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A Chef’s Work-Life Balance: Closed for Dinner, but Open to Subleasing or Partnering?

Between work and life.

Chefs and their Work-Life Dilemma: Dinner Service vs. Quality of Living

A friend and a client recently shared a Food & Wine article on their social media. It was entitled “Why So Many Top Restaurants Are Closing for Dinner“. The article was about how restaurateurs and chefs were seeking better work-life balance by opting not to provide dinner service. Instead they would focus on higher quality breakfast and lunch and that would be it.

Closed restaurant.

Can a restaurant owner afford not to be open for dinner?

I love food and of course, as a small business attorney, I like finding new spots to eat. Networking, meeting clients for lunch, and yes, sometimes picking up the owner as a client. Shouldn’t chefs and lawyers be friends? I often joke that I would trade services for food. Legalese in exchange for pasta bolognese! So as a fellow small business owner I do get the appeal of setting your own work hours, especially for the tough life of restaurant owners and chefs. The desire to spend quality time with friends and family, but of course there is a catch – is it cost effective?

Throughout the article there are comments about the economic realities of this operational decision:

“Though it seems like these breezy cafés should allow their owners and chefs to live breezier lives, many struggle to earn a decent living. Diners who don’t blink at a $100 dinner for two balk at lunch tabs that are half that. Lower price-points make it tough for even the busiest daytime restaurants to pay the bills.”

“Nicholas Morgenstern, owner of New York City’s vegetable-centric cafe El Rey, has been avoiding dinner service, but says it’s not sustainable.”

You Not Being Open for Dinner Might Create Opportunities

While I read through this article, I constantly wondered are there missed opportunities or creative solutions? My practice resolves around assisting business partners formalize their relationships. I also review commercial leases for food service and retail clients. So my feeling was: wow, no dinner service?! That is a lot downtime and an empty space not being utilized!

The following ideas are not complete solutions to the work-life balance equation. However, they do give restaurateurs and chefs, or any businesses in a commercial lease setting some options to consider. They may not be suitable for every business owner that is chasing that work-life balance.  Further, they do require a lot of planning and communicating. Executing them also requires all the right pieces, but they may be worth considering if you are a chef (or an overworked small business owner) trying to get to that magical work-life balance ratio.

Ways to Make Full Use of a Space, While Not Being There: Sublease or Partnering

So what struck me about this article is that these restaurants all likely have a lease; it is rare for a new restaurant business owns the property and building. Meaning the restaurateur is entitled to the premises which they are leasing. Kind of obvious, yeah? But, if they choose not to open for dinner, then that creates a possible opportunity, as they are not maximizing the use of the leased space. What do I mean?

Retail and restaurant space for lease.

A tenant that leases a space has a lot of control over the space. When to open, when to close.

In a lease situation, the renter has property rights. While, the tenant does not have superior ownership rights with respect to the property owner, they do lease the premises. Obviously, there the space comes with restrictions and requirements, such as insurance, indemnification, specific-use, rent, but as the business tenant can use the space as they see fit  Therefore, by shutting the space down for dinner, that means the space is down to 2/3rds of its total use time, that is breakfast and lunch. Granted operating for dinner has costs and expenses, but as pointed out in the article dinner service can be a huge revenue generator with higher ticket food items and alcohol sales.

So how do you operate in a space when you do not want to be there? Why not consider subleasing or partnering. Have someone else make use of the premises for the evening, while you are having dinner with your loved ones. Of course this is easier said than done. I will run through the differences between the two and some of the issues, but if all parties involved can come to terms either one may be a workable solution for the chef that wants to go home for the night.

Subleasing: Becoming the Landlord to Your Own Tenant

Subleasing is a situation where there is a lease in place and the tenant leases out the space to another tenant below them. The legal relationship would look like this: landlord <– (lease) –> primary tenant <– (sublease) –> subtenant.  The primary tenant acts like a mini-landlord to the subtenant. This would mean that the primary tenant, who only wants to operate for breakfast and lunch would lease out the space for dinner time to another business. Thus the premises are used throughout the day and everyone is happy, right?

