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.

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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.

In Restaurant Sales, its You and Me and the Landlord Makes Three

img_broken_handshake_540x360When involved in a restaurant transaction, the parties (understandably) spend much time and effort on examining the health of the business and the terms of the deal itself. The buyer will, among other things, study the restaurant’s revenues and operating expenses, any potential liabilities, and the condition of the equipment involved. On the other side, especially if there is seller financing, seller will examine the creditworthiness and financial wherewithal of the buyer, as well as their experience in running such a business. And both sides (of course) will focus great energy on negotiating the purchase price.

Often forgotten in this exchange of information and examination of risks is the landlord. The landlord is a necessary party to almost all restaurant deals, because almost all restaurant leases contain provisions that require the landlord’s consent to the assignment of the lease from the seller to the buyer. If the landlord does not provide that consent, the deal is off – even if the seller and buyer are in complete agreement on all terms.

For this reason, if you are considering listing your restaurant for sale, you should consult with your landlord to determine (or at least get a sense of) the conditions it might place on any such assignment. Is there a restriction on a change of format (e.g. the type of food)? Will the landlord require the new tenant to meet some threshold of financial strength? Determining these factors early on can save you from wasting time with a prospective buyer that has little or no chance of being approved by the landlord. And if you are a prospective buyer, among the first things you should ask the seller is if he has had these conversations with the landlord.  That question may save you from spending time and money (i.e. lawyer’s fees) to negotiate a transaction that will be snuffed out by the landlord down the road.

So the lesson here is that, while it may take two to tango, it often takes three to finalize a restaurant deal.

Bad Agreements with Bad Actors: A Few Words on Contracts

deal-devil-dude-e1383095467983Contracts are a necessary element of business. They form the relationships and set the expectations on which we all rely as businesspeople. But, at the end of the day, a contract is nothing more than a promise. And a promise, as we all know, is only as good as the person who makes it.

When you enter into a contract, therefore, you have to consider two important things:

First, what is the quality of the actual contract? For example, does it clearly and unambiguously set forth what each party is supposed to do, and what happens if they don’t? Does it provide reasonable grounds for termination of the agreement is not working out, but still ensure that each side gets the benefit of their bargain.

Second, what is the quality of the person on the other side of the contract? Is this a person who will keep his promises? After all, if he doesn’t, all the contract allows for is me to seek a remedy, usually by going to court. All too often, that is not really a remedy at all, given the expense involved and the likelihood that the court can even provide the relief you need.

In my practice, I am often called upon to review a business contract (or, as the case may be, a commercial lease, which is nothing more than a specific type of contract) after the relationship has soured, a dispute has arisen, and a business owner comes into my office asking what he or she can do. In many of these instances, the contract involved either contains ambiguous or unfavorable terms, or is missing important terms altogether.  The counterparty to the contract is either using terms that were put into the contract to bludgeon my client, or taking advantage of the absence of terms to run roughshod over him.

More frequently than I care to mention, when that business owner is sitting in my office, it is the first time a lawyer has even looked at the contract. The opportunity to prepare a solid, comprehensive, clearly worded contract is long past – and now the only thing we can do is try to reach a negotiated resolution to the dispute (if that’s even possible), or litigate it. In either instance, the expense involved is far greater than it would have been to do it right in the first instance.

Humans are fallible, imperfect beings. And business, as is life, is unpredictable. Try as you might, you will never be able to predict with 100% accuracy who will keep their promises and who won’t, and what relationships will work out and which ones won’t. What you can do, however, is take control of those things you can. And one thing you can do is prepare rock solid contracts, and do so right from the beginning.

The Four Relationships that Can Make or Break Your Restaurant Business

restaurant kitchenThe restaurant business, like almost all businesses, is about relationships. And, of course, the most important one you will have is with your customers. If you don’t preserve that relationship, you won’t have a business for very long. But there are other relationships that must be protected just as jealously, because if any of them sour, they can bring down your business just as quickly as if customers stop coming in the door.

