Deadline to List Calories on Restaurant Menus Quickly Approaching

As of May 5, 2017, chain restaurants with 20 or more locations are required to provide nutrition labeling of “standard” menu items. Restaurant owners should, if they haven’t already, start preparing for the compliance deadline. In addition to restaurants, this requirement also applies to food facilities in entertainment venues, such as movie theaters and amusement parks, take-out food establishments, bakeries, convenience stores, grocery stores and supermarkets.

These menu labeling requirements were published on December 1, 2014 as a final rule by the Food and Drug Administration (“FDA”), as required under the Affordable Care Act. If you are a small business owner these new rules will have a significant impact on your operations. What it means is that calorie counts will have to be displayed for popcorn at a theater, food from a salad bar, hot dogs from a convenience store and takeout pizza. In addition, vending-machine operators with at least 20 locations also will be required to post calorie counts.

Calorie information also will be required for some alcoholic beverages served in bars and restaurants. This would apply to beverages listed on menus and menu boards, however, this would not apply to mixed drinks ordered at the bar. Craft brewers should take notice. Even if the rules may not directly affect beer manufacturers, those that sell their brews to chain retailers may be forced to supply calorie counts or take their products elsewhere.

While the purpose behind these rules are to combat obesity in America, where over one-third of meals are consumed outside the home, the effect is to burden retailers with significant compliance costs. Retailers are now faced with the choice of passing this additional cost onto the consumer or eliminating certain products from their menus. While not an easy decision for businesses to make, non-compliance can lead to legal action by the FDA.

The rule’s requirements for determining caloric content and labeling menus are highly detailed and complicated. Therefore, if your small business needs assistance in complying with the rule, please contact us at Morsel Law.

RESTAURANT LEASING: PART 4 OF 5

Your Hours May Be Set By Your Landlord:

The Continuous Operation Clause in Restaurant Leases

Most landlords will insist on including a continuous operation clause in a restaurant lease. These clauses require a tenant to be open for business continuously during the term of the lease on specific days and at hours dictated by the landlord. It is in the landlord’s best interest to make sure it’s tenants are fully operating because this attracts customers. More customers increase a tenant’s sales, which in the case of a lease with percentage rent, means more rent owed to the landlord. While these clauses vary considerably from one lease to another, it is important to read and understand them before you enter into a long-term agreement as continuous operation clauses have several hidden problems that could affect the unsophisticated restaurant tenant.

When negotiating a restaurant lease it is crucial to address the days and hours of operation up front. If a landlord isn’t flexible on these items, it’s better for a tenant to know right away so the tenant doesn’t waste their time and money on a site that won’t work for their business model. A clause that requires a tenant to open earlier, or remain open later, then times customers are predicted to patron the restaurant will quickly erode its profitability. For example, a brewpub restaurant concept probably shouldn’t be expected to serve breakfast, but it probably would want to remain open late to maximize alcohol sales. Likewise, a coffee shop serving breakfast and lunch probably won’t want to be required to remain open until 10:00 p.m. Also important for tenants operating in shopping centers that desire to remain open past normal center hours, the lease should address the party responsible to cover increased operating costs, such as additional lighting, security, parking and access.

Another important issue to address in continuous operation clause is the ability of the tenant to close an unprofitable restaurant and/or terminate the lease. Under a typical continuous operation clause, a tenant would be in default under the lease if it ceased operating, opening itself up to damages and penalties. A tenant in this situation would be forced to decide between closing the restaurant to reduce its costs and expenses or default on the lease. However, a tenant can protect themselves from this situation by insisting on including a “go dark” clause.

A “go dark” clause permits a tenant to stop operating at a site without being in default under the lease. This clause is typically dependent on tenant complying with all of its other lease obligations, including paying rent. A “go dark” option may be available immediately or after a period of time operating (e.g., 1, 2 or 3 years). A tenant will still be obligated to pay rent under the lease, but its expenses will be reduced because it is no longer operating. Landlords may require a tenant to provide a reasonable amount of notice of its intent to go dark so that it can find a suitable replacement for the tenant. Since such a notice requirement will extend a tenant’s ability to stop the bleeding, the tenant should insist on minimal amount of notice as possible.

In the event a tenant goes dark during the term of the lease, a landlord is left with an empty space that isn’t generating sales or attracting foot traffic. In order to protect its interests, the landlord may insist on a recapture right. This recapture right permits a landlord to regain control of the space after a tenant goes dark for a period of time and re-lease the space to another tenant of its choice. When the landlord elects to recapture the space the lease terminates. Tenants should include carve out language in the recapture clause for periods of time tenant closes due to a casualty, repairs, maintenance, alterations or periodic reimaging. A landlord may attempt to include language in the recapture clause that requires the tenant to reimburse landlord for certain costs, such as improvements and brokerage fees. A tenant may argue that since the landlord has the ultimate decision to terminate the lease, but for landlord recapturing the space, it would have paid rent for the entire term.

