This article was first published in the SBM Real Property Law Section E-Newsletter and was written by Todd A. Schafer
One element of the landlord tenant relationship that has evolved in recent years (a trend accelerated by the COVID-19 pandemic) is the increasing demand from food service tenants for the use of space outside the walls of their demised premises for seating. Such spaces can boost foot traffic, enhance visibility, and increase revenue for tenants. Consequently, landlords are more frequently accommodating these requests – with some landlords actively encouraging the creation and use of such areas. However, the terms and conditions governing these exterior spaces often differ significantly from those applicable to a tenant’s interior premises. It is crucial for the parties to clearly define these terms in writing, whether in the body of the lease, a rider or an addendum to the lease, or a separate license agreement. Key considerations include:
Location: Will the area be predetermined or agreed upon in the future? Will the space be physically defined (e.g., by fencing, movable planters, etc.)? Are there certain walkways or pathways that need to be kept clear for legal or practical reasons? Does the landlord have the right to alter the dimensions of the area or relocate the area?
Duration: Is the space available throughout the year? Are there restrictions on operational hours or days? Can the landlord impose temporary closures (e.g., for repairs to the area)?
Improvements and Furnishings: If the lease does not include a specific description or depiction of the allowed improvements and furnishings, what are the landlord’s approval rights with respect to future improvements and furnishings (e.g., quantity, quality, style, location, method of attachment, etc.)? Are there requirements for securing or storing furnishings during periods of non-use or inclement weather?
Costs and Expenses: Is there an additional fee or rent for using the outdoor area? Is this space factored into pro rata calculations of common area or other shared expenses?
Use Rights and Limitations: Is the tenant’s use of the area exclusive? Are there conditions or limitations on tenant’s rights to use the area that differ from those for the interior premises (whether due to legal requirements, governmental approvals and permits, existing exclusives and restrictions, additional rules and regulations, etc.)?
Maintenance Obligations: What specific maintenance responsibilities does the tenant have (e.g., cleaning, snow removal, repairs, etc.)? Can the landlord assume the tenant’s responsibilities (and charge the tenant for the expense), whether or not the tenant is in breach of its obligations? Insurance and Indemnity: Which party is responsible for the area for indemnity and insurance purposes? Are there any additional terms or changes to the lease terms are needed to cover these obligations?
Landlord’s Remedies: Does the landlord have additional rights and remedies beyond those specified in the lease applicable to tenant breaches of the terms pertaining to the exterior space (e.g., shorter or no notice periods prior to remedying a tenant default, fines, suspension or termination of the right to use the area, etc.)?
Each space’s specific use and characteristics will inform how these considerations are addressed. For instance, restaurants with outdoor areas serving alcohol are more likely to disturb other tenants, should carry liquor liability insurance, and will need to satisfy additional rules and requirements of the Michigan Liquor Control Commission and the local zoning ordinance.
Granting a tenant rights to an outdoor area should not (at least without thorough consideration) be accomplished by simply including the space as part of the tenant’s leased premises. Rather, the terms and provisions governing the rights and responsibilities related to the exterior space should be thoroughly discussed, clearly defined, and documented in writing to ensure mutual understanding and agreement.