In our experience, these are those four relationships:

1.      With Your Partners (and Investors).

If you go into business with anyone else, that person has control over the success or failure of your business – regardless of whether they have any involvement in its day-to-day operations. If your restaurant is struggling, will your partners and investors have the patience to allow the plan to work, or will they want to bail out at the first sign of trouble? And, if they do bail out, can they pull their money out and leave you with all the responsibilities and liabilities? Alternatively, if the business is doing well, will they insist that the profits be paid out in distributions to the partners, or will you have the ability to put that money back into the business to enable it to grow and thrive? And, regardless of whether you are succeeding or failing, how will decisions be made about how the restaurant is managed? What if there is a deadlock – can a decision be made at all?

These are all questions that must be answered well before you open your doors – and well before the first sign of discord. That is why we advocate that preparing a written operating agreement should be among the very first things you do when you embark on your restaurant business. If you are in agreement on all these things – great, finalizing the agreement should be easy. But if you’re not, it’s better to find out sooner rather than later.

2.      With Your Landlord.

Perhaps no single person (or entity) has more control over the future of your restaurant business than your landlord. A tough-nosed landlord can stick you in default over the slightest deviation from the strict terms of your lease, whereas a more lenient and accommodating landlord can work with you through rough patches and allow your restaurant the time it needs to get up and running and the room it needs to prosper. So while you need to understand the terms of your lease, you also need to understand who your landlord is – and how they operate – before you sign your lease.

But even a lease with a well-meaning landlord needs to be reviewed thoroughly and completely – every word – because landlords can change, and what today is a small local landlord with a reputation for working with their tenants can tomorrow be an out-of-state investment trust that does not care that you’ve had a few tough months and it always picks up in the Spring. In those cases, your only protection will be your lease. Indeed, the lease you enter into with your landlord is probably the document that will have the greatest impact on the success of your restaurant. For all too many restaurants, whether they succeed or fail is predetermined at the moment the lease is signed. Make sure you not only sign a lease with a good landlord, but that that lease itself is top notch too.

3.      With Your Employees.

As with any service business, a restaurant’s employees are its lifeblood. They are its face to the world and, without them, the food doesn’t get prepped, cooked, plated, or served. Without good employees, even a perfectly formulated restaurant concept will assuredly fail. But taking care of your employees means more than just showing them gratitude, paying them well, and giving them appropriate time off. It also means complying with the letter of the law when it comes to wage and hour and other employment laws.

Federal and state lawmakers, for good reason, have made it a priority to ensure that unscrupulous employers do not take advantage of low wage workers, and the restaurant industry’s heavy reliance on tipped employees makes them a target for government regulation as well as lawsuits from disgruntled employees who may not have been properly paid. To protect themselves, restaurants must keep impeccable employment records and strictly adhere to all employment and wage laws. Take a lesson from those who haven’t, and have paid dearly.

4.      With the Government.

As businesses that prepare food for public consumption, and often serve alcoholic beverages to go along with that food, restaurants are among the most highly regulated small businesses in the country. From food safety permits to liquor licenses, there is almost nothing that restaurants do that does not require government approval or subject it to government oversight. The IRS is also notorious for making restaurants among its favorite audit targets. As with the employment issues highlighted above (which is another area of government oversight and regulation) strong compliance programs are essential. No one is ever going to be perfect, but if you are found to have violated a law, it is better to be able to show it was in spite of your best efforts at compliance, not because of a lack of such efforts.

 

Client Alert: Minimum Wage Increases in Maryland and DC

This post is to remind all clients or interested business people reading this that, effective this past Friday, July 1, 2016, the hourly minimum wage in Maryland and the District of Columbia has increased as follows: 

Maryland:

Statewide.  The minimum wage for regular hourly employees is now $8.75 per hour.  It had been $8.25 and is set to increase annually again in 2017 and 2018, to an ultimate level of $10.10 an hour.  For employees that earn a substantial portion of their income from tips, however, the tipped minimum wage will remain at $3.63 an hour.

