The right way to do food halls
As the retail real estate industry continues to adapt to online shopping, an equally growing reality is consumers’ desire for authentic, shared, and unique experiences that can’t happen at home. So it’s not surprising that landlords are increasingly developing food halls and finding them profitable.
The food hall, however, is not a one-size-fits-all concept that can be just dropped into any retail center. Each one must be thoughtfully designed and curated for each distinct location, with pop-up venues frequently rotating to keep the space dynamic and attract repeat visits. Many food halls highlight local and emerging vendors, some seek to drive traffic through celebrity chefs, others focus on a theme or specific demographic, and many blend all of these ideas.
All these considerations present legal issues unique to food halls that need to be dealt with at the beginning stages. It’s not an exhaustive list, but one that provokes key discussion points for collaboration among landlords, brokers, property managers, contractors, attorneys, and designers.
Food hall management: A fundamental decision at the outset is whether the landlord wants to directly manage food hall operations or hire a third-party operator. It’s a complex decision unique to the landlord’s vision of the food hall and its location. But regardless of the management structure, a hands-on approach and engaged presence of a food hall manager is vital to a food hall’s success. For example, a rotating and diverse tenant mix (even if a number of anchor tenants are present) means different experience levels of using common areas and serving customers with many other tenants and choices close by. An experienced food hall manager onsite can help quickly resolve issues or disputes as they arise. A food hall manager can also implement systems that ease backroom administrative tasks for tenants so they can focus on cooking or entertaining customers.
Leases and licenses: Given a food hall’s variety of entertainment, beverage, and restaurant tenants, the landlord can prepare different types of documents for different tenants in order to provide a diverse mix of choices for customers. Typically the landlord seeks longer term leases with well-established anchor tenants, but also shorter term arrangements for trending or seasonal culinary and entertainment concepts.
A license is useful for such temporary or pop-up tenants because the arrangement provides the most flexibility. The term can be month to month, or perhaps a short period between six to eight months subject to a termination right upon prior notice. The rent structure can also be atypical. For example, a higher than usual percentage rent with a monthly food hall-specific operating costs fee may be more effective than a gross lease with a base rent estimating such operating costs. Some food hall licenses also provide a minimum sales threshold as an additional basis to trigger termination, as in most jurisdictions a license is easier to terminate with fewer legal formalities than a typical retail lease. Ultimately, a license’s flexibility can benefit both parties and allows the landlord to take more risks with less experienced but trending tenants and concepts than the traditional food court or standard retail lease.
Food hall-specific uses and rules: Regardless of how a food hall tenant is documented, the landlord should carefully draft the tenant’s permitted use clause. The landlord needs to provide a variety of concepts that do not materially compete with each other, while also maintaining its sole discretion to deny a tenant’s change of use (whether formally requested by the tenant or not).
The landlord should also establish a robust set of rules and regulations specific to the food hall’s operations and code of conduct. Beyond customary rules such as hours of operation, trash and food disposal, and employee parking, additional rules will ideally include tenants’ responsibilities regarding noise and large special events, use and maintenance of certain kitchen equipment or patio furniture shared by all tenants, anti-employee poaching, and social media policies.
Clear rules addressing alcohol sales and tenants’ compliance with related governmental regulations are vital given that such sales often play a significant role in a food hall’s operations. Such rules typically require tenants to carry dram shop/liquor liability insurance at a higher than normal limit, may limit glass barware depending on the food hall’s design, and provide clear expectations regarding customers’ on-site alcohol consumption.
Andrew Rapp and John B. Gessner are partners in the law firm of Fox Rothschild LLP. Rapp ([email protected]) handles commercial real estate issues with an emphasis on retail, foodservice, and mixed-use developments and warehouse leasing. Gessner ([email protected]) provides legal guidance to growth-stage businesses in the food & beverage and hospitality sectors.