By Brendan Palfreyman and George Brown
In New York State, a brewery-in-planning must have a location before it can even apply for its federal and state brewery licenses. A brewery-in-planning can acquire a location through a commercial lease or by actually purchasing the location, whether it is a vacant lot or a lot with an existing structure. The decision between leasing and purchasing a space for your future brewery presents its own set of unique issues; issues which expand beyond the scope of this article, but if you are purchasing property you should consult with an attorney.
A commercial leasing situation can cause headaches for breweries down the road if they don’t take the time to consider all of the important and unique issues affecting breweries in commercial leases. It is important for breweries to plan for the future, taking the time to read the lease and negotiate for necessary provisions to help their business grow and flourish, instead of just signing the landlord’s contract on the dotted line.
1. Make Sure the Space is Actually Suitable for Brewing
This first point may seem obvious, but it is an important consideration nonetheless. A brewery can face many issues simply because it chose a space that was not ideal for the operation of a brewery.
Questions a start-up brewery should think about when searching for a space are:
Single story buildings are usually more ideal than multi-story structures.
Mixed-use spaces have caused breweries nuisance problems in the past, especially if your neighbors are apartments or condominiums that are not as fond of the smells from the brewing process as you are.
Spaces with a lot of overhead space are usually more ideal to ensure your equipment can fit without any expensive modifications.
Many zoning codes have not specifically addressed whether a brewery can be operated in a specifically zoned area and the local boards may require you to obtain a special permit to operate.
Also, make sure your intended uses, whether it’s purely brewing and bottling beer or it includes serving alcohol at your leased space, are allowed in that zoning area.
2. Make Sure Brewing, Beer, Your Future Customers, and the Operation of Your Brewery Cannot Be Labeled a Nuisance
Many commercial leases will have what appears to be a boilerplate nuisance provision, which allows the landlord to prevent the tenant from using the space in certain ways that are determined a nuisance. A start-up brewery needs to ensure that the landlord understands your intended use of the space and an agreement is made that those uses will not be considered a nuisance. This can be accomplished by a defined and negotiated nuisance provision, as well as, a broad and inclusive permitted use provision.
Items to consider including into a permitted use provision:
3. Make Sure the Lease is Contingent on Your Receipt of All Necessary Licenses and Permits
A brewery should try to make sure the lease is contingent upon the brewery receiving all necessary licenses and permits. Without such a provision, you could end up in a position where you are responsible for paying rent and performing any obligations under the lease without the ability to actually use the leased space and without any right to get out from under the lease without facing some penalty.
A lease can usually accomplish this by including appropriately drafted language that allows the tenant brewery to terminate the lease without penalty if it has not received all necessary licenses and permits after a certain number of days from either the commencement date of the lease or the date of submission of the licensing applications.
4. Make Sure the Lease Allows You to Make the Necessary Alterations to the Space
Unlike many commercial tenants, breweries will usually require a large amount of alterations and build-outs to allow the space to operate as a brewery. Most “standard” commercial leases will either not allow the tenant to make these alterations or require the landlord’s consent, which can be denied in their sole and absolute discretion. If you need to make a certain alteration or install certain equipment, you must make sure the landlord cannot simply deny you the ability to make those changes.
Tenant breweries can protect against a stubborn landlord by stipulating in the lease that the landlord consents to all necessary alterations and installations by the tenant. If the landlord is uncomfortable with this broad consent, the tenant can still protect itself with provisions that temper the landlord’s absolute discretion.
Tenant should also try to negotiate a rent-free period during the licensing contingency and build-out period, only starting to pay rent once the brewery is up and running.
5. Make Sure You Can Get Out of the Lease if the Space Cannot Function as a Brewery
While it is smart to make sure that you can make necessary alterations to a space before you enter your lease, a tenant brewery will not truly know if the space can function as intended until engineers and architects are brought in during the build-out phase, long after the lease has already been signed. Situations may arise during the build-out period which makes it impossible to use the space as a brewery, such as utility pipes and lines that cannot provide the necessary capacity needed to operate the brewery, or if the space is not zoned for the operation of a brewery and you are unable to get a variance.
A tenant brewery can protect itself in situations like this by providing an appropriately drafted termination provision for the tenant if the space either cannot be altered and used for a brewery, if the cost to make alterations would be so high as to make the alterations impracticable, or if the local boards will not grant you a variance or special use permit to operate a brewery in the leased space.
6. Make Sure You Fully Understand All the Additional Rent Costs Included in Your Lease
Tenant breweries must make sure potential landlords are not hiding the true cost of occupancy in the “Additional Rent” provisions of the lease. While a low price per square foot is great, it may not mean much if you are paying an exuberant amount in Additional Rent.
Additional Rent can include many types of costs, including real property taxes, utilities, insurance, common area maintenance (CAM) charges, and a percentage of certain capital improvements
CAM charges usually occur when multiple tenants share a leased premises. In these situations, landlord would be responsible for maintaining common areas, such as snow removal from parking lots and walkways, trash removal, and landscaping, just to name a few. CAM charges provide the landlord with the ability to pass these costs back on to the tenants.
Tenants should also be aware of any rent escalation clauses, which provide for the rent to increase by a certain percentage periodically. Tenants should attempt to negotiate a favorable clause and should at a minimum ensure that the clause is reasonable for their market.
This list is meant to inform brewers of just a few of the important issues any brewery must consider when entering into a commercial lease. An experienced attorney will spell out these issues and many others for a brewery to consider when reviewing their lease.