Local Laws.  Note that some Maryland jurisdictions have a higher minimum wage and that in Montgomery County  the minimum wage was raised to $10.75 as of July 1, 2016, and will go to the same level in Prince George’s County on October 1, 2016.  Both counties’ minimum will go to $11.50 as of July 1 and October 1, 2017, respectively.  The tipped minimum wage in both jurisdictions is unchanged at $4.00 per hour.

District of Columbia:  

The minimum hourly rate for regular hourly employees is now $11.50 per hour, while the tipped minimum wage will stay at $2.77 an hour.

If you have any questions about how these new rates effect your business, or if you are unsure if you are properly using the tipped minimum wage, please feel free to contact us.

Don’t Even Think About Buying a Restaurant Without Answering These Four Questions.

menu-restaurant-vintage-tableFor generations, owning and operating a restaurant has been a common dream for would-be entrepreneurs. Unlike many other businesses, most of us think we understand how restaurants operate (we all eat at restaurants, don’t we?), and there is a certain charm and allure to the idea of welcoming our friends and neighbors to a place all our own. Beyond that, while individual failures are plentiful, the restaurant industry as a whole has been remarkably resilient, even in tough economic times.

Still, we all have heard the legendary statistics regarding new restaurants’ failure rates, and wonder if there is a way to mitigate that risk and still pursue the dream of restaurant ownership. For many, the answer is to purchase an existing restaurant, which may have a reliable customer base, an established location, a proven concept, and a well-known name. If you decide to pursue that route, however, we encourage you to ask yourself (or your lawyer) a few questions early on in the process:

1.     What, exactly, am I buying?

Yes, you’re buying a restaurant. We know that. But it’s really not that simple. In most cases, if you are buying a single restaurant, you will do so through what’s called an asset purchase agreement (APA). In such a case, you will buy all the assets of the restaurant business, including both tangible (tables, chairs, kitchen equipment, point-of-sale system, etc.) and intangible (trade name, intellectual property, good will, etc.). When restaurant deals are accomplished this way, the buyer takes over all the operational aspects of the restaurant, but does not (generally speaking) assume the debts and liabilities of the prior owner, as the buyer would if they simply bought the company that owned the restaurant outright. Moreover, regardless of the structure of the deal, all buyers should conduct their due diligence such that they assure themselves they are not “buying” anything they didn’t bargain for, such as long term payment obligations, liabilities to employees or vendors, or pending regulatory violations and associated fines,

2.     Do I need a new lease?

Often, when a buyer purchases a restaurant, they simply take over the existing lease of the prior owner through a process called an assignment. An assignment, however is not always possible or advisable. In most instances, for example, a landlord will have the right to approve any proposed assignment and may not wish to engage with the new owner on the same terms as the prior one. In that case, the landlord may insist on a new lease with more terms more favorable to the landlord than those of the existing lease. Conversely, the buyer may object to certain terms in the existing lease – a demolition clause, or the lack of renewal options, or simply that there is not enough time remaining on it – and request a new lease as a condition of proceeding with the sale. Whatever you case may be, any agreement to purchase a restaurant should include a contingency that the buyer be afforded time to secure either an assignment of the existing lease or a new lease altogether.

3.     Am I able to transfer the liquor license?

For many restaurant sales, the transfer of the existing liquor license is essential, especially in jurisdictions where the issuance of new licenses is limited in some way. In such instances, buyers must take appropriate measures to ensure there is nothing that could prevent the restaurant’s liquor license from being transferred from the seller. Such things could be a poor compliance record that could cause the transfer to be protested, a pending violation that could lead to revocation, or some other factor related to the buyer himself that might cause local authorities to deny the transfer. Investigation into such matters should be part of any buyer’s due diligence, and appropriate contingencies should always be included in any agreement.

4.     Will I have full rights to the restaurant’s trade name?

Here we have the very simple matter of ensuring that, if you are buying “McFinley’s Tap House,” you can still call it “McFinley’s Tap House” after you take over. As stated above, most asset purchase agreements will include the restaurant’s trade name and other intellectual property as being among the intangible assets of the business.   In some cases, however, a third party may have granted the seller the rights to use a restaurant’s name, and may still be entitled to assert some control over who uses that name. Any seller should therefore be required to demonstrate that he has the right to transfer the trade name to you, and that no third party licensor has any ability to prevent you from using it.

