avoid this, a landlord should establish a distance of no more than five to 10 feet from each tenant's premises within which the tenant may offer samples to prospective customers.

Landlords should reserve the right to discontinue sampling if it is being performed in an aggressive, “hawking,” manner or in some other way that is disruptive to the passing public. This might include causing garbage accumulation within the food-court area (such as when customers dispose of containers in an inappropriate manner), or causing spills that pose tripping hazards.

Landlords should also attempt to prevent territorial problems between the tenants by restricting restaurants from offering samples within a certain distance from adjacent tenants (e.g., no closer than four feet from any other restaurant tenant). This will prevent tenants from attempting to solicit customers from other restaurant tenants, a not uncommon problem: Some have even been known to offer samples to customers already in line to purchase from competitor restaurants.

One final point regarding sampling: Since the sampling occurs in the common area and not within the individual tenant's premises, there should be a statement in the lease that requires the tenant's insurance to cover the tenant's employees while they are located in the common areas providing sampling services. That way, if the sampling creates a “slip and fall” hazard, or if there is a negative interaction between the tenant's employee performing the sampling service and the members of the public, the insurance maintained by the tenant will cover those situations.

The idea is to produce a restaurant environment that allows customers to sample products from various restaurant tenants without materially affecting traffic flow within the food court area, detracting from sales by other restaurant tenants, or creating liability concerns for the landlords.

Cleaning Costs

While generally the cost of cleaning a shopping center is included within the definition of “operating costs,” with such costs being shared by all tenants at the shopping center, cleaning within the food court area is treated in a unique manner. The costs (often referred to in leases as “Food Court Operating Costs”) are generally shared only among the food-court tenants, since the benefit of keeping that area of the shopping center clean is generally for the sole benefit of those few tenants within the food court.

While there are many ways to divide the costs for maintaining and cleaning the food court area, landlords usually attempt to place a fixed or adjustable dollar amount on the cost to perform these cleaning services, which may include redelivering trays to individual restaurant tenants' premises; removing trash and other refuse; cleaning the food court area floors; cleaning particular spills; and disposal of napkins, cutlery or other food service-related products. Tenants should be very careful to analyze the cost for maintaining the food court area. Tenants should attempt to cap these costs (either as a percentage of sales or as a fixed percentage limitation on increases, e.g., no more than a 3% increase per year), to protect themselves from excessive costs that were not anticipated. Further, tenants should establish certain rights, like self-help, in the event the landlord is not maintaining the food court area in a clean and presentable manner.

Storage

Since food court premises are quite small (often between 500 and 1000 square feet), restaurant tenants generally need storage for food and beverage products, as well as a place for refrigeration equipment, that may not fit within the premises being leased. What issues could this situation present?

Often, landlords want the right to be able to relocate the storage area from time to time during the term of the lease. Although, generally, tenants will agree to allow landlords the right to relocate the storage area, issues may arise, especially if the tenant is using the storage space for refrigeration equipment. Frequently, the relocation of that refrigeration equipment requires inspection by the health department, which can add several days to the job of relocation. Further, if the move must be made to a location much farther from the premises than the original storage location, the added inconvenience may interrupt the tenant's business operation, as its employees will be forced to travel a much greater distance to retrieve products from the storage space throughout the day. In addition, tenants will not want to be prohibited from accessing the storage area for any period of time, since same will impact the tenant's business operations.

As a result, the tenant should make sure the lease states that the tenant will not be obligated to relocate from the original storage space until the new storage space is available for use by the tenant. In addition, the tenant should require that the relocated storage space be of a substantially similar configuration and substantially similar size as the original storage space — otherwise, certain of the tenant's fixtures, refrigeration equipment or storage items may not fit within the relocated storage space.

Also, a tenant should attempt to restrict the number of times that the storage space can be relocated during the term, and restrict the timing of such relocation. For example, a demand might be made that such relocation not occur during peak times of the year, like November and December, or at peak times of the day, like lunch or dinner time.

Finally, a tenant should establish that all utilities that serve the new storage space, and the general condition of the new storage space, will be substantially the same as in the original storage space.

Grease and Trash Disposal

Restaurant tenants generate grease and also more garbage and “wet” trash than other tenants of an enclosed regional mall. Therefore, landlords often attempt to pass through to the restaurant tenants the cost of grease traps and grease disposal systems, as well as increased trash removal costs. Tenants would be wise to determine the method of grease disposal that the landlord intends to utilize as well as the means by which the tenant will be charged for trash removal. Often, these grease traps and their maintenance and upkeep are very expensive and can require several clean-outs per year. Further, the cost for trash removal can prove to be extremely pricey; the food-court tenant should be aware of these costs, which can greatly affect the net operating income for the restaurant tenant.

Conclusion

By carefully evaluating the issues that are indigenous to food-court restaurant tenancies in regional shopping centers, landlords and tenants can address them during lease negotiations. With foresight and planning, unpleasant disputes and costly surprises may be avoided down the road.

*****
Glenn A. Browne, a member of this newsletter's Board of Editors, is a shareholder in the law firm Braun, Browne & Associates, P.C., Riverwoods, IL.