Issues with Subleasing: Caught in the Middle

Hold on! It is not that simple. Remember I mentioned there is a lot of planning and communicating? First, is there even a market for another business who wants to sublease the space? Sometimes. Obviously, it depends on your city, but consider that there are food truck owners who may want to test out their food in a restaurant setting and they need a certified kitchen in some cities because of food safety laws. Other times newly-minted chefs want to do pop-ups or pastry chefs would like to focus on doing a dessert bar.  You will have to ask around. Time to use those networking skills of yours!

Second, is the landlord even going to go for this? Depends. Commercial leases almost always have anti-assignment, subleasing, etc … clauses. These provisions make it so that the tenant cannot convey any property rights (such as the act of leasing and using the premises) to another party without the consent of the landlord. It would violate the lease if the tenant did entered into the sublease without the landlord’s approval. So if you did find another party willing to sublease, then you would need to work with your landlord first before formalizing with your subtenant. Sometimes the landlord would make you co-tenants or have the subtenant make a personal guarantee; for them it is all about the risk.

Even if your landlord lets you sublease are you ready to manage your own tenant?

Other issues with commercial leases and subleasing are where is your restaurant located? Often times for malls there are certain operational hours that a business can be open for. If you are intending to sublease for dinner service and that subtenant wants to sale alcohol, they will have to get a liquor license which are often tied to zoning laws. In addition, if the subtenant is going to do a food service that is different than yours, like I mentioned the dessert bar, are there specific-use clauses in the lease? Mall owners tend to want to limit the kind of services depending on size and location as they do not want their businesses to directly compete with each other. Other times large national brands force the mall owner to allow them to be the only type located at the mall.

Finally, you are acting as a landlord to this subtenant. They are a separate business. So that means they have to get their own insurance. Furthermore, as the middle person between your landlord and them, you are responsible to both of them. If your subtenant messes up, say missing rent to you or they burn down the kitchen, then you still will be on the hook to your landlord. On a personal note too, I know with many chefs if it is their kitchen it is their rules. If you are leasing out your kitchen to another how will you tell them to use your equipment and tools? Will you even allow them to? Again, lots of planning and communicating.

Partnering: Two Chef Owners are Better than One

So maybe subleasing is not for you, as you do not want to be a landlord. What about having a partner? Maybe you have an upcoming protégé or work well with someone who want to focus/specializes in dinner, but does not want to manager their own independent business.

Partnering, when you have a business entity, a LLC or a corporation, means having a business partner join in as an equity partner by offering them ownership/membership interest or stocks/shares, respectively.  Especially, with LLCs, members (the owners of the LLC) have a lot of flexibility in designing the partnership arrangement.

Two chefs back-to-back.

Two chefs might mean that the restaurant stays open, that is if they can come to terms of agreement.

Consider that for some doctors’ groups that operate as a partnership they cover each other;  say one doctor wants to go on vacation, well then the others would cover their work thus guaranteeing continual operation and coverage for medical services. Similarly, for the restaurant, one chef partner agrees to provide breakfast and lunch, while the other does dinner. Another option may be it is on an alternating basis, where one chef does breakfast, lunch, and dinner for one week and then it changes to the other partnering chef the next. There are a lot of options to the division of labor.

What about the money? With LLCs, they are flexible in having the “keep what you kill method” via their Operating Agreements. Each member would take a share of the money based on how much they brought in. Partnering lawyers sometimes consider this method when they just want to share in the expenses of the firm, but would like to be responsible for how much they bring in. So for a chef working only during the day, then they would get the money from the sales of breakfast and lunch. So course the chef who opens for dinner gets the profit from the dinner service. Even if they are 50/50 members in the restaurant LLC that does not mean they have to split the profits 50/50. LLCs are flexible business entities. Obviously, for this method to work, you need a good accountability system.

*While a corporation remains a possibility, usually much more goes into such a relationship, such as tax and accounting planning, use of employment agreements, and drafting of specific corporate governance documents.

Issues with Partnering: Are You Ready for Business Divorce?