Three Common Mistakes to Avoid When Starting your Business

slip-up-danger-careless-slipperyLet’s get one thing out of the way:  when you are starting a business you are going to make mistakes — a million of them.  That’s okay.  It’s how we learn and grow, and it also keeps things interesting.  But what’s not okay is when we make mistakes that are easily avoidable, and which can have serious repercussions for the future of our businesses, whether they succeed, and what happens to us if they don’t.

These are three such mistakes (I hope you’ll avoid them all):

1.    Delay in setting up your LLC or Corporation

No matter what anyone tells you, establishing a corporate entity for your business is not difficult, and should not be expensive. But it is one of the most important things you can do to protect yourself from personal liability for the debts and obligations of the business. If you delay in setting up your LLC or corporation and sign (even a few) contracts in your individual capacity, you can be exposing your personal assets, and those of your family, to risk in the event any of those contracts goes bad. The same would be true if you engage in a business where someone could be hurt while visiting your business or while working for you. If any of those losses occurs before you’ve property established your entity, you are probably going to be on the hook personally. It is therefore imperative that you set up your entity – and know how to use it properly — such that any person harmed (either physically or economically) by your business can only sue the business, not you personally

2.    DIY Your Lease Negotiation

I see this way too often in my practice, especially my restaurant practice: someone signs a lease without having it reviewed by an attorney, trying to avoid another upfront expense. I get it. You’re spending a ton to get your business off the ground and this seems like one you can avoid. After all, the lease is pretty standard, right? Wrong. Most often, the lease was prepared by the landlord’s lawyer and has many clauses in it that skew strongly to the landlord’s benefit. Why wouldn’t it, after all? If you were preparing the lease, wouldn’t you do the same thing? Here’s the thing, though: many of these terms are negotiable, especially for a landlord looking to make a deal. For the worst provisions, I will simply request that they be removed entirely. But if you try to do this yourself, will you know where those bad terms are? Will you know how hard you can push back? Doing it yourself may cost you your best (and last) opportunity to ensure the lease is as fair as possible, and that you have the best chance to succeed in your business.

In many cases, your lease will commit you to pay hundreds of thousands of dollars over the next 5, 10, or 15 years. Your lease has the power to make or break you, especially in the restaurant business, and a bad lease can doom even the best operators. That is why going it alone on your lease is one of the most penny-wise and pound-foolish things you can do. You owe it to yourself to do all you can to ensure you understand what you are signing, and that you have achieved the best terms possible.

3.    Don’t Put Your Operational Agreements in Writing 

            When you start a business with other people, there are only two possibilities: that you see everything exactly the same way as to how to manage the business, or that you don’t. Very often, however, people think they are in the first category, but they are really in the second. The best way to find out is to put everything down in writing. There is really no excuse. And, as I often tell my clients, if you don’t. the worst thing that can happen to you may be that the business is successful. Then there will actually be something to fight about. Don’t put yourself in that situation. Put it all in writing (and make sure you understand it all before you sign).

12 Questions to Ask (and Answer) Before Signing Your Restaurant Lease

As I’ve written here before, perhaps the document that will have the greatest impact on the success of your restaurant will be your lease. It sets the terms of your relationship with your landlord, governs the manner in which you may use your space, and determines what you must pay – each and every month – just to maintain the right to open your doors. For all too many restaurants, whether they succeed or fail is predetermined at the moment the lease is signed.

But leases are also complex documents, which are drafted by the landlord, and can be confusing to tenants without a strong legal or business background. When reviewing a lease, it can be hard to know where to start. To provide some guidance, here is a list of some of the questions you must ask – and have answered clearly in your mind – before you execute a lease and commit yourself to its terms. This list is not exhaustive, however, nor is it intended to replace the guidance of an experienced restaurant leasing attorney. With that said, here are some of those key questions:

1.   Who is the Tenant?

You may be saying to yourself, “what does he mean, who is the tenant? Aren’t I the tenant?” Well, maybe not. Most often, tenant restaurants will form a new entity for their restaurant business (a limited liability company, or LLC, for example) and it will be that entity that is the actual tenant on the restaurant lease. Signing a lease on behalf of an entity provides an extra layer of liability protection for the individual owners of the business (subject to the guaranty – see below) if the business fails to meet any of its lease obligations, such as if it cannot pay its rent. If you are the tenant on the lease individually, however, you will be personally liable for all rent and other obligations under the lease. Similarly, if you are a multi-unit operator and sign all your leases in the name of the same entity, rather than create a new entity for each location, you put the assets of all your restaurants at risk if one defaults on its lease.  So make sure you understand when you sign your lease, who is responsible if things don’t work out.

2.   What is my personal obligation on the guaranty? 

The corollary to the explanation above to question 1 is that, if the tenant is an LLC, the Landlord is going to want some real live person to “guarantee” that the terms of the lease will be followed, and be liable on the lease if the LLC cannot meet its obligations (which is often the case if the restaurant goes out of business). This “personal guaranty” as it is known can, however, be limited such that the guarantor is not liable for the full extent of any damages caused to the landlord by the tenant’s breach of the lease. Among these limitations are that the guaranty is capped at a certain amount (e.g. 24 months of base rent), or that it “burns off” after a specified period of time such that there is no further guarantor liability if rent is paid on time for some specified period. Not all landlords will agree to such limitations, and much will depend on who the tenant is, but as with Number 1 above, understanding the extent of the guaranty (and seeking to limit it where possible) is critical to understanding your personal exposure and risk in signing the lease.

3.   Can I get a liquor license for this space?

Many restaurant owners are surprised to know they can’t just get a liquor license anywhere. Many locales have strict limits on where businesses that sell alcoholic beverages can be located, and others have a cap on the number of new licenses they will issue. If you sign a lease without understanding how these local laws may effect your planned business, you could be placed in a situation where you are either (in the former situation) unable to get a liquor license at all, or (in the latter) be required to spend significant and unanticipated sums to purchase an existing license. In either case, if your restaurant depends on a liquor license for its survival, this miscalculation can doom your restaurant from the start.

4.   When do I have to start paying rent?

Unlike residential leases, where you start paying rent as soon as you move in, many restaurant leases will provide you with several months before you have to make your first monthly rent payment. This delay is to permit you to do whatever buildout you may need to do for your restaurant, and perhaps even give you some time to get up and running before you must start meeting that monthly rental obligation. How long you will be permitted before you have to start paying will of course be a key topic of negotiation, and every extra month will make a big difference in whether you get off on the right foot or are playing from behind right from the start.

5.   What do I really have to pay every month? 

Of course you have to pay your monthly rent. But what else? If your restaurant lease is what we call a “net lease” you will have to pay your share of other expenses incurred in the operation and maintenance of the property. These charges, which are often called “pass throughs,” because the landlord pays them directly and passes them through to the tenant as an additional monthly cost, can include property taxes, common area maintenance (CAM) costs, and insurance – and in the case of a “triple net” or NNN lease will include all three. As these costs can be significant, and can change from year to year, it is critical to your monthly budgeting to understand as precisely as possible how much you should expect to pay in pass-throughs every month. You do not want to sign a lease for what you think is a reasonable rent, only to find out that the pass-throughs add another 50% to your monthly obligation.

6.   Do I owe my landlord a share of my sales?

You may want to consider this question 5a, because as with the above, it relates directly to what you will really be paying every month. That is because, in addition to pass-throughs, your lease may also require you to pay to the landlord some percentage of your sales every month in the form of “percentage rent.” This extra rent effectively allows your landlord to share in your success (but good luck getting him to reduce your rent if you are struggling). Sometimes, this percentage rent only kicks in after a certain sales threshold is reached, but in any case, a restaurant tenant absolutely must have a firm grasp on when he may owe percentage rent, how much, and what reporting and document requirements he may have to support the sales figures used to calculate this extra rent.

