Narrator: You’re listening to WeirTalking Leasing, an eight-episode podcast series from WeirFoulds LLP’s commercial leasing group, educating landlords, tenants and property managers on today’s commercial leasing landscape in Ontario. Our legal specialists will be discussing everything new and interesting, from lease terminations, office sharing, unattractive properties, cannabis and so much more.
David Thompson: Hi, it’s David Thompson, partner in the leasing group of WeirFoulds, I’m here with Karsten Lee, my leasing partner.
Karsten Lee: Hello.
David Thompson: Today we’re going to talk about food halls, which are a little bit different from the old style food courts we remember from our misspent youths. Karsten, can you tell me what’s the main difference for you about a food hall?
Karsten Lee: Good day everybody, first, thanks for joining us. As you know, David, traditional food courts have the typical same offerings. If you were to go to one food court in one mall in Toronto and then another food court in another mall in Vancouver, you’d find, typically, the exact same operators there. I don’t want to name any retailers, but it’s the same hamburger chain, it’s the same donut chain and it’s the same Chinese food chain. It gets replicated from one mall to another across the country.
Karsten Lee: What’s different about food halls is that what landlords have been trying to do is get a little bit more local chefs to come in, they design it so that it’s trendier. I would say one food hall is very different than another food hall across the city, if not across the country.
Karsten Lee: When you go in there, you’re not going to get a lot of chains, a lot of them are local restaurants that, for example, already have one restaurant set up and they’d like to expand their footprint. Instead of opening a second restaurant with 50 or 100 chairs, they’d end up going into these food halls. It’s a little bit quicker to get their expansion underway. A lot of times there’s also chefs and operators who start out as food truck vendors and they gain a following. To set up their bricks-and-mortar offering, they end up going into food halls because there’s a lot less capital involved.
David Thompson: Landlords talk a lot about dwell time, where they want their customers to spend more time in the shopping centre. Do you think this new offering is accomplishing that goal?
Karsten Lee: I think that’s exactly the mindset that landlords have when they are thinking about putting in food halls into their shopping centres or into their buildings. Again, landlords are hoping to do this so that they can drive traffic to that mall, build excitement, have people come and congregate. Going back to your comment about dwell time, hoping that a lot of people do come, stay, stay later and just like in my case, spend a lot more money at these places.
Karsten Lee: Where have these food halls come from? Well, landlords have carved out spaces in former department stores, I’ve seen food halls be carved out of formerly empty lobbies and office buildings, that sort of space. Landlords have definitely had some creative ways in which they put together these food halls. They’ve come to become, for example, almost like a new anchor in the shopping centre or in the community.
David Thompson: So there’s new locations, there’s a more bespoke offering, and it’s maybe a little bit more independent, maybe a little bit more local, but how is it structured? Is it like the old food court, the deal, the way the deal is structured?
Karsten Lee: Thinking about structure from a legal point of view, the two most common types of structures in Canadian food halls are, number one, the landlord or the owner of the mall or the shopping centre is the one who’s operating the food hall. The second type of structure is one where there’s a head tenant who leases the whole food hall from the landlord and that head tenant takes over the operations of the food hall, including finding the tenants to lease the space.
Karsten Lee: As a landlord, there are challenges with each of these structures. In the first type of structure where the landlord or the owner of the shopping centre is the one who operates the food hall, the landlord will then have to deal with all the issues that I had previously mentioned, finding tenants to lease space into food hall, making sure that the food hall has the right look and the right feel, making sure that the marketing is targeting the correct types of people who would come to the food hall, as opposed to a traditional food court.
Karsten Lee: Making sure there’s a right tenant mix, making sure that the cleanliness of the front and the back are up to par. One of the things that I’ve seen is that landlords have had these fantastic relationships with the chain tenants who they typically put into their traditional food courts. However, they don’t really have the team with the boots on the ground to be able to connect with the local chefs, who they typically would like to see in these new, trendier food halls.
Karsten Lee: In the second type of structure where there’s a head tenant that leases the whole food hall from the landlord, what happens is the landlord who owns the mall or the shopping centre basically downloads all of these issues to the head tenant. Now, the main downside with that is the landlord basically loses control over the leasing and the operations of the food hall. The landlord will definitely have to ensure that it has chosen the right head tenant as the operator.
Karsten Lee: Now, if the head tenant does not do a good job operating, then the landlord will have to rely on its remedies with its lease that it enters into with that head tenant.
