You Should Hire a Restaurant Real Estate Broker

We work with lots of clients who are thinking about opening their first restaurant, or who are in expansion mode. When I get one of these calls, among my first questions is “are you working with a broker?” If not, I always try to encourage them to call one of the many experienced restaurant real estate brokers that I work with. Why? It’s simple:

They Don’t Cost Anything. If you work with a restaurant real estate broker as a tenant, you don’t pay a dime. Your broker can pound the pavement and work the phones looking for available space and, if you find a good space, negotiate the business terms of the lease and shepherd the process through to signing. And, if it all works out, the landlord pays his commission. So you – quite literally – have nothing to lose.

They Know the Market. Unlike buying a house – where sale prices, along with detailed photos and precise locations, are readily available – renting commercial restaurant space can be an opaque, mysterious process. Price per square foot can vary dramatically from place to place, and landlords are often willing to give concessions (such as tenant improvement money or months of free rent) depending on the circumstances.  If you don’t know the market, you won’t know what to ask for. And you can leave a lot on the table.

They Know the Landlords. As we’ve written here before, who your landlord is can make all the difference in the world. There is no single greater relationship that will determine your success. And landlords, like people, run the gamut. Some are accommodating and forgiving. Some are tough but fair. And some are unrelenting and unforgiving. When you are signing a ten-year restaurant lease, you want to know which one you are dealing with, don’t you?

They Know the Restaurant Business. A caveat here: a good broker should know the business. And this is where you need to do a bit of due diligence. You wouldn’t hire a podiatrist to fill one of your cavities, right? You wouldn’t hire an electrician to fix your toilet.  By the same token, don’t hire someone who is used to filling office space for lawyers or accountants or dentists to find your next restaurant space. If you hire someone who knows the restaurant business, they can tell you the dead spots in a shopping center, and if the space you are looking at is one of them. They can tell you if the kitchen is suitable to your needs. They can tell you whether the demographics of where you are looking work for your concept, or if there is a lot of competition in the immediate vicinity. And if they are not sure of any legal issues (like can I get a liquor license for this location), they know enough to call a restaurant lawyer like us to make sure all questions are answered.  In short, only a broker who knows your business can make sure the terms of your deal are consistent with the needs of your business.

We work with experienced restaurant real estate brokers every day. When we get a restaurant lease from them, we know that the business basics will be covered – just as they know when they get the lease back from us, the legal terms will be airtight. We act as a team to make sure you get the best restaurant lease possible, and thereby have the best chance to succeed in your business.  If you need a referral to a good restaurant real estate broker, just give us a call. It’s one of the biggest decisions you can make to get your restaurant business off on the right foot, and we’d love to help make sure that the decision you make is a good one.

Limiting the Personal Guaranty in Your Restaurant Lease

If you are getting ready to sign a restaurant lease, you are almost certainly being asked to provide the name of someone who will provide a personal guaranty of payment on the lease.  This person, whether it be you yourself, or someone with whom you are associated, will be personally on the hook if the tenant (usually an LLC or some other corporate entity) itself does not pay.  The reason the landlord requires this is because, unless the tenant is a big corporation with a lot of assets separate and apart from this restaurant (and, regardless, we usually advise our clients to set up new entities for every location they open), a personal guaranty is the only way the landlord can have some assurance that you won’t simply walk away from your restaurant (and the lease) if business gets bad.  The landlord wants someone on the hook.

Many restaurant tenants do not realize that they do not have to agree to a full guaranty – i.e., one that will make them liable for all payments due under the lease, for the full term, if there is a default.  On the contrary, landlords will often agree to limit the personal guaranty on on the lease, and thereby limit the personal liability that can result if your restaurant does not succeed.  The two most common forms these limits take are a cap on liability, and a “burn off” provision.  Most common is some combination of the two.