Continuous operation clauses have many moving parts and are complicated.  While this article touches upon some of the issues that commonly arise in a lease negotiation, how these and other issues are resolved will depend upon many factors, including the relative bargaining strength of the parties involved.

Worldwide Olive Oil Shortage

Buyers beware: this could mean an increase in food fraud as criminals attempt to cash in on record high prices. Olive Oil accounts for more than 10% of all incidents of food fraud worldwide. Fraudsters in the past have been caught passing off cheaper oils from Turkey and Tunisia as higher priced Italian oil. Other schemes have been identified where importers were blending cheaper oils, such as hazelnut, soy, corn, walnut or palm oil, and passing the products off as 100% pure olive oil. This is especially concerning when nut-oils are substituted which can lead to major problems for those with food allergies.

For more, see the article here: https://www.washingtonpost.com/news/worldviews/wp/2017/02/16/were-about-to-suffer-a-worldwide-olive-oil-shortage-2/?utm_term=.c347b5c940cf

Restaurant Leasing: Part 3 of 5

Exclusive Use: Before Adding Coffee to the Menu Check Your Lease

Restaurants are constantly adding and subtracting menu items to meet customer demand. Whether it’s adding healthy options for calorie conscious consumers, like salads and wraps, or craft cocktails and beers, rarely will a restauranteur review its lease prior to changing menu items. However, it’s important to know whether your lease is subject to an “exclusive use” provision granted to another tenant by the landlord. Violating this provision can be costly to wary restaurant owner. For example, I recently spoke with a business owner who was sued by a neighboring tenant over the right to sell pizza. The business owner sold thin-crust artisanal pizzas as an appetizer, even though its neighboring tenant had an exclusivity clause in its lease to sell “traditional pizzas.” What qualifies as “traditional pizzas” is at the center of the dispute, but regardless of the outcome litigation is expensive and can be potentially avoided if an exclusive use provision is carefully crafted.

As a tenant, including an exclusivity clause in your lease may be key to maintain a competitive advantage over other tenants. While most large chain restaurants will require an exclusive use provision, it is just as (if not more) important for mom-and-pop restaurants to also insist on exclusivity in order to eliminate the competition within the tenant’s own backyard and help ensure a steady stream of potential customers. On the other hand, each time a landlord grants an exclusivity to one tenant it narrows the pool of potential tenants from which the landlord may lease space. No landlord wants to make it harder than it has to be to fill vacant space, or have to turn down a request from an existing tenant to change its use.

Tenants should seek an exclusivity clause that is a broad as possible that accurately captures the types of uses and businesses from which the tenant seeks to be insulated. While a tenant may want an exclusivity clause prohibiting any other restaurant use, this is probably an unrealistic and unnecessary request. Landlords will try to narrow the scope of the exclusivity in order to maintain flexibility in future leasing activities. As such, the tenant’s permitted and/or actual use may not be precisely the same as the tenant’s exclusive use. For example, a local coffee shop may seek the exclusive right not only to coffee sales, but also to the sale of tea. If the coffee shop also sells sandwiches, muffins and bagels, but those sales only make up a small portion of overall sales, the owner may not be as concerned about extending the exclusivity to full-service diners that serve breakfast. Conversely, a diner’s exclusivity clause may prohibit only businesses that derive more than a small percentage of their total sales from breakfast food items, such that the coffee shop and the diner could coexist within the same shopping center, as could a quick service sandwich shop. Further, the exclusive use clause could be crafted to prevent a national coffee chain from moving into the center, but might permit the diner and the sandwich shop to sell coffee.

But how is a tenant supposed to know whether their use will violate another tenant’s exclusivity clause or if a current use in the shopping center would violate the tenant’s exclusivity clause? Tenants can seek assurances in the lease from the landlord in the form of representations and warranties, but some landlords may object to such representations and instead agree to provide the tenant with all existing exclusives for the tenant to review on their own. Landlords may also carve out preexisting tenants from the scope of the exclusivity, so tenants should make sure to perform their own due diligence on the existing tenants. The parties may agree to add as a compromise that the landlord cannot agree to a change in the use given to a preexisting tenant if such change would violate the tenant’s exclusivity clause.

Exclusivity clauses may also extend within a certain proximity of the restaurant, which such restriction can apply to both landlords and tenants. Landlords may want to prohibit tenants from operating another restaurant in close proximity to its current restaurant, especially when the lease includes percentage rent, because this could lead to declining sales receipts. In order to prevent this from occurring, landlords may insist on a clause that prohibits a tenant from operating another restaurant with the same primary use within a certain radius of the existing restaurant. On the other hand, Tenants may seek to prevent the landlord or any affiliates of landlord from permitting a violation of the exclusivity within a certain radius of the shopping center. While landlord may resist including such a provision because it could affect the marketability of the shopping center, a reasonable compromise may be to carve out any existing tenants within the specified radius.

