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.

Big News: Private Liquor Stores May Be Coming to Montgomery County

As we continue our review of the 2017 Maryland legislative session, which ended last week, it is clear that, for those of us in Montgomery County, one of the most consequential – and overlooked – new laws relates to how hard liquor is sold in the County. For the first time since anyone can remember, private retailers will be able to obtain the right to sell spirits such as vodka, rum, whiskey, and gin in their stores.

Now, as with all good things, there are some restrictions on who can apply for these privileges – for example, convenience stores that sell items other than beer and wine (e.g. snacks or groceries) will not be eligible. And eligible stores will still need to contract with the County for the authority to make these sales (with that process still to be worked out via regulations to be formulated by the County DLC).  But still, don’t let anyone tell you any different – this is a very big deal.

Until now, anyone who wanted to buy a bottle of liquor to take home had to buy it at a County-owned retail store. This was a cause of great frustration to many, not only because residents were captive to the selection that the County Department of Liquor Control decided to stock in their retail stores, but also that there were only 26 such stores – for a population of over a million people.

With this change, there are now – immediately – approximately 150 stores that meet the requirements and are eligible to seek full beer, wine & liquor retail sale privileges. If even a fraction of those stores actually sought and obtained the right to sell liquor, the number of available outlets to buy spirits could double, or even triple. Presumably, many would attempt to differentiate themselves from the DLC-owned stores by offering more hard-to-find or craft spirit brands. This increased availability, variety, and overall competition will be great news for consumers.

But it is also wonderful news for so many of our County’s small beer & wine store owners, who are generally prohibited by law from owning more than one store and can often struggle to finds ways to maintain profitability. As lawyers who work with small business owners every day, and who do all we can to ease that struggle, it is gratifying to know so many of our clients will have the opportunity to expand their product offerings in such a dramatic manner.

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.

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.

The Morris Law Firm’s Founder Featured in the Washington Lawyer’s Issue on Restaurant Law

fullsizerenderDemonstrating the critical importance and growing complexity of the legal issues surrounding restaurants, the Washington Lawyer dedicated its September 2016 issue to the intersection of the restaurant business and the law.  The cover story was entitled Behind the Kitchen Door and featured interviews with local restaurateurs, including celebrity chef Mike Isabella, and our founder, Sean Morris.

Among the things Sean was asked about was what the first thing an aspiring restaurateur should do when considering opening a restaurant:

 

Sean Morris, founder of the Morris Law Firm, LLC, in Bethesda, Maryland, and an expert in restaurant law, urges aspiring restaurant entrepreneurs to talk to a real estate broker and a lawyer.  ‘Those two people can enable you to survey the legal landscape and the actual physical landscape of what the local real estate market is,’ Morris says.

Sean was also asked about upcoming changes to DC’s zoning laws as they relate to fast casual restaurants, liquor licensing issues, and the pitfalls of using social media to boost your restaurant’s profile.  The magazine also picked up on Sean’s advice to shore up the four most important legal relationships that you will encounter in your restaurant business and reprinted our blog post of the topic on the DC Bar’s website.

Finally, we were very proud to have Sean featured in the magazine’s Member Spotlight for September, which not only included a full page profile, but provided Sean with the opportunity to tell the story of why he was drawn to a practice in restaurant law:

Through college, through graduate school, throughout my pre-law school days, I always worked in restaurants. I washed dishes. I bussed tables. I waited tables. I’ve worked in kitchens. … I came back to this industry because I knew it and because I loved it. It’s an industry where there are a lot of good people working really hard who could use just a little bit of help, particularly from someone who knows their business.

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If you are interested, you can check out the full digital edition of the issue here.

 

Hooters Waves White Flag: Will Voluntarily Close Rather than Face Revocation

There are some battles that are just not worth fighting, apparently.  For the Rockville, Maryland Hooters restaurant that was charged with overserving the drunk driver who killed Montgomery County police officer Noah Leotta late last year, that would include the battle to save their liquor license.  The restaurant faced a show cause hearing before the Montgomery County Liquor Board this week over whether their license should be revoked, or some lesser penalty (a suspension and/or fines) should be levied.  Apparently seeing the handwriting on the wall, the restaurant opted to forego battle and accept terms of surrender — namely, the surrender of their license.  They will voluntary turn over their license and close their doors permanently in November.

Many may wonder why the restaurant wouldn’t at least try to defend themselves — after all, there is no stronger penalty the liquor board can levy than revocation, and this result is tantamount to that very outcome.  Moreover, in our experience, it is notoriously difficult to make the case that an individual became intoxicated at a particular establishment, and as a result of drinks served to him at that establishment.  This was, however, a very high profile case and Hooters — a nationally recognized brand — may have had strong business reasons to not engage in what seem like an exercise of shirking responsibility.  The individuals who held the license for this establishment may have also had a strong interest to avoid a hearing and not tinker with the possibility of revocation — had their license been revoked they would have been permanently banned from ever holding a license again.  By voluntarily surrendering their license, they avoided that fate.

Considering the business and legal implications, and the fact that the liquor board is not a court of law but an administrative body that has broad discretion to make decisions that it thinks are in the best interests of the community, this voluntary surrender and closure appears to be the proper result for all concerned.  Finally, considering that the establishment cannot face any civil liability under state law (because Maryland is one of only a handful of states that does not permit so-called “dram shop liability”), this should close the matter (and a sad chapter) for the restaurant and its licensees.

 

 

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.

 

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.

How a Glitch in Local Liquor License Laws is Hurting Fast Casual Restaurants

beer tapsI’ve written here before about how one of the distinguishing and appealing elements of fast casual restaurants is that, unlike more traditional “fast food” outlets, they often serve alcohol. Most often, however, these restaurants do not have a full bar and only want to serve beer and wine. That more limited offering can make things easier for the restaurant owner because they can simply obtain a beer and wine license, and not have to bear the heightened scrutiny and oftentimes greater regulatory burdens that come with the right to sell hard liquor.

Here in Montgomery County Maryland, where I do a significant amount of work, it doesn’t quite work that way due to a glitch in the local liquor laws. That glitch is this: an individual can hold up to ten full liquor licenses – i.e. those for beer, wine, and liquor – but are restricted to only one beer and wine license. Of course, very often fast casual restaurants have more than one location in a given jurisdiction, and several of my clients have more than one here in Montgomery County. If they want liquor licenses for all of their stores, the law requires them to apply for and obtain full liquor licenses, even if they only want to sell beer and wine. And while that full liquor license gives those restaurants the option to sell drinks containing spirits if they’d like, it also comes with it a much higher licensing fee and more burdensome administrative and regulatory requirements.  While many proceed anyway, and take these burdens on, others decide it is not worth it, and forego alcohol altogether.

Why this inconsistency in the law exists is difficult to say, but it appears it may simply have been an oversight as the laws were amended over the years. Indeed, for years full liquor licenses were by far the most desirable to restaurant owners and very few were interested in selling only beer and wine. Thus, when lobbying efforts were made to expand the number of licenses an individual could hold, the focus was on full beer, wine, and liquor licenses, and no changes were made to the laws regarding the more limited beer and wine licenses. As fast casual continues to boom, however, it would seem that greater attention needs to be given to this inconsistency, and that the right to hold beer and wine licenses be expanded in the next legislative session to meet the demands of this growing trend in the restaurant industry.

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.