‘F’ Is for Food Halls (Please Don’t Call It a Food Court!)

The original food hall was a dedicated marketplace within a major department store—à la Harrods. Grand Central Terminal’s mostly underutilized Vanderbilt Hall now bustles with traffic thanks to Claus Meyer’s food hall and fine-dining restaurant and the Pennsy food hall opened in the Penn Station area—a part of town many considered to be a “black hole for suitable dining options.”

Wait a second…isn’t this column supposed to be about law? O.K. I’m getting there. As to how these deals are structured we observe three distinct types of food halls: Type 1: owner/developer built, managed and vendor-populated (Eataly); Type 2: owner/developer built and turnkey to a manager under contract to operate and select vendors per the owner’s overall directions and approval; and Type 3: operator takes a direct lease from owner/developer and is responsible for all phases of operation, management and selection/licensing of vendors (Gotham, Urbanspace).  Note: The vendors selected in this last scenario become licensees of a tenant-operator.

The legal papering over typically consists of either a management agreement (Type 2 deal) or a lease and then numerous sub-interest licenses to occupy space (Type 3). This license arrangement is often preferred over a lease or sublease as the landlord or operator retains the ability to move vendors around to maximize sales and can invoke expedited termination in the event a vendor is failing (all hallmarks of the license agreement)—also a high degree of control over location, operations and the like.

So, often, the question du jour in structuring the food hall deal is to what degree the landlord wants control over the space.

As to the management agreement structure, the owner builds out the space and hires a manager to curate vendors and manage the retail facility. This type of food hall arrangement has been adapted from the hotel deals where a star chef is brought in to operate one or more in-house specialty restaurants. Typically there is a definitive term with clear expectations as to the day-to-day operations, including layers of consent (i.e. control) from the owner prior to the performance of various activities and clear guidelines and options for termination of the operator, including for poor performance. All intellectual property (trade names, for example) remains with the owner.

Where you have an operator take a lease and then populate the space with curated licensees (vendors), the operator, having invested a substantial sum to build out the space and put all the vendors in place is looking for the long-term protection and stability a lease affords: It is deemed an interest in real property, and provides for exclusive use and possession of the space for a fixed term (no performance reviews).  There is almost no day-to-day owner involvement, just the typical required consents for major alterations and transfers. Again, the license (more formally, a “temporary privilege” to use the space of another) offered to the individual vendors—by comparison—is terminable at will (procedurally a simple notice to quit the premises) and does not grant the licensee an estate in the land. The owner typically retains most control over the premises (including the right to relocate the licensee) and provides all essential services for the licensee-vendor to operate.

Practice pointer: We note in passing that courts have been inclined to disregard labels and find a lease has been formed if all the indicia of a lease (fixed space, term, etc.) are present in the agreement.

Jeffrey A. Margolis is the founding principal of Margolis Law Firm; his website is newyorkleaselaw.com