Another important consideration for restaurant tenants is the practical effectiveness of exclusivity clauses.  Often tenants focus on obtaining the exclusivity language but neglect to address how to actually enforce this language in the event of a violation. Given the catastrophic effect a competing use may have on tenant’s business, a tenant will want extensive remedies for a violation of the exclusivity clause. Tenants should push for language discouraging landlords from ignoring the exclusivity restrictions and also requiring them to take action in the instance of “renegade” or “rogue” tenants who disregard the protected exclusive use. A tenant may negotiate the right to abate a portion of the rent during the period their exclusive use protection is compromised or permit the tenant to seek injunctive relief. In addition, tenants may seek to include a termination right in the event the violation continues for a certain period of time. Some landlords may permit a tenant to terminate the lease only if the violation is caused by a rogue tenant, the violation continues beyond a specified period and the violation has a material impact on the tenant’s business. After a specified waiting period, a landlord may well require the tenant to either exercise the termination right or start paying full rent again.

Exclusive use provisions in restaurant leases provide critical protection to a tenant’s business. A tenant’s ability to obtain acceptable exclusivity protection is often proportionate to their bargaining power with respect to the landlord and other tenants, and is also related to how the desired protective language relates to the overall negotiation of the lease. In the event a tenant is able to successfully negotiate exclusivity, such clause should be included in a Memorandum of Lease and the memorandum should be recorded with the appropriate recorder’s office in order to put other parties on notice of the existence of such exclusivity.

Restaurant Leasing: Part 2 of 5

What Do You Mean I Can’t Change My Restaurant?

You have a great idea for a restaurant concept in an emerging area of the city, let’s say fast-casual barbecue, focusing on pork using your grandfather’s secret rub to give the meat an out of this world flavor. Six months after opening, sales are less than stellar. You’ve received rave reviews from local food critics, but unbeknownst to you when you signed the lease, the immediately surrounding neighborhood is comprised middle eastern families who abhor pork. Realizing the concept is probably best used elsewhere, you inform the landlord that you’re reinventing yourself as a Mediterranean grill, refocusing your barbecue skills on grilling kebabs and meats (other than pork of course). The landlord is sympathetic to your unfortunate situation, but informs you the lease only permits a barbecue restaurant and any other use violates the lease. What is a food entrepreneur to do?

This scenario is quite common; however, the risk can be minimized by proper planning. Restaurants by nature require periodic re-imaging. Whether it’s a complete change of concept or some minor updates and sprucing up, tenants should make sure the lease provides flexibility and an exit plan. This is important in order for restaurants to remain profitable and adaptable to continually shifting market trends. If the restaurant is part of a franchise it will be subject to a variety of image and use requirements imposed by the franchisor and franchise agreement, so these factors must be taken into consideration during lease negotiations.

To protect its flexibility, tenants should attempt to negotiate a broad use clause to permit a “restaurant or any lawful use.” Similar concepts should be addressed in the alterations and signage provisions of the lease in order to permit tenant to reimage or rebrand as necessary. Since the lease term for restaurants are generally longer than most other retail businesses, such broad use clauses will protect a tenant from future changes in the market.

Landlords may not be willing to provide such flexibility out of fear that a restaurant may become a nightclub, bar or coffee shop. Some landlords may not be flexible at all and may insist upon attaching a menu as an exhibit to the lease to establish the parameters of a potential tenant’s use. However, having an agreed menu can limit innovation, even when a tenant is not looking to drastically change its use of the premises. It is important to point out that many landlords are concerned with maintaining a mix of tenants at the property in order not to duplicate certain cuisines or themes. To further protect this tenant mix, landlords may include language in the lease that requires approval or recapture rights for a change of use.

While initially in the lease negotiations parties may appear to be at an impasse when it comes to defining permitted use, there is still room to reach a mutually acceptable compromise. If the landlord rejects including a general restaurant use provision, the tenant may suggest an expanded use clause. This would permit the tenant to modify its use of the premises after operating for a period of time under the initial permitted use, so long as not in conflict with any prohibited or exclusive uses granted by the landlord. Another option is to limit the percentage of sales or square footage of the premises which are devoted to the new use. If the landlord is unwilling to consider any of the suggestions above to provide tenant with sufficient flexibility in the use clause, tenant may try to include a right to terminate the lease if the restaurant does not generate a certain amount of sales.

When negotiating a restaurant lease for a franchise particular attention should be paid to the requirements under the franchise agreement. Too often tenants overlook the terms and conditions of the franchise agreement in regards to reimaging and rebranding, which may conflict with the permitted use provision in the lease. In such event, the tenant may be in a position of having to choose between defaulting under the lease or franchise agreement, neither of which results in a desirable outcome. In order to prevent this from happening, the parties may want to include a provision that permits the tenant to change the use and/or name of the business under which tenant is operating if the change is made across the franchisor’s franchise system. Usually, if the qualification is that such changes are done in the majority of the franchisor’s locations, the landlord will permit this.