Negotiate Safeguards for Patio Restaurant Tenant

With the failure rate of new restaurants hovering around 59 percent in the first three years of opening, it’s not surprising that restaurant owners are trying to come up with a hook—a theme, a specific type of ambiance, or discounts for certain groups or time periods in the day or evening. A trend that has gained so much momentum that it’s no longer a novel concept—and is somewhat expected in “cute” or bustling neighborhoods—is dining “al fresco,” that is, on a patio or outdoor common area next to the restaurant. If it works in their interest, landlords should be all for the concept—provided they don’t get burned by forgetting to negotiate provisions in the lease that protect them. Otherwise, you could have trouble down the line. For example, you could end up in a dispute with the tenant if the patio area hampers the flow of pedestrian traffic into and out of your building or center. Here’s what you need to know before agreeing to allow a tenant to use a common area as its dining space.

Give Tenant Revocable License Only

Like our Model Lease Clause: Control Restaurant Tenant’s Use of Patio Area, your lease should give the tenant only a “revocable license” to operate in the patio area [Clause, par. a]. Because it’s “revocable,” you can take back permission to use the patio area, at your discretion. And because it’s a “license,” the tenant doesn’t get a “leasehold interest” in the patio area, so you can take the patio area back quickly, with minimal notice. You’ll especially want a right to revoke the license in case the tenant’s use of the patio area later creates problems—such as security problems, offensive odors, or if the patio area’s appearance deteriorates [Clause, par. k(i)].

You may also want the ability to temporarily discontinue the tenant’s use of the patio area, which would be desirable if you think you might need access to areas near or above the patio area for repair or maintenance purposes. For example, you may need to clean windows above the patio area.

Be aware during lease negotiations that tenants are likely to balk at getting only a revocable license to use the patio area, mainly because they might be staking their business model on it. A tenant that only wants to set up a few removable tables and chairs in the patio area has little at stake and may give in on this point; but a tenant that plans a major installation—for example, with permanent seating and a glass enclosure—may not accept a revocable license. It could argue that because the improvements are permanent, you’re leasing—not licensing—the use of the patio area to the tenant. And if a dispute over this ever wound up in court, the court would likely side with the tenant. So ask your attorney about giving this particular type of tenant a “right” to use the patio area so that you can take back your permission more easily.

Require Tenant’s Use to Comply with Lease

Require the tenant’s use of the patio area to comply with the lease’s use clause [Clause, par. a]. Otherwise, the tenant might use the patio area in a way that violates the lease. And the tenant might argue that the patio area isn’t governed by the use clause because it’s not part of the “premises.”

Also, say that all other lease provisions apply to the tenant’s use and occupancy of the patio area [Clause, par. g]. So, for instance, if the lease bans the tenant from playing live music in the space, it can’t play live music in the patio area either.

Make the tenant agree to comply with all laws, codes, ordinances, regulations, approvals, permits, and licenses relating to its use of the patio area, similarly to how it’s obligated to for its main dining space [Clause, par. a(i)]. Otherwise, you might get into trouble with your local government if you let the tenant use the patio area illegally. And, worse, the tenant may argue that it’s your problem because you—not the tenant—control the common areas.

Additionally, communication is key on this point. Make sure the tenant understands that you’re granting it a license to use the patio area, but only for as long as federal, state, and local laws, codes, zoning restrictions, ordinances, regulations, and safety requirements permit you to do so [Clause, par. a]. So if, for example, a local law is later passed that makes the tenant’s use of the patio area illegal, the tenant’s license would be revoked immediately.

The tenant should also be required to get and keep in effect—at its own expense—all governmental approvals, permits, and licenses required for it to operate the restaurant in the patio area. Otherwise, the tenant might try to make this your responsibility. And require the tenant to give you copies of these approvals, permits, and licenses [Clause, par. a(ii)]. That way, you’ll have proof that the tenant is properly authorized.

Limit Operation Times and Access of Patio Area

Say in the lease that the tenant can open for business in the patio area only when the tenant’s space is open for business—preferably only during center or building hours [Clause, par. b]. Letting the tenant open for business and bring in customers outside of business hours could create security and traffic problems at your building or center.

If the tenant plans to use the patio area on a seasonal basis—for instance, an outdoor space only during the spring and summer months—spell that out in the lease.

Also, have the tenant agree not to restrict access to the building or center or inhibit pedestrian traffic. Specify that the tenant agrees to prevent loitering in the patio area by anyone who isn’t a customer [Clause, par. d(i) & (iv)].

Make Tenant Responsible for Furniture in Patio Area

Allow the tenant to install furniture, equipment, lighting, and signage in the patio area, but make it:

• Pay all installation costs;
• Install only high-class furniture, equipment, lighting, and signage that’s consistent with your building or center’s design and construction;
• Give you the right to approve the design, size, color, and location of the furniture, equipment, lighting, and signage, including the method of installation, before they’re installed; and
• Be solely responsible for any damage to or theft of the furniture, equipment, lighting, and signage [Clause, par. c].