A liability cap means that the guarantor’s liability is capped at some dollar amount or, more commonly, some number of months’ rent due under the lease.  For example, the guaranty could provide that, in the event of default, the landlord’s maximum recovery against the guarantor be (let’s say) 24 months of rent.  This would be true even if it takes the landlord much longer to find a new tenant or incurs significant expenses in securing such a tenant (such as in brokerage fees, rehabbing the space, or in concessions to the new tenant).  One can imagine such a cap being particularly valuable if a restaurant fails early in a long-term (e.g. 10-year) lease.

burn off provision means just that, that the lease guaranty will “burn off” at some point, provided the tenant has met all other requirements under the lease.  For example, a restaurant lease guaranty could provide that, after five years of on time payments by the tenant, the guarantor would have no further liability and the guaranty itself would terminated.

Again, most common is a combination between these two liability limitations.  In one formulation we negotiate for our clients quite often, the liability will be at some amount during the initial years of the lease, then burn off, or “burn down,” as time goes on: perhaps from a full guaranty to 24 months after some number years of on time payments; then from 24 down to 12; and then maybe eliminated altogether.  In this way, a tenant is incentivized to keep paying rent on time (especially early in the lease, when the liability is the greatest), and rewarded for being a good tenant later in the lease.

Of course the specifics of what a landlord will agree to will depend on the financial viability and business history of the tenant, but this all where an experienced restaurant leasing attorney (or restaurant real estate broker) can be immensely helpful.  The limits your lawyer or broker can negotiate for you can make the difference between bankruptcy, and being able to pick your self up and give it another try some time the future.

Prince George’s County Liquor Board Seeks 5 New Members, Cancels Upcoming Hearings

The Prince George’s County Liquor Board, which is already down to three members due to the resignation of its chairman (following a guilty plea in a DUI matter) and another member (following a bribery arrest) will get an entire new membership later this year.  Pursuant to legislation passed in the recent 2017 Maryland General Assembly, the Board last week published a notice seeking applications for these members.

On that same date, the current members of the Board voted to cancel the upcoming hearings scheduled for June 27, July 12, and July 25, inviting the question of whether there will be any liquor board hearings at all until the new members are seated.  As the Board is required to approve all new and transfer liquor license applications, that will mean no new liquor licenses can be issued in Prince George’s County until at least August, and quite possibly later than that.  Not being able to issue any new licenses during the summer months is, of course, not a good look for the County, which is touting its development boom and holding itself out as an alternative to high-priced Montgomery County and areas of Northern Virginia.  This delay and overhaul will not help those efforts, at least in the short term.

It has been a difficult few years for the liquor board in Prince George’s County.  In addition to the well-publicized arrests noted above, in 2015, the former chairman of the Board  to the new chairman appointed by (at the time) incoming Governor Hogan.  This led to chaos at at least one hearing (of which I was in attendance), and the cancellation of multiple scheduled hearings before the the controversy was finally resolved.

The current members of the Board (as well as its fantastic staff) are conscientious public servants who probably deserve better, but so do the people of Prince George’s County.  Here’s hoping that this overhaul (and increase in oversight) can get the Board back on track.  Prince George’s County is becoming more attractive to national and local restaurant chains (we’ve finalized several leases there just in the last couple of weeks), so a functional liquor board is vital to demonstrating that the County is someplace businesses should want to invest.

New Restaurant Location? Strongly Consider a New LLC.

I often say that opening a restaurant is like becoming a parent.  It keeps you up late at night, it occupies most of your time and attention, it makes you worry whenever you leave it with someone else…. But like parenthood, restaurant ownership can also get easier over time. And, when it does, you may actually start thinking, “hey, I’m beginning to get the hang of this.” If you are lucky enough for that to happen to you, you may also think like the parents of a moderately behaved toddler – “maybe it’s time to think about number 2.”

That decision (as related to restaurants, at least for these purposes) is fraught with many more issues than I could ever cover in one blog post.   So I will allow this post to cover only one such issue – whether you need to create a new entity for the new location. My answer, in almost all instances, is a resounding “Yes.”