David Thompson:That’s interesting, where they need self-help remedies, you would think against the head tenant, because there’s a big part of their development that’s taken over by one tenant.
Karsten Lee: Absolutely.
David Thompson:If they don’t do it right, they would want to make sure that they can take it back.
Karsten Lee:Yes, it looks bad on the whole centre, just as if a landlord was to rent one store to a tenant that’s not operating well, now that gets exacerbated because the food hall is meant to be a draw for the entire centre, and if that’s not operating well, then it looks poorly on the landlord.
David Thompson: You’ve talked about some of the challenges that the landlords have in these deals. What would be some of the challenges that the actual food operator would have?
Karsten Lee: The actual tenants, each of the “smaller tenants” who are now running each of the food stalls, each structure would have its own challenges as well. If the landlord, the owner of the shopping mall or the building is the one running the food hall, one would assume that they will be able to run the food hall to the same standards that it has run the mall within which the food hall is located, but the tenant will have to make sure that the landlord has the resources to make the food hall into a success.
Karsten Lee: They really shouldn’t be relying on past experiences of the landlord running their traditional food courts. For example, a landlord may be extremely successful in putting together a traditional food court, since it has, like I was saying, many connections and relationships with national chains, but it may not have that local experience to be able to entice local chefs and food operators to come out into the food hall to be able to create a good mix of food operators.
Karsten Lee: The landlord may also not have the requisite experience with marketing to the target market of the food hall. Typically, the demographic that’s being targeted is younger and trendier and more affluent, so the landlord will really have to make sure that they have the marketing correct. The landlord may also not put enough capital to make the food hall into an aesthetic destination. They may simply be relying on the design team that they had used in traditional food courts. If they’re just doing that, then it’s just not going to work.
Karsten Lee: If it’s the second type of structure that we were talking about where there is a head tenant that leases the entire food hall, the challenges are the same as I just outlined. A tenant will need to make sure that the head tenant operator has the connections to the local food chefs and the capital to do the correct marketing and aesthetic. However, it will need to make sure that the head tenant is actually a capable operator of a food hall. This is extremely important because beyond the actual food itself, every successful food hall requires a great operator, right?
Karsten Lee: This is the case for every other sit-down restaurant out there. No matter how good the food is, if the restaurant is not operated well, it will fail, and we’ve seen that time and time again. Every prospective food hall tenant needs to realize this, they’re essentially relying on the food hall operator to make sure that the front of the house is handled well. What I’m talking about is the marketing of the food hall, the layout of the food hall, the tenant mix, the availability of seating, the cleanliness, the trash removal and so on and so forth.
Karsten Lee: It’s easy to rely on a big name landlord to operate the food hall and think that they will be able to run the food hall since they’ve operated food courts for decades, but that’s just not the case all the time. You have to realize that the operation of a traditional food court can be very different than the operation of a food hall. There’s new demands on a food hall operator when it comes to marketing, hours of operation and how to deal with chef-driven restaurants as opposed to the typical chains we see at food courts.
Karsten Lee: Are they able to deal with seating? Possible flexibility required to remove and add seating for special events? Is the food operator able to tackle issues of food odours coming from the number of different food operators? Is the head tenant able to deal with food operators that need very different temperatures? For example, can you put the barbecue operator who deals with open flames right next to the ice cream vendor?
Karsten Lee: Does the head tenant know how to deal with various operating expenses and how to divide them properly amongst the food vendors? And most importantly, does the head tenant have the financial wherewithal to continue to put capital into the food hall and make sure it is run efficiently and profitably?
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David Thompson: So Karsten, the tenants who are going to be operating these food halls, what are some of the issues that they need to think about in structuring their leases?
Karsten Lee: There’s a lot of things that tenants really need to think about, and just to remember, a lot of the tenants that are entering into these food hall leases have never entered into a lease. Like I was mentioning, they could be food truck vendors and this is the first time they’ve ever seen a lease. They really need to take a step back and think about what exactly they’re getting into. This may well be a very long-term lease, so let me just outline some of the things that any tenant going into a food hall should think about.
Karsten Lee: The first thing I’d like to highlight is operating costs because that really hits the bottom line, right? Just like any other lease, every tenant needs to know what these costs are. At this point in time, food halls are still relatively new, and a tenant may well be entering into a lease for a brand new food hall, like there’s no track record. This is the first time the food hall is opening, and they’re one of the new inaugural tenants. Whatever operating costs that they ask from the landlord may well be an estimate, and it may be a very, very rough estimate.
