In Part 1 of this article, we looked at the trend of hotels enhancing their food and beverage (F&B) operations, a move which may be surprising given the somewhat outdated view that hotel restaurants offer unextraordinary dining experiences. In this second part, we discuss the key legal considerations for a hotelier looking to boost its F&B offering.
Leases and licences
The nature of the restaurant/bar in question may determine whether the relevant space is offered to an F&B operator under a lease or licence. As will the terms of any lease if the hotelier owns the leasehold (as opposed to the freehold interest). Licences may be more appropriate for trendy grab ‘n’ go street food trucks which operators may want to move from location to location within a hotel and which generally don’t require the fitting out of a space or installation of kitchen facilities (à la Hotel Zephyr in San Francisco which offers ‘The Camper’, a converted sleeper re-fashioned as a food truck selling sustainable locally sourced food paired with craft beers and wine to guests) or where hotel owners and F&B operators are seeking more flexible arrangements with simple and short termination provisions.
On the other hand, leases may provide both hotel owners and F&B operators greater certainty with regard to length of the arrangement so as to enable both parties to justify the extensive fit out and marketing costs involved in creating a ‘destination’ restaurant. Particularly if the space is associated with a celebrity chef or there are other licensing arrangements involved, for example, for a specific brand. This level of investment also usually requires the F&B operator to have exclusive possession of a specific area of the hotel which in turn, from an English law perspective, requires the grant of a lease.
Reputation Management
Hoteliers and also F&B operators must consider what to do if the F&B operator/hotel with which they have partnered is no longer ‘flavour of the month’. This could be due to changing consumer tastes or reputational issues, especially where, for example, a hotel restaurant is run by a celebrity chef or affiliated with someone in the public eye. As mentioned above, incorporating termination rights in the relevant lease/licence can be one way to end a relationship. However, particularly in a lease, such rights are often exercisable on or after certain dates, and notice periods can be relatively lengthy. Albeit a termination right linked to reputational impact can always be considered.
In addition, from a hotelier perspective, where an F&B tenant’s rent is based on turnover, a decline in customers will inevitably result in a decline in your tenant’s turnover, meaning a tenant’s popularity directly impacts on the hotel’s income. In addition, if a restauranteur’s reputation goes really stale, prospective guests may think twice about staying in a hotel which is associated with (and therefore seen as supporting) them. In contrast, whilst business is booming, turnover rent mechanisms ensure that a hotelier landlord gets a larger slice of the action.
Fit out of the restaurant/bar
If a hotelier owns a leasehold interest in a hotel, it is crucial to check the terms of the hotel lease in order to check whether any alterations to the F&B tenant’s premises are permitted, prohibited or whether any consents are required. In addition, consideration should be given as to who is responsible for the costs of fitting out the restaurant/bar, the tax implications of the same as well as the insurance arrangements whilst the works are being carried out. Who is responsible for obtaining any necessary planning and/or operational consents for the works and the restaurant operation also needs to be considered.
If the F&B tenant is to carry out the relevant works, it is likely that the hotelier will require collateral warranties or third party rights in favour of all relevant stakeholders (think landlords and funders) to be provided from the F&B tenant’s contractors, professional consultants and sub-contractors (typically those with design responsibility).
In short, there are a number of considerations a hotelier should take into account when establishing or looking to bolster its F&B offering and our dedicated hotels and hospitality team is available to discuss and advise appropriately.
For further information, please contact:
James H. Martell, Partner, Withersworldwide
james.martell@withersworldwide.com