The main reason is this: you will need to sign a new lease for your new location. And, with that new lease, comes another set of significant obligations and financial liabilities. If you don’t create a new entity, not only will your new restaurant be responsible for those liabilities, so will your first one. That is to say, if the new restaurant flops and goes out of business, but the first one is continuing to do well, failure to form a new entity can allow the Landlord for location Number 2 can go after the bank accounts and assets of location number 1. In short, Number 2’s debts can bring down Number 1 along with it.

If you create a new entity, however – call it McSwiggen’s Ale House Number 2, LLC – only the assets of that entity will be available to satisfy any liability under that Lease. The assets of McSwiggen’s Number 1 LLC will be protected by laws of limited liability (that’s what the two L’s in LLC stand for, after all). Yes, of course, you personally may be on the hook for any personal guaranty on Number 2’s lease, but the first restaurant – the one that was doing so well that it caused you to think about Number 2 in the first place – will still have the chance to live to fight another day.

To use a different analogy from the one I started with, you can build your restaurant business like an apartment building or a suburban subdivision. And if you think of your restaurants like that, think of financial difficulty like a fire. If you use the same LLC entity for each new location, financial difficulty in one will threaten to bring down them all, just like a fire in that apartment building. But LLC laws allow you to treat your restaurants like suburban homes on a cul de sac. They may all look the same, and be constructed the same, but they all stand on their own. And, while a fire in one will not be welcome to the neighbors, they’ll all still have some place to sleep that night.

Getting good advice and doing things right the first time will help you sleep at night too.  Before you open your second location, consult with an experienced restaurant lawyer to make sure you do all you can to protect the first.

 

Tough Market Makes a Good Restaurant Lease More Important than Ever

2017 has not been the easiest year for restaurants, particularly for sit down casual dining restaurants. Reports of store closures, missed earnings, and abandoned concepts have been a common occurrence this spring, as restaurants have tried to recover from its worst year since the recession. Even fast casual chains, which had been thought to be insulated from many of the challenges of the larger restaurant sector, have felt the pinch.

In recognition of this broad trend, we have been advising our clients that it has never been more important to focus like a laser on your lease, and not sign one you don’t fully understand and feel comfortable with.  First of all, restaurant owners need to make sure that the rent is affordable. As concepts proliferate (many of which are backed with investment dollars), rents have escalated in many markets. While a location may be attractive, if you cannot collect revenues of approximately 10 times your monthly rent, you are probably paying too much. When you are scouting space, be sure to keep this closely in mind. Second, as it relates to your lease terms themselves, you should be sure to focus (and push back hard) on key provisions such as:

  • Assignment rights. If you ever want to sell your restaurant, or just get out of a concept that is not working, you will need to be able to assign your lease to someone else. Make sure your lease provides for the ability to do that.
  • Guaranty limitation. You will almost certainly be personally liable for any damages to your landlord if you breach your lease. There are ways to cap that liability, however, and limit any damage to yourself personally if you have to close or walk away.
  • Default provisions and remedies. Can your landlord kick you out if you are a few days late with your rent? Do you have any opportunity to cure the default if you are late? Many leases have very strict default provisions. You can soften those to allow you to recover if you hit a rough patch.
  • Exclusivity provisions.  Competition is tough in the restaurant business, but if you can, you should keep any direct competition out of your backyard.

Certainly rents are going up and there is a lot of competition for restaurant space, but the spate of restaurant closures, as well as softness in the broader retail market (as Amazon and other online retailers force closures in that sector), can present opportunities to negotiate. And, you can negotiate.  Too many restaurant owners simply sign the lease they are provided, thinking they have no choice.  You do — especially now.

If you know what questions to ask, and what pitfalls to avoid, at the time you are looking as space and signing a lease, there is no reason your restaurant can’t be among the success stories.

