If you are a landlord who has a food and beverage (F&B) premises in your portfolio, or you are a prospective tenant who has found a site that is the perfect location for a restaurant, what are the top ten things you should consider? Here are our thoughts:
- Permitted Use – firstly, does the premises have the correct permitted use for planning purposes? Put simply, will the local authority allow a F&B business to operate there? If so, does the permission suit the type of F&B business intended to operate from there? A permission for a premises to sell hot food takeaways (a “sui generis” permission) is different to a permission to sell food and drink for consumption mostly on the premises (Class E(b)). Putting in one table by the counter would not turn a takeaway into a restaurant but adding ten tables might incur the wrath of the local authority.
- Kitchen extraction systems – a key part of the F&B fit out is the kitchen, and an important part of that kitchen is ensuring adequate ventilation and extraction of things like steam and cooking odours. An issue to get ahead of if the premises will require an external duct or extractor as these units often require access to the exterior of the premises to discharge the air. If the premises are only part of the building, it is likely that the demise will be an ‘internal only’ demise. This will mean that a tenant will need the landlord’s consent (and any superior landlord’s consent) to carry out alterations to the structure and/or exterior of the building. This can be dealt with in a ‘fit out licence’. Some landlords may be more reticent to allow structural alterations, or the building may have certain restrictions on it – for example, a listed building which is prohibited from having certain works carried out on it to preserve the history of the building.
- Noise, smell, and nuisance – as popular as a restaurant may be with its clientele, you may find that neighbours, whether residential or commercial, are less supportive. The lease may have permitted hours of use to ensure that patrons are not leaving too late at night, or that the sounds of clanking bottles or a busy kitchen do not disturb a good night’s sleep. Most F&B leases usually have prohibitions on causing a nuisance or annoyance to any neighbouring property, including noise, fumes, or smells.
- Seating Licences – is the premises adjacent to some open space that would be simply perfect for customers to spill out onto on a summer night? A few tables outside, some space heaters in the winter? If you are planning to use outdoor space, it is crucial to make sure that there is either a) the right for the tenant to use it in the lease or b) that space is included in the premises (check the demise plan). If the open space belongs to the landlord, they may grant a separate seating licence to allow seating to be set up out there. If the land belongs to the Council (for example a wide pavement outside a busy city pub) then it may require a ‘pavement licence’ to place removable furniture over the pavement as part of the public highway.
- Premises Licences – sticking with licences. Will alcohol be served at the premises? Will live or recorded music be played? Most people are aware that a premises licence from the local Council is required to serve alcohol (and it is a crime to serve alcohol without one), but the premises will also require a ‘PPL PRS’ licence if there is going to be live music or recorded music played – the cost of such a licence will depend on the venue and how the music is used.
- 1954 Act Renewal – does the lease grant the tenant ‘security of tenure’? This antiquated phrase gives the automatic right for the tenant to renew a lease on similar terms on expiry. If it does not have security of tenure, at the end of the term the landlord can ask the tenant to vacate and any goodwill or local following from the location may be lost. Some purpose-built developments will always insist on excluding security of tenure to keep control of their investments going forward – but this should be discussed at Heads of Terms stage.
- Break clause – when entering into a lease, the tenant covenants to pay the landlord the quarterly rent until such time as the lease ends, or they can ‘assign’ their obligations to another company. A break clause allows the tenant to exit the lease on a pre-agreed date, subject to mutually agreed conditions. The starting position from a tenant perspective should be that if they have given the landlord enough written notice, are not in arrears of annual rent, and have removed any undertenants or third-party occupiers from the premises on the break date, then they will have successfully operated the break clause and are free to go.
- Turnover rent – the landlord or their agent may suggest that the lease include turnover rent. This allows the landlord to charge the tenant a percentage of their turnover as rent. This may seem attractive in principle because if an F&B business is performing poorly then surely the turnover goes down and so does the rent? Most landlords will insist on a ‘higher of’ calculation, so the tenant either pays a) the basic agreed rent or b) the turnover rent, if that is higher. Turnover rent is particularly popular in retail and F&B because it (in theory) promotes a collaborative approach between landlord and tenant. If the landlord keeps the shopping centre or development in good repair and attractive to customers, then the tenant’s turnover should increase and the landlord shares in the profits and both parties share the hit of any downturn in the industry.
- Rent free – as the name suggests, this is an initial period where rent is zero in order assist the tenant with fitting out the premises and help to assist the tenant to bed in during those difficult opening months. The number of months (or years!) will depend upon bargaining positions, the desirability of the location and the tenant’s financial history, but do not be afraid to discuss either reduced rent or free rent.
- Repair – the premises may currently be stripped back to shell. This blank canvas can be thrilling, but the parties need to take into consideration what the tenant will have to hand back to the landlord on the expiry of the lease. All the bespoke fit out may have to be pulled out to return the premises to the shell received on day one, at great cost to the tenant. At the end of the lease, the landlord will expect their premises to be returned in good repair and condition, to allow them to quickly re-let to a new tenant. It may be worth limiting the tenant repair obligation with a photographic ‘schedule of condition’ – this is a set of photos to be attached to the lease, which ensures the tenant only must hand back the keys with the premises in the state shown in the photos.
Key points
- Negotiate – ensure that any financial points such as rent frees, break clauses, turnover rent or schedule of condition are agreed up front in the Heads of Terms.
- Fit out – agree fit out in advance. Will the tenant’s extraction system aggravate the neighbours with fumes and noise? What state does the tenant need to hand the property back in?
- Licensing – does the premises require an outdoor seating licence? A premises licence for alcohol? A music licence? A gambling licence? All these licences require time and effort and should be sorted as early as possible in the transaction.