01 December 2014 #Real Estate
The restaurant sector has always been fast moving and competitive. Buoyed by current eating trends and increased consumer spending the newer restaurant brands are expanding their mini empires whilst the larger operators are protecting their market share with modern renovations and a determined push to grow still further.
The young upstarts
In recent years the UK market has seen the introduction of many new restaurant operators. Often these have expanded to a small cluster of restaurants in a similar geographical area. An example of this would be Polpo. Initially set up by Russell Norman in 2009 as a stand-alone small plates Venetian restaurant. It now has 5 locations all in the London area.
Other examples would be MEATliquor (see article Popping-up Everywhere) and Burger and Lobster. In recent years both have expanded rapidly in the London area but both now seem to have realised that it is time to expand outside of the capital. This may be due mainly to the lack of suitable property stock and the rising cost of operating in London. MEATliquor now operate in Brighton and Leeds and Burger and Lobster are in the process of opening a new restaurant in Cardiff and are also keen to open a unit in Manchester too.
The inflated London property market has been driven by the lack of supply of suitable properties. In Wimbledon recently, Five Guys and Wahaca were both bidding on a prime location in the town centre. Wahaca was the higher bidder and a substantial premium was paid to encourage the prior tenant to hand over the unit. Understandably, some of these prices (and rents) are too high for the smaller operators and so they are forced to look elsewhere to find a suitable affordable retail location.
Where a restaurant group has private equity backing the group and investors will often be keen to see a quick roll out of the brand so they can increase the value of the investment as soon as possible. This is another reason why the restaurant groups are looking for other suitable locations across the UK. A good example of this is the well regarded steakhouse group, Hawksmoor who were bought for a reputed £35 million in August 2013 by Graphite Capital. In a little over a year they have expanded by 50% including a new restaurant in Manchester.
The private equity firms view the restaurant sector as a lucrative investment class. Often the key management team and vision is already in place but they bring an extra injection of money which can enable a good but small restaurant chain to push their brand nationally and even internationally.
Legal considerations for expansion
Type of unit – careful consideration is needed in choosing the right location as well as the type of legal ownership. In London and many other major UK cities there are very few freehold opportunities in prime retail locations and so most occupiers will be looking to agree a lease or take on an existing lease of the space they are interested in. Occasionally, a short term pop-up option might be a good way to test the popularity of the food concept in a new location. Generally, a lease or short term tenancy will offer more flexibility for the restaurant rather than them being tied to a freehold purchase.
Fit out – The operators are likely to want to follow similar fit out works to those in their other restaurants and they will need to consider whether they need to obtain the consent of the landlord and the Local Authority to any proposed works. On a practical level they must also consider the ease of access to the unit to carry out the works as well the availability of workmen and material to enable a swift opening.
Key lease considerations – Other than those mentioned above the restaurant occupier will also need to consider what length of term it is happy to take and whether it would prefer to have a right to break should the restaurant not perform as well as they had hoped.
Cash flow is also important. The restaurant will want to ensure that the rent they agree is manageable and any rent review is to market rent. Alternatively the restaurant might agree a stepped rent so that rental payments are certain.
The restaurant will also need to look at whether there will be a service charge and if so they should seek to cap it.
The lease should enable the occupier to assign or underlet with the consent of the landlord not to be unreasonably withheld or delayed. This way if the new venture is not as popular as hoped they should be able to pass on the occupation of and liabilities for the unit.
A landlord is likely to want the lease to be outside of the security of tenure provisions of the Landlord and Tenant 1954 Act meaning that when the lease expires there will be no automatic right for the tenant to renew the lease at the then market rent.
If the unit is part of a shopping centre or an estate then there may be competing restaurants with exclusivity provisions preventing similar restaurants from operating within the centre/estate.
Landlords realise that restaurant revenue can be substantial and they may seek to obtain a share of that success by insisting on a turnover rent in the lease.
Planning - The restaurant will need to consider whether it needs to obtain planning consent not only to any proposed fit out works but also to change the use if the unit is not already authorised for A3 Use under the Town and Country (Use Classes Order 1987.
Licensing – If the restaurant is to sell alcohol then they will need to obtain a premises licence before trading.
The old guard
The more established restaurant brands have realised that they need to revitalise their offering to retain their strong brands and to keep up with the fashionable newer operators.
Last month McDonald’s celebrated its 40th year in the UK. They now operate 1,200 stores in the UK and last year they concluded a seven year, £500 million facelift of their restaurants. The new designs are modern and sleek which the consumer has come to expect from a food outlet.
TGI Friday’s have also recently completed a re-imaging. There is less focus on it being a family restaurant and they have made the decor more “grown-up” to attract the adults.
KFC recently announced a planned programme to refurbish its 860 UK outlets with the proposals mirroring some of the styles and designs seen in the trendier chicken retailers such as CHICKENliquor and Chicken Shop.
McDonald’s claim that the reimaging has helped them increase sales and along with TGI Friday’s and KFC they still have an ambitious plan to continue expanding their portfolio.
Legal considerations for refurbishment
Planning - For substantial alterations it is likely that the restaurant operator would need to obtain planning consent to the works.
Licence for alterations - If the property is leasehold then the lease would need to be carefully reviewed to check whether the landlord’s consent is required to the works. If so then a formal licence for alterations will usually need to be agreed. The licence will attach the plans and specifications showing the works and will usually require the tenant to remove the works at term end. The licence will often specifically disregard the works carried out at the cost of the tenant on any future rent review.
Lease terms - The lease should be checked to see what the position is at the end of the lease term as to reinstatement. It may be that the alterations will need to be removed at term end and this is a key cost consideration for the operators.
The evolution of the existing restaurant brands and the expansion of the newer ones is continuing at a pace. In their wake are the more old fashioned chains such as Wimpy and Little Chef who seem doomed to remain little more than nostalgic reminders of a bygone age. As people’s tastes change so must the restaurant operators to ensure they protect their share of an ever expanding market.