Avoiding Heartburn: Restaurant Leases - Parts 1, 2 & 3

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Introduction

Although restaurants often exist in a mixed retail environment or as an adjunct to an office facility, they

bring with them a panoply of issues which need special consideration when drafting their leases.

Who is the Tenant?

Restaurant tenants, like most other retail tenants, come in a variety of sizes. The difference with restaurants is that many large restaurant chains exist to franchise their locations so the day-to-day occupant will not be the party the landlord is contracting with. Alternatively, the large restaurant chain may have its operator sign the lease but build in a right to require an assignment of the lease to the chain. At the opposite end of the spectrum is the owner/proprietor who has a vision for his or her own

restaurant – a vision which sometimes conflicts with the day to day realities of a retail environment.

At either end of the spectrum, the tenant named on the lease is often not the day to day directing mind of the operation.

One of the interesting linguistic differences between American and Canadian lawyers in this area is that Canadians talk about "covenant", as in, "what is the covenant that the landlord is getting?" Americans are confused by this, since they correctly see the lease as chock full of covenants and are not quite sure which one is being referred to. By "covenant" in this case, we Canadians are really asking what is the net worth of the tenant. At the end of the day, no matter how it is phrased, the key question is, where is the money that is going to pay to construct the restaurant and, once that is done, where is the money that is going to pay the rent? Whether the chain or the operator is on the covenant is a key question for

the landlord.

(See Article for further information).

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