You don’t want to be responsible for paying any costs or damages connected to the tenant’s furniture and equipment. And you don’t want the furniture and equipment to be an eyesore or clash with other furniture or equipment in your common areas or to damage the common areas.

If the tenant wants to protect its furniture and equipment from bad weather by enclosing the patio area, require it to first get your approval to do so [Clause, par. d(ii)]. And if the tenant doesn’t want to use the patio area throughout the year, add a requirement that makes it responsible for storing its furniture and equipment and paying all storage costs.

Restrict Noise and Odors from Patio Area

You may want to put a blanket prohibition in your lease on noise and odors from the patio area. But in practice, that would be very difficult to enforce, even if, for instance, you set a maximum decibel level in the lease. A more realistic approach is to make the tenant agree not to let music or similar sounds be heard in the patio area without your prior approval [Clause, par. d(iii)]. And bar cooking in the patio area. That should lessen odors and reduce fire risks [Clause, par. a].

Require Tenant to Keep Patio Area Clean, Pay for Repairs

Make the tenant solely responsible for keeping the patio area clean (with trash removed frequently) and in good repair. Also, give yourself a self-help right—to step in and clean, remove trash, and make repairs yourself if the tenant fails to do these jobs. And require the tenant to reimburse you, on demand, for 120 percent of your costs [Clause, par. e]. This should give the tenant an incentive to act before you resort to self-help.

Make the tenant responsible for any costs you incur if the common areas are damaged by something occurring in the patio area [Clause, par. f]. For example, a fire in the patio area might spread to other parts of the common areas. Although your insurance may cover this damage, by having the tenant pay instead, you avoid the headache of filing claims with your insurer. And added claims can result in increased premiums.

You should also require restoration after notice. You’ll probably have to agree to give notice to the tenant if you plan to revoke its license. Consider agreeing to send the notice to the tenant at least 20 days before the license is revoked. That should give the tenant enough time to remove its furniture and equipment and perform any needed restoration work. (The lease should require the patio’s restoration to its condition before the tenant began to use it.) But make sure you also give yourself a self-help right—to step in and to do the removal and restoration work yourself if the tenant fails to do it [Clause, par. k].

Require Percentage Rent on Sales from Patio Area

If the tenant pays you percentage rent, make sure the lease says that it will pay percentage rent for sales generated in the patio area [Clause, par. h]. Otherwise, the tenant might argue that these sales are excluded because they weren’t generated in its space.

Make Right to Use Patio Area Personal to Tenant

Say that the right to use the patio area is personal to this particular tenant. That is, the tenant can’t transfer or assign it to anyone else [Clause, par. i]. After all, the right is a special perk that you’re giving to this tenant only, and it might be a concept that is beneficial for only this particular business.

Limit Your Liability to Tenant

Say that you’re not liable to the tenant if it can’t use the patio area for any reason (other than because of something you did wrong) [Clause, par. j]. So, for example, the tenant can’t sue you for lost business if a storm floods the patio area.

Get Right to Withhold Your Approval

Make sure the lease clearly says that wherever your prior approval is required (for example, for the tenant’s furniture, proposed enclosure, or playing of music in the patio area), you may withhold approval in your sole discretion. That includes withholding approval for aesthetic reasons—such as not liking the design of the tenant’s furniture [Clause, par. l]. That way, you can sidestep any disagreements with the tenant over whether you were reasonable.

Require Tenant’s Reimbursement Obligations to Survive License’s Revocation

Say in the lease that the tenant’s reimbursement obligations in the patio area clause will survive the revocation of the license [Clause, par. m]. Otherwise, the tenant may argue that once you revoke its license, it’s no longer required to reimburse you if you must step in and take over the tenant’s repair, cleaning, or restoration obligations.

Check Other Lease Clauses

In every lease, you should check that all of the clauses in your lease properly protect you when used together. Patio space provisions are no exception. Ask your attorney to make sure that these provisions work in unison with your patio provisions:

Rent clause. If you’ll charge the tenant extra minimum rent for using the patio area, spell this out in the rent clause. Consider giving this rent amount a distinct name—such as the “Patio Area Rent.” This way, if your tenant pays percentage rent over a natural breakpoint, you won’t increase the breakpoint by increasing the total minimum rent.

Indemnification clause. Make sure the indemnification clause is broad enough to require the tenant to indemnify you—that is, reimburse you and defend and hold you harmless—from all claims and damages arising from its use and occupancy of the patio area.

Security clause. Whether or not the lease requires the tenant to provide security in its space, you may want the tenant to have to provide adequate security in and around the patio area.

Insurance clause. Make sure that the tenant’s insurance requirements in the lease include its business operations in the patio area.