7.   Do I have an exclusivity provision?

I always encourage my clients to request that their restaurant leases contain a provision that states the tenant has exclusive rights to sell a certain style of food – e.g. that tenant will be the only one in the shopping center who can sell fast casual Mexican or sit-down Mediterranean or carry-out Chinese.  If you do not have an exclusivity provision, there may be nothing stopping the landlord from leasing to a competing business who sells the same type of food you do, just because the landlord may think they make a better tenant, or if they just need to fill the space.  For that reason, such a provision is strongly advised. And more than that, if your lease has such a provision, it is critical that it also protects your exclusive use by imposing real financial penalties on the landlord if your exclusivity is violated.

8.   Can I change the concept of my restaurant if it is not working?

Again, we have a corollary. One of the reasons landlords will agree to include exclusivity provisions in the lease is they have a strong interest in ensuring the proper mix of tenants in their shopping centers. That is to say, the landlord may not want two fast casual Mexican places. But with that interest in ensuring a good mix of tenants, comes with it an interest in controlling the type of offerings their tenants provide. As such, landlords generally will include in their restaurant leases a use provision that sets forth the type of restaurant the tenant is going to operate, and which requires that the tenant not deviate from that use during the term of the lease. Or, at least, that the restaurant does not do so without the landlord’s approval.

9.   Can my landlord make me move to a new location in the shopping center?

Like most of us who own property, landlords want to preserve maximum flexibility with respect to how they use their property – and long term leases can get in the way of that. To deal with that fact, landlords will often request that relocation provisions be included in restaurant leases such that if they want to redevelop the portion of the shopping center in which your restaurant is located, they can move you to another location. While that desire may be reasonable, the lease terms must also be reasonable and ensure (among other things) that the new space you are moved to is similar (in size, access, visibility, etc.) to that from which you are being moved, that your business will not be unduly interrupted by the move, and that you are given a chance to participate fairly in the selection of the new space without fear that the landlord will simply kick you out and terminate the lease if you do not agree.

10.   What happens if I am late or miss a rent payment?

This is a biggie. You know you have to pay your rent on time, right? But what actually happens if you don’t? The answer is, as one of my law professor liked to say, “IAD. It all depends.” And on what does it depend? Many things: how late you are; whether you’ve been late before; what your relationship is like with your landlord; and, for many, who your landlord is (some are bigger sticklers than others.). Like anything else, however, what actually will happen is less important at the time you sign your lease than what could happen. And what could happen will depend on only one thing: the terms of the lease.

In many leases I see what could happen is the nuclear option: termination and eviction. After one missed or late payment, you ask, really? Yes, really. In these leases, the landlord reserves the right to terminate the lease and evict the tenant if one single rent payment is late by defining such a late payment as a default under the lease. You’re late, you’re in default, simple as that. Now you are at the landlord’s mercy, as all default remedies available under the lease are now in play. A better option? Take a good hard look at those default provisions and do all you can to get some wiggle room in the event of a late payment – notice and an opportunity to cure being the most obvious. Sure, maybe the landlord won’t evict you for one late or missed payment. But the fact that he could should be enough to make you worried.

11.   Can I assign this lease if I want to sell my restaurant?

Ten years, which is the length of most restaurant leases I see in my practice, is a long time. People’s lives change a lot over ten years – families grow, people relocate, health deteriorates, businesses struggle…. Maybe after a time, running a restaurant just does not seem like the best option for you anymore. But if you are tied to a long-term restaurant lease, what do you do? For many, a strict restriction on assignment (the process by which someone assumes your obligations on a lease) seems like a trap from which escape to another life in impossible. Thankfully, that is not altogether true.

Generally, a landlord wants a good tenant who is invested in their business and wants to and has the capacity to be successful. If that is no longer you – for whatever reason – and you bring to the landlord someone who wants to buy your business and take over the lease, most landlords will be receptive (even if the lease has a strict prohibition on such assignments). That does not mean, however, that you should ignore such prohibitions at the negotiation and signing stage. You should still make sure you understand the limitations on assignment built into the lease and, to the greatest extent possible, do what you can to carve out the broadest allowance for such assignment that you are able. The less you are dependent on your landlord’s good graces, particularly if you meet with times of struggle, the better.