So again, just opening your business entity and suddenly having a partner is not at all what it is cracked up to be. First, often times when launching a food business many chefs do not have the funds to open their restaurant. They need a financial backer. Whoever is funding them, is either a formal partner already or have a loan to the restaurant. Either way, adding a new person to the mix is something a financial backer may be concerned about.

Second, even if you get the money situation squared away to what is deemed “fair” between the partnering chefs there are still a host of other issues. They may or may not have an equal say in running the business. Even if you are majority partner and they are the junior partner, how long will they keep working with you if you keep overriding all their decisions or input? Can there two chefs use the same kitchen? What about branding? In this scenario, you do not have two separate businesses, but just the one. So personalities, visions, goals, and even styles of may not be aligned. Even if you both have a unified vision, what about consistency and quality? If the breakfast and lunch food items are awesome, but dinner services are subpar, you can only imagine what the Yelp reviews will say …

Partnering is not for everyone and is not someone should do seeking a quick fix for business issues as business divorce is not pretty.

If clients come to me and they want to talk to me about partnering, then my first question to them is: are you ready to be married? Having a  partner means making a lot of decisions together. Decisions where money is involved, how to split it up profits or how much to contribute to pay for expenses. You will be discussing marketing, finance, accounting, and HR issues. So if work ethics and personalities clash, then you will be looking at business divorce. Your pursuit of a work-life balance may turn into a nightmare if nothing is in writing. Business divorces can be costly in terms of time and money. I’ve seen situations where it takes months (years) before former partners even agree to the value of their contributions and the business itself; this says nothing of the payment process of a buyout. Again, planning/communicating is key, then documenting it.

One Last Bite on this Topic

Sometimes going out and networking is best to float ideas and opportunities, especially with a trusted adviser or mentor.

All of this is not to frighten off a chef making the personal decision of limiting their operating hours. However, like the article points out dinner is a revenue generator. So then the question becomes is there another way to maximize the leased space? I’ve offered a sampling of some creative solutions, but yes, subleasing may not be an option with a stringent landlord. For partnering, maybe you are seeking work-life balance to spend more time with your spouse, but you may be getting a business spouse. Can you juggle both?

Consider that closing down for dinner service might be a business opportunity for another who wants a shot at it. While there are no free lunches in these scenarios, try sharing a meal with a trusted adviser or two, or maybe a mentor or peer. It never hurts to ask, especially when your goal is to spend time with loved ones. Cheers and bon appétit!

-RKH

DISCLAIMER: This post provides general information, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained in the post without seeking the advice of  an attorney in the relevant jurisdiction.  Hew & Bordenave, LLLP expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Draw the Law: Location Issues Part I, Leasing and Subleasing

Last week’s Draw the Law post I discussed buying a business or into an established franchise, but let’s go back to the original proposition you started your own business now you are looking for a place to settle.
Where am I going to sell by service and/or products?  Do I need an office Downtown?  Or a retail space or warehouse in Kaka’ako?  That kind of determination will be largely based on what type of industry you are in.  Moreover, a business planner and market researcher can help you narrow down a location suitable for you needs.  Today is mainly about commercial leases and some of the terms and clauses you will see in such agreements.

Leasing: Know What you are Signing

For the vast majority of small businesses here you will probably get a commercial space of some sort. While, each location you look at for your office or retail space will have some different considerations there are some basic clauses that landlords like to throw at you to legally bind you into some one-sided arrangements.  Remember that whether the lease is a generic “one-size fits all” or a custom one, that an attorney probably helped the landlord create it.  You also have the option of having an attorney review the lease and go over it to help your negotiating position.  In addition, one only need join me on my running route through King St. to realize that there are a lot of open spaces right now (2011).  So some of the following terms and clauses that I will discuss are negotiable, as the landlord would rather have someone fill the space than leave it empty.

