RESTAURANT LEASING: Part 1 of 5
When a restaurant lease expires it is fairly common for disputes to occur between landlords and tenants over what is the landlord’s property and what belongs to the tenant. Disputes may also occur upon a tenant default, where the landlord sues to terminate the lease and recover possession of the premises. However, what constitutes the “premises” is not always clear. For tenants, who spend significant amounts of money on equipment and trade fixtures to build out a space, this can be a major issue.
Property is divided into two distinct classes: real property and personal property. Real property consists of the land and building, whereas personal property is removable and includes the furniture, fixtures and equipment (“FF&E”) the tenant uses to operate its business. FF&E is usually defined as a “trade fixture,” which means the tenant may remove it at the end of the lease. Examples of common restaurant trade fixtures include coffee makers, soda machines, tables and chairs, and certain kitchen equipment.
However, certain fixtures that are affixed to walls that cannot be removed without causing damage or injury to the premises or building are not considered trade fixtures and therefore remain with the premises at the end term, regardless if they were paid for by the tenant. Items that may be considered “affixed” to the property include stoves, ovens, walk-in coolers and exhaust vents. During the lease negotiation period tenants should take steps to identify the equipment considered “trade fixtures” in order to avoid costly lease end disputes with landlords.
So what can tenants do to protect themselves? The following are some suggestions to include in restaurant leases:
- Listing FF&E in the Lease. Tenants may want to identify their trade fixtures at the execution of the lease in an attached schedule, including items that may be installed at a later date. During the term of the lease tenants may replace items that are not considered FF&E, but could be considered affixed to the premises and therefore landlord’s property. The lease should address who owns the replaced item and whether tenant has the right (or obligation) to remove it at the expiration of the lease. For example, if a tenant is operating an upscale restaurant and intends to install expensive fixtures in the restrooms or lighting in the dinning area, the lease should include language that permits removal of these fixtures. These fixtures are considered leasehold improvements that remain landlord’s property, but the landlord may agree to their removal so long as they are replaced with lesser quality fixtures.
- Improvements and Alterations. Leases typically provide for landlord’s prior consent to the installation of fixtures and trade fixtures on the premises. While tenants may want unlimited rights to install equipment and improve the premises, including such language in the lease may not be in their best interest. Even if the lease provides tenant with substantial discretion to alter the premises, the landlord should get notice of tenant’s work in order to establish a paper trail of what was installed. At the expiration of the lease the parties can rely on such documentation to determine ownership should a dispute arise. Alternatively, if the landlord won’t agree to provide a tenant with broad alteration rights, the tenant may try to negotiate the right to remove all improvements at any time.
- Catch-All Provision. Regardless of how FF&E is defined in the lease, it is important to include a provision that protects a tenant from breaching its other legal obligations. For example, restaurants frequently lease major equipment used in the kitchen from third-party lessors. If, at the expiration of the lease, the tenant is prohibited from removing equipment affixed to the premises (e.g., stove, dishwasher, refrigerator), then tenant would be in breach of the equipment lease by conveying ownership to the landlord. The risk of this occurring can be reduced by including language that permits removal of any equipment leased to the tenant by third parties.
Restaurant leases are unique and contain provisions specific to the industry. Although there are obvious similarities between many lease transactions, each transaction is different and accordingly so is each lease. There is no “standard form” lease that is appropriate for all situations. Having a lawyer who is familiar with the restaurant leasing process, lease documents and their hidden traps is the best way of ensuring that your transaction will go as smoothly as possible and that the lease accurately represents your understanding and expectations, and protects your interests.