New Maryland Law to Cure Liquor Licensing Glitch

Credit: CHRIS URSO, Tampa Bay Times

We wrote here last year about a glitch in Montgomery County liquor licensing laws that limited individuals to holding one beer & wine license in the county, whereas an individual could hold up to ten beer, wine & liquor licenses.  This, of course, made little sense and caused any restaurant with more than one location in the county to incur the additional cost and bear the additional regulatory burdens of a full liquor license, even if the restaurant just wanted to serve beer and wine.

The glitch in the law has been particularly frustrating to fast casual operators, who are likely to have several locations — and increasingly are moving to serve beer and wine
— but also do not generally need a full liquor license.

I am happy to report, however, that today Governor Hogan will sign into law a bill that will raise the number of beer & wine licenses an individual can hold to ten as well.  This new law, which will go into effect on July 1, will not only save many restaurants already operating in the county thousands of dollars a year, it will also make the county more attractive as a place for restaurant chains to grow and prosper.  (Note:  Anne Arundel County law is set to change as well, increasing the number of beer & wine licenses allowable for one individual from 2 to 5).

And how did this all come about?  As it happened, around the same time I wrote the post referenced above, I had the occasion to discuss this matter with senior licensing staff at the Montgomery County Department of Liquor Control, and explained that this was a frustration to many of my restaurant clients with multiple locations, and that it was likely a deterrent to smaller restaurants, particularly fast casuals, opening new locations in Montgomery County.  It was not any formal advocating for a change to the law; it was just an expression of frustration about the state of the law and the burdens it placed on my clients.

To the DLC leadership’s credit, however, within weeks I was told that the matter would be brought up with the county’s delegation to the Maryland General Assembly, and later last fall, was advised a bill was being prepared for presentation in the Assembly during the 2017 session.  The bill passed both houses unanimously and, as mentioned, is set to be signed today.  So, while I would like to take some credit for raising this issue in the first place, I commend DLC staff — notably the amazing Kathie Durbin — for being so responsive to the needs of our small restaurant owners here in Montgomery County.  This was good government at work, and we will all — businesses and consumers alike — benefit from it.

Can My Landlord Lease to One of My Competitors?

GARY T. MILLS/The Times-Union -- Jan. 2012 -- Quiznos Sub recently closed at 7159 Philips Highway.

(GARY T. MILLS/The Times-Union — Jan. 2012)

My family and I had dinner this past weekend at the newest location of a locally-based fast casual restaurant chain.  It had a line nearly out the door and every table was full.  After dinner we noticed that, in the same shopping center, was an existing restaurant serving the exact same type of food.  It was nearly empty.  And I have to figure it will not long survive.

Competition can be brutal in the restaurant business, of course.  And no one can — or should — expect to be protected from competition entirely.  Competition is, after all, necessary.  And it is even desirable in many ways.  It drives innovation and fosters outstanding customer service.  If you can’t stand competition, go find another business to get involved in.

But should restaurant owners be able to expect their landlords to give them some protection?  Or at least not undermine them directly by bringing a competitor into their same shopping center?  The answer is: not necessarily.

I wrote a while back about the need to seek exclusivity provisions when negotiating restaurant leases, and for those provisions to have teeth.  Your landlord is not your partner, and not your protector.  The only way your landlord will keep your competitors out of your shopping center is if it is financially harmful for them to do so.  And those provisions have to be included and negotiated at the time the lease is being signed.

I don’t know what this smaller, older restaurant’s lease said about exclusivity – or if it said anything at all.  But I do know that if it did say anything, it was not strong enough for this landlord to hesitate in bringing in a shiny, new, well-financed competitor.  And because of that, the smaller competitor is probably going to go out of business.

