Protecting Your Dream in the Hospitality Industry

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Operating a business in New York City is often described as an uphill battle. Zoning laws, safety regulations, and consumer protection measures can eat into any business’ profits—but especially in the hospitality industry. In this blog, I provide food for thought to aspiring restaurateurs and bar owners who are considering setting up shop in the city.

Term sheets: A term sheet allows the basic terms of a lease to be negotiated without signing a contract. This way, both parties can at first postpone, and then subsequently justify, taking the time, energy, and expense of obtaining legal counsel, once key terms are generally agreed upon.

Security deposit: Normally a security deposit is anywhere from two to six months’ rent. It is dependent on a number of factors, including the power dynamic between the parties and the creditworthiness of the tenant.

Liquor license contingency: It is wise to have your attorney insert language into the contract that makes the execution of the lease dependent on obtaining a liquor license. This would allow you to walk away generally unscathed if you are not permitted a license.

Department of Buildings certificates: While it is vital to ensure that the landlord is allowing for an eating and drinking establishment, obtaining the proper approval from the city is equally important. The Holy Grail of Building Department permits is the Certificate of Occupancy or C of O. If you have a C of O that has already been granted for space, saying it is zoned exactly for an eating and drinking establishment, then there are no real concerns about the use of the building. If a C of O has not been issued, the tenant must be allowed time to acquire a Letter of No Objection (LNO) from the Department of Buildings stating that it does not object to an eating and drinking establishment in the demised premise.

Defining the exact space: The area of the building being rented needs to be strictly defined—especially outdoor spaces, whether or not the use of the basement has been granted, what portions of the basement have been granted, and exactly what part of the first floor has been granted. Is there storage? If so, is it contiguous or not contiguous?

Commencement of rent: When is the first month’s rent due? This seemingly simple question can sometimes be more complicated because many businesses are able to negotiate some lead time for buildout and an accompanying rental abatement.

Commencement of production: What’s the term of the lease? Is it dependent upon the work that was done by the landlord? Most of the time landlords are supplying space as-is, but occasionally there are specific landlord obligations in the preparation of the lease commencement.  

Percentage rent: This is an arrangement in which the landlord takes a percentage of all profits often after a certain threshold is met. For example, some leases stipulate that percentage rent will kick in after the business makes two million dollars in a given year.

Hours of operation: Unfortunately, sometimes landlords can come back at a tenant and attempt to curtail the business hours of the establishment. That is why it is so important to spell it out up front before the lease is signed.

Operating expenses: Operating expenses include electricity, trash removal, extermination, water, gas, etc. Because tenants often pay for utilities by the square foot, it is important to know exactly what that fee is comprised of. 

These are just some of the myriad considerations that must be taken into account before you start serving customers food and drink in New York. To guard yourself and your business against the full range of hazards that can threaten your dream, be sure to contact Pierce & Kwok LLP, a firm that has the experience and skill necessary to “have your back” before you agree to anything with a potential landlord.

Aaron Pierce
(212) 882-1752
299 Broadway, Suite 1405
New York, NY 10007

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