Food & Beverage Leases – What do tenants need to know?

From trading hours to the type of food which can be served, how it’s cooked, and whether a new menu is permitted – commercial landlords of food and beverage premises may have a legal right to approve.

The prevailing view in the market is that food and beverage (F&B) leases are “the same” as all other commercial leases.

In truth, the nature of F&B operations means that tenants of such leases need to give careful consideration to a number of key provisions to prevent being exposed to increased costs or onerous/restrictive obligations.

So, what are these provisions and what should tenants be considering in each case?

1. Permitted use/Planning

• It is essential that tenants check that the lawful planning use of a premises aligns with the permitted use to be granted in the lease.
• It is common for F&B planning permissions to impose restrictions/conditions on trading/operational matters which can adversely restrict how the tenant is permitted to use the space or the food or drinks it can serve.
• It is key to remember that a beneficial permitted use definition in a lease does not give a tenant planning permission for a use

2. Operational restrictions

1. Menu restrictions: F&B leases may impose conditions/restrictions around the type of food which can be served, how it can be heated/cooked or - in extreme cases - even require landlord approval to menu changes.
2. Operating hours: Restrictions on trading hours are very common in such leases. Premises are often located in areas with other types of uses - such as residential - which may lead to restricted delivery times, prohibitions on take-aways or other late night opening periods.

3. Licensing

If the F&B operation will sell alcohol, it is typical for the lease to clearly set out the tenant’s obligation to procure a licence, not to breach the licence terms, and to ensure the licence is transferred to the landlord when the lease ends (at the tenant’s cost). There may also be provision for the landlord to apply for a duplicate premises licence in its own name using the tenant’s trading information - known as a “shadow licence”.

Care should be taken to ensure these obligations on the tenant are in line with market norms and do not impose excessively onerous cost or time burdens on the tenant.

4. Fit Out

The typical F&B fit out is a far more detailed and intensive than fitting out an office, for example. Tenants may need to consider upgrading power utility supplies, installing specialist grease traps and extraction filters, and structural works to staircases or changes to existing fire escape routes.

Alterations such as these often require additional approvals under the relevant terms of a lease, and tenants would be well advised to build in as much flexibility as possible into the relevant consent provisions to minimise costs and delays to the landlord approval processes.

5. Flexibility

The nature of F&B operations is that they can be exposed to high levels of fluctuating demand. As such, tenants ideally need flexibility in lease terms and their exposure to rent and other tenancy costs.

This is typically achieved in two ways:

1. Break rights: Firstly, a tenant should ensure that it has either a rolling break with a fixed number of months’ notice or as many fixed breaks as it can negotiate with the landlord (typically at 5 yearly intervals). Break rights can allow tenants to exit an operation if it does not deliver the anticipated profits.

Whilst it is not typical for F&B leases to allow the tenant to immediately determine a lease and hand back a premises to the landlord, the tenant giving consideration to a sensible break right pattern at the outset can assist in minimising unnecessary costs.

2. Assignment: Secondly, a tenant should consider robustly negotiating the assignment provisions in its lease to make transferring the lease during the term to a third party as easy as possible. Whilst there are a number of market standard restrictions which the landlord will insist on imposing in the lease as a condition of giving its consent to such assignments, there are many areas where the tenant can negotiate to facilitate a smooth sale of the lease in the event it becomes necessary.

These include financial covenant strength tests, rent deposit levels required from an assignee, and the situations in which an authorised guarantee agreement needs to be given by the tenant.

The above are a few of the key considerations which all F&B tenants should consider when entering into new unit leases.

A failure to take these into account when negotiating heads of terms/leases can but put F&B tenants at risk of exposure to potentially significantly increased costs and expenditure - both during the terms of their leases and at their expiry.

How Hamlins can help

The Hamlins team has significant experience in advising a range of F&B operators on their commercial real estate needs. Please get in touch to understand how we might be able to help.