12.   What are my renewal options?

Again, ten years is a long time and a lot can change over that time. Not the least of those changes is the value of real estate and the associated market rates for rental property. If you were a pioneer and your restaurant is now located in an area where people are moving in and rents are skyrocketing, the terms on your option to renew (assuming you have one) can make the difference between whether you can stay (and benefit from your foresight in opening in this hot neighborhood), or have to find new space, perhaps at a higher rate or in a less desirable neighborhood.

The determining factor may be whether your renewal option is on the same terms as the primary term of the lease (e.g. a fixed annual percentage increase) or whether it is at market rate, which can lead to a whole new round of negotiations with the landlord and is, in many ways, not a real renewal at all. So pay attention to those renewal terms and, for goodness sake, certainly keep in mind when you have to provide notice of your intent to renew. You don’t want to negotiate favorable renewal terms at the time of your lease, only to lose that benefit by letting your renewal deadline to lapse.

 

Again, this list is not exhaustive and others will no doubt be important in your restaurant lease negotiation (e.g. who pays for repairs to the building or its systems? what rights do I have to use the sidewalk or patio?), but I hope it begins to convey the range of issues in play. I hope it also conveys to you that the assistance of an experienced restaurant leasing lawyer may be advisable, if not an absolute necessity.

If you need help answering one of these, or any other question, as you review and negotiate your restaurant lease, please give us a call.

Yes, Your Business Needs an Operating Agreement

agreement

Imagine this scenario:

A couple of years ago you partnered up with a few associates and started a new restaurant business. Because you did not know much about the business, you opted to take a background role, with your contribution largely being financial. You trusted your partners, who had experience as chefs and restaurant managers, to run the day-to-day operations of the business. After a few rough months, the restaurant started doing really well and is now thriving, but you have not really seen much in the way of a return on your investment.

You have started to wonder and have asked your partners whether you will start seeing some distributions any time soon. You also called a local lawyer you know who has experience with small businesses and asked her for some advice. You and she scheduled a meeting, and she asks you to bring a copy of the company’s operating or partnership agreement. You check your files and review your emails from a few years back only to discover there is no such agreement, that you and your partners never entered into one. You were too excited to get going and didn’t want to spoil the good vibes between you all.

You mention this all to the lawyer when you meet with her, and explain the overall situation, before asking her, “What are my rights?” Her answer (not in so many words, and perhaps a bit more gently): “Who the heck knows?”

While it is true that the corporate and business law of the state you live in may provide some answers, the lesson of this imaginary story is this: It is impossible to overstate how important a good operating agreement** is if you are embarking on a restaurant (or any business) venture with anyone other than just yourself. With the possible exception of your restaurant lease, it is probably the most important document you will deal with. That is because, while your lease may be a key factor in whether you succeed or not, your operating agreement will be the determining factor of what happens if you succeed or not. And, as I tell my clients, sometimes the worst thing that can happen if you do not have a good operating agreement is that you do succeed, because then there is actually something worth fighting over.

So, why do you need an operating agreement? It is, among other things, to answer the most critical questions about how your company will be run:

  • Who has primary responsibility for managing the day-to-day affairs of the company?
  • What are the manager’s duties, obligations, and responsibilities?
  • Which matters get put to a vote of the members and which are left to the discretion of the managers?
  • What happens if the manager of the business is failing in his duties and needs to be removed?
  • How are profits of the business distributed to the members?
  • What happens if a member of the company wants to leave and be bought out?
  • How does the company raise more money if it is needed?
  • What if the company wants to take on investors as new members?
  • What happens if the company gets purchased?
  • What happens if the business fails?

The time to get on the same page with your business associates regarding these questions is at the start of the business, not when they come up later on.  Because if you wait until then, and you do not have a good operating agreement, the answer to each of these questions can be the same as the one the lawyer gave in the story above: “Who the heck knows?”

 

** NOTE:  I’ve used the terms “operating agreement” and “members” in this post because most of my clients structure their businesses as limited liability companies (LLCs), but the same would be true of a partnership or shareholder agreement if you were structured a partnership or close corporation.