Acting for restaurateurs of all sizes – from operators of a handful of venues through to multi-site, national chains – means that our specialist team have identified some key trends when it comes to issues which affect businesses in the sector. As your business grows, these are some of the points to look out for:
Pre-exemption clauses and their enforceability
Some landlords insist on pre-exemption rights in leases in order to prevent them being assigned to another tenant. This happens where landlords wish to retain control over the tenant mix in a development, and is particularly prevalent in travel hubs and retail centres.
So where an operator wishes to assign a lease on the open market, they are obliged to first offer it back to the landlord. If the landlord decides they are not happy with the potential new tenant, this can in some cases prevent or hinder tenants from assigning their leases.
This can lead to costly delays; the difficulty lies in pre-exemption clauses often being poorly drafted, leaving tenants open to doubt over their position.
Restrictive / non-compete covenants
The inclusion of non-compete covenants in leases can be highly restrictive for restaurant operators. Where the anchor tenant on a retail park is, for example, a major pizza chain, covenants may seek to restrict the sale by other tenants in that market of any pizza based products. So an Italian restaurant operator wishing to take a lease in that location would find that there could be restrictions on the menu they could offer.
The question is, are these covenants enforceable? Historically there have been no precedents on which to base such challenges. In fact the burden of proof for enforcement lies with the party trying to enforce the covenants, rather than the other way round. Other issues lie around the definition of the ‘market’ in which the restrictions apply; essentially the landlord may be exhibiting anti-competitive behaviour by closing the market to a particular product or service.
Construction Industry Scheme (CIS) – taxing considerations
There are times when it is more convenient for tenants to carry out works to premises, which are actually the responsibility of the landlord, themselves – for example if they are already carrying out an upgrade and have contractors on site. In this case, the landlord will simply pay the tenant for the work that they are responsible for, which has been carried out on their behalf. But because CIS rules apply – essentially to prevent cash payment to contractors who then may evade tax liabilities through cash in hand payments to their workers – if the tenant is not CIS registered, then the landlord will be forced to make a 30% deduction from the costs incurred to cover tax liabilities.
For tenants who are not CIS registered, whilst tax deductions can be reclaimed, it can cause a significant cash flow problem. Whether CIS registration for a smaller operator is worth all of the administrative burdens has to be weighed up against the detriment caused by cash flow issues.
Brand and signage
Clearly a strong brand is the life blood of operators. Investment in developing a brand, advertising campaigns and the physical design of outlets to fit with corporate branding is a huge cost. If there is any restriction on displaying that brand, for example because of restrictions on signage, that investment can be diluted. Landlords hold ultimate control over signage that will be allowed in and on their properties, so any restrictions should be subject to robust negotiations. In addition, local planning requirements must be complied with, so it is essential to look ahead and have the right permission in place at an early stage.
As soon as the sun shines outdoor areas become extremely popular. Restaurant operators need to ensure they have the right licence conditions to enable customers to eat and drink outside. Operators should scrutinise these conditions to be sure of how they are determined and how long they apply for. Failure to comply with any conditions could affect the overall premises licence, which would undermine the future of the entire outlet.
Music adds ambiance to any area, but when played in external eating and drinking areas there are noise nuisance considerations. The Anti-Social Behaviour Crime and Policing Act 2014 means victims of anti-social behaviour (including noise) have the right to demand action is taken, with police and local authorities having powers to force closure for up to 48 hours in extreme cases.
Reinstatement of premises
When a restaurant tenant exits a site, reinstatement works will inevitably be required to return the unit to its original state. However, where the incoming tenant is another restaurant and the landlord therefore intends to leave certain amenities for their use, how does this change the need for some of that work? Another issue is the rights of the tenant when it comes to removing fixtures and fitting – and who actually owns them. This should be covered by the terms of the lease, but there are sometimes grey areas to be negotiated.
Employing the right approach to people
Running a restaurant business is dependent on attracting and retaining the right staff to deliver service levels which customers expect. With fluctuating demand, the use of zero hours contracts is an attractive option for the trade for staffing busy periods, but with recent changes care must be taken when employing staff on this basis – particularly in imposing exclusivity clauses.
In terms of investment for the future, offering apprenticeships is an approach to home-growing talent. There are numerous other issues to balance, including avoiding discrimination or dealing with family friendly requirements, such as shared parental leave…the list is long and onerous.
Regulations – fire, health and food safety
Despite coming into force at the end of 2014, allergen regulations remain an area fraught with the potential for confusion for staff and customers. Uncertainty also remains over responsibility for fire risk assessments (which lies with the operator), robust food hygiene procedures and staff training, and other health & safety obligations.
Buying or selling a business as a going concern
Acquisitions and disposals of restaurants as going concerns involve a lot more than just the sale of the property and fittings – for example, TUPE, operational issues and questions around the brand all form part of the picture. So it is important that all of these elements are considered before embarking on a business sale or purchase.
Who to turn to
Look out for guides on these topics, published on this web site.
Freeths’ hospitality team regularly encounters these points, and many more, on behalf of their restaurant clients. This means they can provide clear, practical advice as to the best approach to take, to achieve your commercial objectives. To discuss any concerns you have, please contact email@example.com
The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.