How Long Does it Take to Get a Liquor License in Montgomery County?

cross1Just about every day, we get a call from a restaurant owner (or aspiring one) who is interested in opening a restaurant here in Montgomery County, Maryland. One of the questions that we are almost always asked is “how long will it take to get a liquor license?” It is understandable that this is a primary concern. Many restaurant leases require a tenant to open on or before a certain date, or incur penalties. If you cannot get your liquor license before that date, you are faced with the choice of opening without a license – and tell your customers, “next time you can get a beer, we promise!” – or incurring penalties from your landlord. Even where the lease does not require it, many restaurants understandably do not want to open until they can offer their guests the full experience, drinks included.

So we get it, and we do all we can do to expedite the process. But there are many steps involved, and when it comes to dealing with the government, some things just cannot be rushed. To help give restaurants a better sense of the overall process, and how long it takes, we thought it would be helpful to provide this overview so you can plan accordingly.

Step One: The Application

At this stage we work with you to complete the written application to the County Liquor Board as well as compile all the required affidavits, corporate documents, and other information the Board needs to review your application. If a resident agent needs to be named, or if any documents needs to be created as related to your company or restaurant, that will happen at this stage too. Finally, we coordinate with your landlord, as they will have to sign off and approve your license application as well.

Depending on how diligently we work at this stage to gather the information and prepare the materials, the time from when you contact our office to when the application is submitted can take 7 to 14 days. In certain circumstances, we have gotten applications submitted in as short as 48 hours, but that is not the norm – or our preference.  We find that rushing leads to mistakes, and can ultimately lead to unnecessary delay.

Step Two: Review and Supplementation

After we submit the application, it will be reviewed by licensure personnel at the County Liquor Board. These reviews occur once per week, so it is important to get the applications in before the review day, or you can end up losing a week. After review, Board personnel will contact my office and let us know if they have any questions or if anything is missing. While there are usually follow up questions or requests for further information, it is always our goal that nothing of significance is missing so that the application can be set for hearing. This process of review and supplementation usually takes about one week, but can drag on if there is anything important wrong with the application.  (See, that’s why we don’t want to submit it unless it is done properly).

Step Three: Publication and Posting

After review of the application, you will be provided with a hearing date for your application and a poster to put in the window of your restaurant. This poster will note the date and time of the hearing so any interested member of the public can attend the hearing and, for whatever reason, express support or disapproval of the license application. The hearing will also be publicized on the Board’s website as well as in certain other publications.

The poster must be in your window for a minimum of 30 days, but depending on the dates the hearings fall – they are only held twice per month – and whether the Board’s docket is full, the period between application and approval can be as much as 45 days or longer.  During this period, we try to stay in regular contact with liquor control personnel to make sure there are no last minute issues that we need to deal with.  We want there to be no surprises at the hearing.

Step Four: The Hearing

After the notice period is over, and after all this hard work is done, you will have the hearing on your application before the County’s five-member Liquor Board. Each of the Commissioners will have the opportunity to ask you questions about your business and your experience in the restaurant business and with serving alcohol. The Commissioners will also ask you about your policies and procedures as it relates to the service of alcohol and explore your familiarity with state and local liquor laws.

We usually meet with our clients during the week leading up to the hearing to go over these questions in detail and, at the hearing itself, are usually given the opportunity to ask our clients many of these questions ourselves. We pride ourselves on having our clients exceptionally well-prepared for their hearings.  The hearings can be nerve wracking and intimidating, and solid preparation helps them go more smoothly.

At the conclusion of the hearing, the Board members will vote on whether to grant the license.

Step Five: Final Inspection

Once the Board has voted to approve the application, the hardest work is done. The last step is to schedule your final inspection with the Department of Liquor Control. Someone from the DLC will come to your establishment and inspect the premises and ensure that your restaurant is compliant as it relates to, among other things, where your alcohol will be stored and how it will be served. After you pass your inspection, which will usually take place about a week after your hearing, you can pick up your license.

