Why experiential concepts are emerging as winners

Food halls are popping up across the UK at breakneck speed. The concept is simple: a collection of small food vendors with a shared dining area and bar, under one roof. It’s not a new idea – think of the traditional food court in shopping centres nationwide – but the difference is that the current focus is on collecting together independent, artisan outlets rather than chain restaurants, with a central bar area for socialising. They are inspired by continental food markets where the focus is on curating a diverse range of authentic and quality culinary options to be enjoyed in a communal atmosphere. The trend is driven by current market conditions, which combine to create a winning formula for all involved: (a) For a building owner, food halls are a great way of repurposing large voids left by failed retailers for which there is not otherwise any demand. A food hall can anchor a development and drive footfall into an area, which is ideal for an evolving marketplace where the focus is now all about the customers’ experience, and occupiers that deliver services that cannot be offered online. (b) For a would-be restaurateur, food halls present a new operating model that offers far lower start-up costs than opening a standalone restaurant. All-inclusive rents mean that occupiers don’t have to pay separate business rates. There is no need to employ a lot of waiting staff, so that employment costs can be kept down. There are no tricky planning or licensing issues to resolve as they have already been dealt with. (c) For a customer, food halls offer a huge choice for group dining. They cater for vegans, vegetarians, allergies, intolerances and fussy eaters by allowing groups to go their separate ways and then reconvene to eat together. Customers often get value for money because central services are pooled – essentially a sharing economy for restaurants – and food vendors have not incurred huge set-up costs that need to be recouped quickly in order to maintain liquidity. Standard food hall operating models There are three standard food hall operating models: (a) the owner manages the food hall and licenses or leases units directly to food vendors; (b) the owner enters into a management agreement and, for an annual fee, the appointed management company runs the food hall and co-ordinates the grant of unit leases and/or licences to food vendors; or (c) the owner lets the space to a tenant operator for an annual rent, and the tenant operator then issues leases and/or licences to sub-tenants/licensees. Key letting considerations Regardless of the adopted operating model, there are a number of points to think about when entering into arrangements with individual food vendors: 1. Lease or a licence? A lease creates an irrevocable interest in land. A lease can be assigned and survives changes in property ownership. A lease of commercial premises which satisfies the criteria set out by the Landlord and Tenant Act 1954 allows tenants to remain after the end of the contractual term of the lease (unless set procedures to contract the lease out of the 1954 Act are complied with). By contrast, a licence is a personal, contractual permission for the licensee to do something. A licence does not confer any proprietorial rights, it cannot be assigned, and it does not survive any change in property ownership. The 1954 Act does not apply to licences. In summary, the licensee’s position is temporary, personal and easily terminated. Once the distinctions are understood it is easy to see why the vast majority of food hall operators prefer licences. The temporary nature of the licence suits the short life span of these types of arrangements. For the owner/operator, the constant evolution of food retailers is key to maintaining the relevance of the food hall by keeping the offering fresh and generating repeat visits. From the food vendor’s perspective it allows them to experiment with new, unproven concepts, with little financial risk and only a short-term commitment. Vendors are often happy to cut their teeth in a food hall environment and move on to their own premises after a “trial run” if the business model is a success. Alternatively, well-established local restaurateurs are happy to “pop up” for a short period of time in the latest “place to be”. The personal nature of a licence aligns with the landlord’s need to control the operators in the food hall to ensure the right tenant mix, especially if rent is linked to turnover. And although a licence arrangement can be terminated readily, this is an advantage, as it allows owner/operators to easily remove underperforming vendors. Likewise, licensees can choose to exit if the concept is not working. However, implementing a licence framework comes with a strong warning. The case of Street v Mountford [1985] 1 EGLR 128 AC 809 confirmed that being given exclusive possession of an area for a set term will create a lease and not a licence, no matter what the document calls itself or what it purports to be. This means that any licence granted to a food operator must genuinely be a licence; it must be personal, it must use the correct terminology (licensor and licensee), and it must allow the owner/operator to allocate the licensee different kitchen/service areas from time to time and retain the right to pass through the licenced area. Otherwise, the operator risks granting the tenant a lease, with all the security of tenure that accompanies it. For longer term occupiers with more complex business needs (for example, they need to fit out their own speciality kitchen or will anchor the food hall), a simplified form of short lease may still be suitable, but care needs to be taken to ensure that the lease is excluded from the security of tenure provisions of the 1954 Act. The landlord should also ensure that it has the option to terminate the lease if the tenant is not performing – perhaps by way of a break clause if certain financial thresholds are not met. Assignment and underletting should be prohibited to enable the landlord to retain control of the tenant mix. 2. Rent arrangements Food halls usually operate on the basis of charging occupiers an all-inclusive rent, which is a rent including business rates, utilities, insurance and shared services charges. This provides the occupier with certainty over its cost base, rather than fluctuations that are inherent in utility charges, insurance premiums and a traditional service charge regime. Owners/operators need to carefully consider and build into their all-inclusive rent a charge for shared services – the use of the central table area, staff to collect used crockery/glasses, washing up and redistribution of crockery, rubbish disposal, fridge/freezer/storage space, branding and advertising etc. An owner/operator is well advised to continuously monitor these costs, because if the shared services charge is packaged up in an all-inclusive rent, any overspend will not be recoverable. It is also common for an additional turnover rent to be payable on top of the all-inclusive rent – essentially a rent that is calculated by reference to a fixed percentage of the turnover generated at the premises to the extent it exceeds the all-inclusive rent. Food vendors with little upfront capital prefer turnover rent arrangements, as they only have to pay the turnover rent when they are performing well and have the income available to pay it. This means that the owner/operator and food vendors share in success, but equally share in any failure. 3. Exclusivity A licensee or tenant may request exclusivity over certain food types or ethnic cuisines to prevent an overlap in the type and style of foods offered within the food hall. Although diversity is crucial to the success of the food hall, exclusivity arrangements can become managerially burdensome for the owner/operator, and the wording of the clause needs very careful consideration. It is essential that it is kept as focused as possible (so as to not severely limit the pool of tenants able to operate in the food hall) and is clear and unambiguous (to avoid disputes). Ideally, a middle ground – where the food vendor’s core business is protected but the owner/operator is still able to let to tenants with overlapping, but not fundamentally competing, concepts – should be found. 4. Operating hours/keep open It is crucial to the success of the food hall that the full complement of retailers are trading at the same times to keep the food hall busy. Owner/operators should impose requirements on vendors to continuously trade during the food hall operating hours, and have the right to terminate the agreement on short notice if they fail to do so. For licences or leases which are linked to a turnover rent, this is also important to allow the owner/operator to protect its revenue. Final word The future looks likely to see the continued rapid growth of food halls. There are many cities in the UK where food halls are only just arriving, and there is plenty of untapped potential for speciality food halls focusing on locally grown or sustainable food. Of course, as with any successful concept, there will come a point where the market becomes saturated. But in the meantime, owners/operators making an entrance into this niche market should carefully consider their preferred operating model and letting framework. Top tips for owners/operators Ensure a licence is not inadvertently a lease by including relocation provisions Continue to monitor shared services costs to ensure that there is no overspend Include clauses which allow you to obtain information from licensees or tenants on footfall and trading performance Make exclusivity clauses specific Monitor vendors’ opening hours to ensure they are complying with keep open provisions Jennifer Ayris is a senior associate at Irwin Mitchell