Diners love the continental outside cafe culture and restaurant operators love the additional profits outdoor seating can generate for their business. Whether based in the high street, a shopping centre or elsewhere, outside seating space gives operators scope to create flexible dining space, more covers and a pleasant, convivial atmosphere for diners.
Don’t be left out in the cold
However, if ill advised an operator may find that its rights to use the outside seating space more precarious than expected. It is important to ensure you get the deal you expect so you have continuous use of the outdoor space for the duration of the lease, with the number of covers you had anticipated. Equally for a restaurant owner, you need to be in a position to sell a unit with the benefit of the outside seating that a purchaser would want.
Understanding your rights to use outside space
As part of the negotiation of head of terms, or due diligence process at the start of a leasehold acquisition, the nature of the legal rights over any outside space must be understood and reflect the business needs of the operator. How the rights to use the outside areas are documented can make a big difference as to how secure the tenant’s right to use the space is.
- Outside space granted in the lease as part of the legal demise of the premises It is also worth bearing in mind that if the outside space forms part of the legal demise of the property being let, then this is likely to mean increased service charge liability and a greater floor area to be assessed for rent review purposes.The landlord however may not be able to grant such outside space as part of the lease if it does not own the outside space or if the unit is situated in common parts of shopping centres, retail parks or fronts a public highway. In these cases, and where the outside seating space is operationally important, the operator may wish to make the grant or purchase of a lease conditional upon satisfactory rights being granted over such space by the landlord or third parties (including any necessary highways licence where footpaths are encroached upon).This will give the operator a legal interest in, and exclusive use of, the outside space on the same terms as the remainder of the unit. This means (subject to the usual forfeiture provisions contained in a lease), certainty of the use of the space for the duration of the lease (and therefore greater certainty of EBITDA). It also means the outside space can be sold on with the unit, subject to the terms of any assignment or subletting under the lease.
- Outside space granted as a right to use the space in a restaurant lease If the outside seating does not form part of the operator’s legal interest in the unit, by falling within the area specifically demised to the tenant, then the tenant may still have a right to use the area for its business. Care must be taken however to ensure that the precise extent and nature of these rights are properly drafted. The wording of the right may affect whether or not the operator has the exclusive right to use the space or not, whether the landlord can temporarily or permanently suspend or withdraw such rights or even if they can re-locate the area to be used as outside space to a different location under a “lift and shift” provision.
- Outside space granted by way of a separate fixed term lease An additional issue may arise for the tenant if the lease of the main unit enjoys security of tenure under the Landlord and Tenant Act 1954 but the lease of the outside space does not. An ill-advised tenant may find it a shock at the end of their lease that they do not have an automatic right to renew the lease of the outside space. They may also find themselves in a weakened negotiating position for agreeing a lease renewal of the main unit as it will want the landlord to grant another outside seating lease in conjunction with the renewal.Often outside seating space (particularly in shopping centres) is dealt with by way of a separate lease. This may give both parties some flexibility in that the terms of occupation of the unit and the outside space may be distinguished from one another, but the lease is nonetheless typically drafted to be co-terminus with the main unit lease so that the tenant has the ability to hold both until termination of the lease, or to assign both together to the same purchaser. However, if the tenant does not have the ability to assign the lease with the main unit they may find that its main unit is unsalable or less valuable. Furthermore, if the seating lease includes a break right or additional termination rights in favour of the landlord then a tenant may be left with trading an unprofitable unit with insufficient covers.
