Don't Say "Upscale" Restaurant

You may be negotiating a lease with a tenant that plans to operate a restaurant it considers “upscale.” And this tenant may demand that you give it an exclusive that restricts you from renting space in your center to any other “upscale” restaurant. But if you agree to bar this type of restaurant from your center, you may end up restricting the number of tenants you can rent to more than you anticipated. Plus, you may be setting the stage for a potential dispute with the “upscale” tenant, warns Chicago real estate attorney Carole L. Pechi.

“The term ‘upscale’ is so vague that you and the tenant may differ about its meaning,” says Pechi, an Insider board member. A tenant could argue, and a court could agree, that its meaning is much more restrictive than you thought. Instead of using the word “upscale,” list two criteria in the lease that the restaurant must meet. “You'll be in violation of the exclusive only if you later rent to another tenant in your center that meets both criteria,” points out Pechi.

First, bar a competing tenant from running a “white tablecloth” restaurant. (“White tablecloth” is a commonly used expression in the restaurant industry that refers to fine dining establishments.) Second, require a high average check cost. Set a threshold amount that the average food check per person must meet—excluding alcohol, taxes, and tip. “This is a very good indicator of an upscale restaurant,” Pechi says. That's because the average food check per person for dining is typically higher at an upscale restaurant than at a lower scale restaurant because the menu pricing reflects higher food and service costs. Food and service costs might increase after the lease is signed, so allow the average food check to be adjusted by any increases in the Consumer Price Index for All Urban Consumers.

To use these two criteria, ask your attorney about adding the following language to your lease where it discusses the tenant's exclusive:

Model Lease Language

1. Landlord agrees that subsequent to the date of the execution of this Lease, Landlord will not enter into a lease of space in the Shopping Center to any Competitor (as defined herein) of Tenant.

2. For purposes of Paragraph a hereof, “Competitor” shall mean any tenant or occupant of the Center which is a white tablecloth restaurant with an average food check per person, excluding alcohol, taxes, and tips, of more than $[insert amount, e.g., fifty (50)] adjusted by reference to any increases in the then-current Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics of the U.S. Dept. of Labor for U.S. City Average, All Items.

Insider Sources

Carole L. Pechi, Esq.: Partner, Laude Pechi Law, Glen Ellyn, IL.

James V. Persino, RPA: Principal, First Development Corp., Chicago, IL.