Karsten Lee: Landlords may, as you know, tend to underestimate operating costs and they may well be underestimating it to a very large degree, since they don’t know how it’s going to be operating. A question that any tenant entering into a food hall lease can ask the landlord is whether operating costs can be kept, or can they be kept artificially low somehow. Inexperienced food tenants will also have to realize that operating costs of food halls can be very high compared to the operating costs of a typical standalone street-front restaurant, so definitely something to think about.
Karsten Lee: The next thing for any tenants entering into a food hall lease, they need to think about, is location, the location within the food hall. Now, as the old saying goes, the three most important things about real estate is…
David Thompson: Location, location, location.
Karsten Lee: Absolutely, so a prospective tenant needs to know exactly where their location is within the food hall. Will they be next to or across from their direct competition? Is that a good or a bad thing to be next to or across from your direct competition? Are they in an area where there’s a ton of traffic? Are they near the entrance to the food hall where people will definitely see them or are they all the way in the back next to the common garbage hallway? Will there be access from their store to the back hallways or will deliveries only be made to the front of the store?
Karsten Lee: Who’s next door? Like I was mentioning, if you’re an ice cream vendor, do you want to be right next to the barbecue joint with an open flame? Is the use next door complimentary, or will it be disruptive? Are you expecting the tenant next door to have huge lineups that will block the visibility of your store? So, another issue about location that attendant will need to think about is that all landlords’ standard form of leases typically contain a relocation clause. This is something that you need to think about now, as opposed to later on, and it’s something that you have to negotiate with your landlord now.
Karsten Lee: Do you want to be right next to your direct competitors? Are there any areas that you definitely don’t want to be within the food hall? Perhaps you don’t want to be right next to the common garbage hallway, and also, one other thing to think about is a lot of the landlords who have these large shopping centres that are implementing or are building these brand new food halls is that if you read the lease, a lot of these landlords actually have the right to move that tenant out of the food hall all the way into the traditional food court or even on another part of the shopping centre. Tenants really need to think about negotiating with the landlord right when the lease is signed, that if they are to be relocated, then it would be within the food hall or within certain areas of the food hall.
Karsten Lee: The next big bucket of items for a tenant to think about are responsibilities for repair and maintenance. These are the things that you really need to think about while you’re negotiating the lease. For example, who’s responsible for repair and maintenance of the entire food hall? Typically tenants are responsible for repairing and maintaining their store or what’s within the store and landlords should be responsible for the common areas, but will that be contracted out to a third party? Is that third party reliable? Will the common areas be kept clean? Who’s responsible for repairing and maintaining the HVAC, the heating, ventilating, and air conditioning unit? Does the tenant even have control over that HVAC unit or is it an open concept that everyone shares the same ambient temperature?
David Thompson: To your point before about the ice cream operator and then the barbecue operator, you’d have a real difference in temperature there. I think the food operator, if it was a food hall operator, they’d have to think long and hard about who they put next door to each other, otherwise you’d have these big fluctuations in temperature, I guess.
Karsten Lee: Absolutely, so you really definitely need to know if you’re able to control the temperature within your unit or if it’s completely an open concept. You also have to think about how the costs of the HVAC are charged back, is that going to be based on proportionate share? Is the landlord going to have free rein on how they charge these costs back? Is there a separate HVAC charge?
Karsten Lee: Other things to think about, garbage. Where is the garbage room located? Who’s responsible for taking it out? Is it the tenant’s responsibility to bring the garbage to the common garbage room? Is the common garbage room located at a convenient location? How is the cost allocated to the garbage room going to be spread out over the other tenants? How are you going to bring the garbage out? Is the common hallway leading to the garbage room far away? Do you have access to it from the back of your store? Just a few things to think about, and in the same vein: deliveries, how are deliveries going to be handled?
Karsten Lee: Is there only one delivery area for the entire food hall? Is there only one delivery area for the entire mall? Who’s responsible for coordinating these deliveries? How far away is the delivery area from the tenant store? Is it located so far away that the tenant will need to wheel its product through the entire mall at 6:00 AM because they can’t do it during regular operating hours? Definitely things to think about when you’re scoping out the location.
Karsten Lee: The next items to think about for a tenant, are marketing and operational issues. Again, I’ve touched upon this in the past, but marketing is a very important part of the success of the food hall. What type of marketing is being done? Who’s doing it? Have they hired a third party, a marketing company to do the marketing, or is it being done in house? Is the food hall operating, planning a lot of special events, which are vital to getting people to come in and stay? How often are these special marketing events planned? Is the tenant required to participate?