- Outside space granted by way of a separate licence or tenancy at will Often the EBITDA generating potential of these sites makes them attractive to operators, but the risk of a dramatic reduction in number of covers from loss of outside seating space must be factored into the acquisition decision.Such tenancies and licences are personal to the tenant so cannot be assigned to a purchaser (who would have to negotiate a new licence/tenancy with the landlord) and do not afford the tenant any security of tenure. Most importantly such arrangements may be easily terminated by the landlord either “at will” (as the named tenancy implies) or for other (sometimes spurious) reasons in the landlord’s absolute discretion. A tenant may be advised where there is a turnover rent payable on the seating space that the likelihood of termination by the landlord is slim, given that this may run contrary to their own interest, but this really depends on the nature of the turnover rent payable (ie whether it is substantial or just a “top up”), and whether the space can be re-allocated to another nearby tenant with greater turnover or used for another purpose.We typically see outside seating areas granted by way of a separate licence (where non-exclusive possession of the space is being offered) or a tenancy at will (where a tenant does have exclusive use of the space) where big shopping centre landlords wish to maintain the greatest flexibility in allocation of outside space to their tenants and a restaurant operator may not have the negotiating power to require greater rights than are being offered
- Outside Space granted by pavement licence on public highway or private land
If the outside space at your property forms part of the public highway, or is private land through which pedestrians have access, a pavement licence and possibly planning permission will also be required. This is not granted as a matter of course and the councils may consider many factors when deciding whether to grant a licence, such as ease of continued pedestrian access to the highway, any blocking of areas which causes safety concerns, noise and visual impact on the area. If your operation is dependent on having outside seating covers, then an early assessment of the viability of outside seating and is desirable and planning for this can be made a condition of the agreement for lease of purchase contract. Even where you are acquiring a property with outside seating already in situ then, unless continuous use of the area for outside seating has been established for at least 10 years (at which point a certificate for lawfulness of existing use can be sought), planning for such use and a pavement licence is not guaranteed to be granted.
You should also bear in mind that planning permission and pavement licences for outside seating are time limited and most councils will require either 6 month or yearly renewals. So ensure to diarise this to avoid permissions lapsing.
Points to be aware of
Once the nature of the tenant’s rights are established the operator should seek to ascertain whether there may be any obstacles to their use or control of the space by considering the following:
- Can such rights be easily terminated? Careful review of the documents will be required to ascertain what (if any) ability the landlord has to terminate the tenant’s right to use the space as this could impact heavily on the EBITDA of the restaurant unit. For instance, where stringent termination rights exist for single breaches of tenant covenants it is often possible to achieve a compromise position with the landlord by way of a “3 strikes and you’re out” clause. These usually allow the tenant an opportunity to remedy breaches within an agreed timescale before the breach can count against them. Sometimes landlords are even prepared to concede that a mortgagee must be notified of any such breaches also (and before they exercise their right to forfeit) which provides an additional safeguard to both the tenant and its lender.
- Can the tenant assign or underlet its right to use the seating area? If seating is granted to the tenant in a separate lease or licence then it is important to check whether these rights will be passed to any incoming tenant on assignment or will fall away as this may affect the value of the lease of the main unit and saleability. Any rights to outside space granted as easements to a tenant in a lease should also be reviewed as to whether these are personal to the original tenant or not.
- Can the allocated seating area be moved? The right to use the seating area may be subject to “lift and shift” provisions which may result in seating being available in a less desirable or convenient (and therefore less profitable) location.
- Are concessions and/or group sharing of the outside space permitted? Corporations may need flexibility to re-brand, re-allocate units within the group or to enter business synergies under concession arrangements. If the rights to use the outside seating are personal to the tenant (even if group sharing/concession arrangements are permissible under the lease of the main unit) then a tenant may be prevented from obtaining maximum value from its unit.
- Are there any general restrictions affecting the seating area? These might include restrictions on things which are generally thought to be a nuisance such as noise (which could include playing music) and food smells (the actual cooking of food in such outside space is often prohibited) or things like signage. A tenant may need to consider whether such restrictions are of material operational significance to their business.
- Is a separate third party licence required to legally use the outside space for the purpose of outside seating? If so the operator may wish to make the grant or sale of a lease conditional on obtaining this.
At Freeths we know that outside seating can often be the lifeblood of a restaurant business. As restaurant lease acquisition specialists we can give you the advice that you need to ensure that your business is not left outside in the cold with outdoor seating.