Leasing a Not So Spooky Ghost Kitchen

Obermayer Rebmann Maxwell & Hippel LLP
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Obermayer Rebmann Maxwell & Hippel LLP

Even before the invasion of Covid-19, food delivery was an evolving trend, made especially so by the easy use of cell phone apps such as DoorDash and UberEats. The pandemic, of course, accelerated this trend and along with it, the rise of ghost kitchens. Also known as virtual kitchens, cloud kitchens, and dark kitchens, ghost kitchens are cooking facilities that offer food for delivery (and sometimes take-out), but with no dine-in seating (think Domino’s Pizza without a storefront).

Leasing property for a ghost kitchen is beneficial to a restauranteur for many reasons. Because dining space is not needed, the rentable square footage required for operation is less. Therefore, the rent is diminished as well. There is no need to hire wait-staff, and no need to spend money building out a restaurant, purchasing furniture, or decorating. Because of the lower start-up costs and reduced operating expenses, a chef who wants to launch their own restaurant is taking less of a risk if their endeavor does not work out. Additionally, for those smaller mom and pop owned restaurants that were unfortunately forced to close during the pandemic, a ghost kitchen might be a good way to get back into the restaurant industry, especially if the restaurant already has a following. Many ghost kitchen culinarians share space with other chefs in order to further reduce leasing costs as well as the costs of cooking equipment. Another cost benefit of opening a ghost kitchen is the lack of the need to be in the most desirable location (as would be sought with traditional dine-in). The kitchen just needs to be close enough for timely delivery to its intended patrons.

Likewise, property owners with vacant space are able to benefit by leasing their unoccupied property to ghost kitchen tenants. Ghost kitchen tenants have been leasing not only defunct restaurant space, but other retail space to include space in malls, warehouse space, storage space, trailers in parking facilities, unused hotel kitchens and space used by others during the day, but not used at night.

A ghost kitchen agreement of course, needs to be documented in writing as would a standard restaurant lease. In addition to typical leasing provisions, such as indemnification, repair maintenance and cleaning, and compliance with applicable laws, the parties should consider:

  • Is the space properly zoned or licensed for use as a delivery kitchen? If not properly zoned/licensed or if improvements are needed to be made to make the ghost kitchen safe and ready for operation, who pays for/performs the work?
  • With landlord approval, will the tenant be permitted to license its space to other restauranteurs as shared space?
  • Will rent be flat out or based in whole or in part on a percentage of gross sales?
  • Does the landlord have any say as to the type of food prepared, the menu, or the hours of operation?
  • Will dining in be allowed in the future?
  • Who pays for utilities? What, if any operating expenses will the landlord charge the tenant?
  • Is signage necessary? What if there are multiple tenants?

It is anticipated that food delivery will still be a high priority in post Covid times. A ghost kitchen might be a winning proposition for both landlord and tenant. This business model gives landlords the opportunity to mitigate the loss of rent for their vacant space. For tenants, the low barrier to entry along with reduced operating costs could create a high rate of return.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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