Karsten Lee: What happens if the tenant does not want to participate in certain special events? How much input does the tenants actually have to these special events? A lot of these store operators have a lot of social media presence and have a lot of great ideas. Do they end up being able to influence how the marketing gets done at the food hall? What if the special event does not align with the values of the tenant? For example, if the landlord or the marketing company’s planning a big steak and meat event, what happens to the vegan tenant in the food hall?
Karsten Lee: Then in terms of operations as well, what are the hours of operation? Are the hours longer than a typical food court? Is the tenant required to operate for longer hours, or can they shut down earlier, especially for special events? Are there extra costs that they need to incur to operate these longer hours?
David Thompson: Karsten, you mentioned something about you had a client who had a problem with a food hall that was underperforming. What do you do in that case where the whole concept isn’t working?
Karsten Lee: That’s a huge problem, especially when you’ve signed the lease for a significant length of time, for example, three or five years or 10 years. As you know, a lot of the landlord’s formal leases are very heavily weighted towards the landlords and really don’t give tenants an out to get out of it. This goes back to the tenant being able to negotiate right from the get go, right from the start when they’re negotiating the lease, some sort of rights for them to be able to mitigate any risk down the road that the food hall is not operating as well as it should be.
Karsten Lee: The main rights that you can try to ask a landlord at the beginning are termination rights, if they’re able to negotiate rent abatement or reduction rights directly from the landlord. This is in the case the food hall is not operating as successfully as expected by the parties. For example, if a lot of the other food hall tenants have failed and the food hall is half empty, then you might want to have that rent abatement or reduction rights in those circumstances.
David Thompson: That’s interesting, so it’s almost you’re suggesting that the tenant and landlord would share the risk of the success of the food hall.
Karsten Lee: Absolutely.
David Thompson: That if it didn’t work out, then maybe the tenant could have an exit or maybe an abatement while it was ramping up. Okay, now we’re going to have the rapid fire portion of the podcast where I’m going to ask you questions and you’re going to give me a quick answer.
Karsten Lee: Okay.
David Thompson: Just whatever, it has to be off the top of your head. The trend against national chains you mentioned before, do you think that the chains are going to lie down and give up or do you think they’re going to up their game and try and improve their experience to stay in these food halls?
Karsten Lee: I think that’s two different questions. A lot of the national chains have to improve no matter what, that’s just the changing nature of the retail landscape and any food operator or any retail operator out there always needs to be constantly improving to keep up with the market. So to answer your question about whether or not they will improve, from my point of view, they will always be looking for ways to improve.
Karsten Lee: But going back to your first question about whether or not the typical national chains are now feeling, well you didn’t really ask that way, but are they feeling threatened? From what I understand, the market that a traditional food court, the market demographic that the typical, traditional food court goes after is very different than the demographic that a food hall would go after.
There’s always, in my view, going to be a market for the traditional food courts because a large segment of the market
does look towards the comfort and the familiarity of a national chain. The food hall tenants or the food halls are targeting a very different demographic and it’s typically younger, trendier, and I said a little bit more affluent. This is one of the reasons why at the beginning of the podcast I mentioned that I spend too much money at a food hall, it’s because their price points are significantly higher than a traditional food court.
David Thompson: Now you’re making an argument that you could have a food court and a food hall. Karsten Lee: Absolutely, there are malls out in Canada right now that have both a food court and then, on the other side of the mall, this brand new food hall.
David Thompson: So they could actually compliment each other, because one could be convenience and familiarity and the other one would be a more diverse offering, which is a higher level of experience, but then you pay for that.
Karsten Lee: Absolutely, and that’s what landlords are banking on. The traditional food court is there, food courts will still continue to cater to families who come to the mall to grab a quick bite and what the landlords are hoping for are these new food halls are a destination, that they’re attracting newer clients, who typically would not have thought about getting a meal at a shopping mall. They’re thinking of it more as a restaurant.
David Thompson: Albeit a more diverse one.
Karsten Lee: With more offerings for sure, like for example, my wife might want to eat a very nice vegan meal and I’d like my open flame barbecue meal, whereas my kids would like to eat ice cream for lunch.
David Thompson: You heard it here that carnivores and vegetarians can cohabitate in peace. I’d like to thank everyone for listening, Karsten Lee, my partner for presenting, I’m David Thompson. We hope that you enjoyed this podcast. If you did, check out our other podcasts and as always you can subscribe, rate and review, thanks.
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