Clauses and Terms: Things to be Aware of in Your Lease

  • Base Rent – what does it cost you to use the property for your business?  It is calculated by taking the square footage of the space and multiplying it by a set dollar amount.  Remember that the usable amount of square footage will be less than the base square footage.
  • Additional Rent – wait, what is this “additional rent”?  This is a place for negotiating or determining if your landlord is trying nickel and dime you. It is usually a catchall term to include a lot of extra things that base rent does not capture.  Ask and have the landlord define this term and spell out what it includes.  Does it include taxes, insurance, and/or utilities or are those in the base rent?
  • Operating Expenses – this is another clause whether the landlord or property manager will try and past off the expenses to you.  Watch out for the phrase “without limitation” and if you are in a mall don’t let them try and pass on a higher common area maintenance (CAM) rate to you because they gave a lower rate to an “anchor” store.  As a small business you do not want to be paying the same or more to maintain the common areas that are more trafficked by the big box stores.

  • Parking – does parking come with the space?  Do you have to maintain it?  Do you get parking for the duration of the lease or can the landlord/property manager change at will?  Parking is a premium in this state and you need to know if you are going to have it for you, your employees, and customers or you will have to come up with other solutions.
  • Option to Expand – can you knock down a wall and add the space to yours?
  • Termination – do you have a way to extract yourself?  A landlord is reluctant to let you go if they have extracted a lot of assurances and money from you.  If you terminate early that usually messes up their projects and it takes time to find another tenant.  They may force you to accelerate payment if you terminate early.
  • Use – you will state how you will use the space, don’t be too specific and use general terms.  You don’t want to pigeonhole yourself.
  • ADA Compliance – is the building compliant with the American Disabilities Act (ADA) and if it isn’t is the landlord trying to pass on some of those costs to you?
  • Signage – what are the requirements and restrictions of the use of signs for your business?

There are still other terms and clauses to be on the watch out for, like tenant improvements, occupancy and commencement, relocation,, option to renew, and the security deposit.  Be mindful of state and city and county level requirements, such as zoning restrictions and requirements of spacing.  You may have a landlord try and lease you a space for a food business knowing full well you will not be able install a require grease trap or venting system, and then you would be stuck.

In general, if you do not understand something ask the landlord for an explanation of clarification. If they are not being helpful seek out expert advice.  This is your lease and your business will be tied to the location for a significant amount of time.  You do not want to be stuck in a position with unfavorable terms due to the lease and unable to move or do anything about it.   In addition, ask some of the current tenants what their feelings are dealing with the landlord or property manager.  Find out if you would be dealing with a landlord who does their job or is an absentee who just collects the rent.

Subleasing

If you are leasing from a tenant, then you are subleasing.  You would be the called sublessee.  Your agreement is with the tenant and does not put you into connection with the landlord.  This has certain ramifications.  The legal agreement is between the tenant and the landlord, therefore if the tenant fails to pay the landlord cannot come after you.

Even though, you are subleasing from the tenant you should still ask to see the main lease agreement.  Why?  Whatever, is affecting the tenant will then trickle down and affect you.  In addition, trying to sublease to you may be a violation of clause in the lease agreement or there may be stipulations on how to sublease.  By subleasing the space out the tenant acts like a competitor to the landlord.  Remember, you can always arrange for a sublease yourself and become a mini-landlord.  However, you would have to make sure that you are collecting payments for your sublessee and paying your landlord on time.  If not you would be the one in default and the landlord would come after you.

Last Word

In general, lease agreements will always be lengthy documents with a lot of clauses that will probably not work in your favor.  However, with so many rental spaces available right now (2011) you should try to negotiate to get the best deal as possible.  This requires a lot of reading, researching, and even talking.  Find out what is going on around the area and not just the building.  Also be aware that the broker may actually be representing the landlord, so make sure you get your own expert on your side.

Bottom line: be aware of what you are signing!

Next time I will discuss about owning a property for your business and using your home as your primary business location.  Don’t forget if you enjoy this series or any of the other series on my blawg feel free to subscribe in the right-hand corner of this page to receive e-mail updates on posts.  If you are on Facebook be sure to “Like” “Ryan K. Hew” to get updates there as well.

See you on the next draw!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.   No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.   Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.