So, as you can see, this whole process can take anywhere from 8 to 10 weeks from the time you pick up the phone and call our office. We can do our best to try to shorten that time in certain circumstances, but it is rare for the process to take much less than two months from start to finish. And if the application is incomplete or not prepared properly in the first place, that time period can drag on longer.

So the sooner you get the process started, the better.

PRESS RELEASE: The Morris Law Firm Achieves Unanimous Jury Verdict on Behalf of Client Mezeh Mediterranean Grill

FOR IMMEDIATE RELEASE

(Bethesda, MD) — On January 19, 2017, a federal jury in Maryland returned a verdict in favor of Mezeh Mediterranean Grill on trademark infringement and unfair competition claims brought by one of its larger competitors. The lawsuit, brought by Cava Group, Inc., claimed that Mezeh’s logo unfairly infringed on one of Cava’s registered trademarks.

The jury deliberated for less than ninety minutes before returning a unanimous verdict in favor of Mezeh on all claims. The court had previously thrown out claims that Mezeh copied the design and layout of Cava’s stores.

Mezeh is a Virginia-based chain of fast casual restaurants serving Mediterranean-inspired food made with fresh, all-natural ingredients. Mezeh currently has six locations in Maryland and Virginia.

Mezeh had been represented by Sean Morris and the Morris Law Firm, LLC, of Bethesda, Maryland, since the lawsuit’s filing in early 2014, and Morris was the restaurant’s counsel through the three-day trial. “We are very grateful the jury listened closely to the case, and found in favor of Mezeh,” Morris said. “There is no question that this was the correct result, but it was also hard-earned.”

The Morris Law Firm also serves as outside general counsel to Mezeh, a role on which it now intends to focus. “Now that it this trial is behind us, we can turn our focus back to helping Mezeh grow. Mezeh is a great brand, and we look forward to being part of their next chapter.”

The case is Cava Group Inc. v. Mezeh-Annapolis, LLC, et al., 8:14-cv-355.

###

A Hidden Danger in Lease Assignments and Restaurant Sales

hidden-danger-remodelingWe have written here before about important things to consider when purchasing a restaurant, and we have also written about exclusivity provisions in restaurant leases. A recent deal we were working on, however, has highlighted how those two topics work together – and demonstrated a hidden danger for restaurant purchasers that can be hidden in restaurant leases.

As part of our legal assistance of any restaurant purchaser one of the most important things that we do is review the existing lease that will be assigned to the buyer. The quality of the restaurant’s lease, after all, bears an outsized relationship to whether the restaurant succeeds, and how bad things can be for the owner if it does not. Understanding the lease you are inheriting in a restaurant purchase is therefore critical.

In this case, our client was purchasing a restaurant that specialized in a specific type of food – for the purposes of this discussion, let’s say it was a Korean restaurant. We were therefore initially pleased to see that the lease contained an exclusivity provision whereby the landlord was restricted from leasing space in the shopping center to any other restaurant that sold Korean food. That initial pleasure wore off, however, when we noted two other provisions: first, that the tenant would lose that right of exclusivity upon any event of default; and second (and of particular importance in our case), the exclusivity would not survive assignment of the lease. We were able to quickly confirm and get assurance (supported by the appropriate documents of course) that there had been no prior defaults, but we still had to address the assignment issue or our client would be buying a Korean restaurant, but would be taking over without a built-in advantage that the current owner enjoyed.

Thankfully, in this case, the landlord agreed – as part of the assignment – to extend the same exclusivity provisions to the buyer that it did to the seller. It should provide a cautionary tale, however, on the importance of a detailed lease review by a knowledgeable attorney. Had we not reviewed the lease, and paid attention to this provision, our client would have been exposed and vulnerable were this landlord (or a subsequent landlord) to later decide to lease space in the shopping center to another Korean restaurant — perhaps a national chain or hot new fast casual place. Maybe it would never have happened, but when you are investing in the purchase of a restaurant, especially a particular type of restaurant, there is no reason to take that chance.