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Small Bites: An Overview of Restaurant Operating Models

By Wendy Hansen Counsel, Eversheds Sutherland | June 2024

Gone are the days of dull dining! Today’s hoteliers are focused on activating Food and Beverage (F&B) outlets. F&B can be a key part of the hospitality experience for the hotel guest, promoting the overall lifestyle and reputation of the hotel. When done right, local consumers also become regular guests, making the restaurant a destination in itself.

So, how is it done? There are several different models that a hotel owner may consider for their restaurant (or other F&B outlet). This article will provide a high-level overview of some of the legal issues in four different models: (1) the in-house model, (2) a license and consulting services agreement, (3) third-party management, and (4) a leased outlet.

1. The In-House or "Do it Yourself" Model

To start with the basics, a hotel owner can always operate their own restaurant (either directly or through their third-party manager). In this instance, the hotel owner is responsible for the entire lifecycle - from creation of the concept and selection of the restaurant name, to daily operations and to eventual closure and repositioning. The advantage of this model is that the hotel owner is in full control (subject to the terms of any management or franchise agreement), including over their capital and operating budgets. The disadvantage is that the hotel owner may not have the in-house skills to ensure the launch of a successful concept and will likely need to contract for assistance on many components separately - restaurant concepting, interior design, construction and fit-out, logo and signage design and marketing.

While the contracts for each of these components are important, perhaps the most significant decision made at the outset is the restaurant’s name. To avoid unnecessary expense, the hotel owner should confirm that its selected name is available for use, typically by reviewing registered trademarks as well as use in commerce (e.g., general web searches for uses of the name). If the name is available, it is recommended that it be registered as a trademark. The hotel owner should also carefully review any management agreement to ensure that whatever name the hotel owner selects will be owned by the hotel owner, as some management agreements will automatically vest ownership of restaurant names in the management company. Given the time and financial resources the owner may invest in the outlet, it should ensure that ownership of the trademark and logo will be owned by it.

2. License and Consulting Services

In the second model, the hotel owner contracts with a third-party for the use of trademarks and the provision of certain services, which may include concepting, menus, training, chef appearances and marketing. The advantage of this model is that the third-party is an established brand or celebrity chef with a proven concept. The name recognition draws additional clientele, and the hotel owner likely receives an uplift in revenue. The hotel owner still largely controls the day-to-day operation of the restaurant, although it now must comply with operating standards and guidelines provided by the consultant or chef.

Typically, this model is governed by a “license and consulting services agreement.” As part of the license, the hotel owner will have the right to use the consultant’s trademarks in connection with the restaurant. If a new name is being created as part of the consulting services, there may be some debate as to which party will be the owner of the newly created name. While the hotel owner may prevail on the basis that they are investing the funds to build out the restaurant and is responsible for the operations, the consultant will be reluctant to cede ownership as they won’t be able to open additional outlets to capitalize on a successful concept. Ultimately, ownership of the restaurant name will depend upon the relative bargaining power of the two parties.

The license and consulting services agreement will have a shorter term compared to the two models discussed below, ranging from three to seven years. Fees will vary based on the business terms. There may or may not be an upfront development fee. Annual fees are often based on the revenue and net profit of the restaurant, although the consultant could be paid a fixed annual fee. Variable annual fees may also be subject to a minimum and/or maximum. While the hotel owner has more control over operating expenses, some hotel owners prefer lower base fees (off of gross revenue) and greater incentive fees to encourage the consultant to provide menus and operating guidance that promotes a higher net profit.

The consultant will require that the restaurant be operated in a manner consistent with its standards. However, the hotel owner should ensure that it retains control over budgets. The parties should agree upon any development budget as part of the contract negotiation. The hotel owner may also want an explicit provision that all purchasing goes through the hotel and is subject to its standard procedures to prevent surprise purchase orders or being forced to use a consultant’s preferred vendor with pricing that may not be competitive. Comps by visiting consultant personnel can also be problematic, and the contract should include a monetary limitation or a procedure for the hotel to approve comps by the consultant.

If a celebrity chef is associated with the consultant, the hotel owner will want to ensure he or she visits the restaurant a minimum number of times per year and participates in promotional activities; the agreement should also include a grant of publicity rights. The hotel owner will want a territorial restriction, preventing the consultant from opening another restaurant, bar or other dining concept within the city or a certain radius around the hotel. The territorial restriction may apply to all business activities of the consultant, or it could be limited to a similar concept or the same trademarks that are being used at the hotel owner’s restaurant.

Termination rights are important for the hotel owner, which may include rights to terminate if a gross revenue or other performance threshold is not met or if there are any incidents that affect the reputation of the chef or group. At the end of the term, the hotel owner will want to ensure it has the right to continue operating the restaurant without making significant physical changes other than removing the consultant’s trademarks, although a consultant may negotiate for the hotel owner to change the concept or a substantial portion of the menu. Generally speaking, recipes are not protected by copyright, and their use should not be restricted following the term. However, the consultant may require that certain signature dishes be removed from the menu on termination.

As a final note, the hotel owner should consult with their liquor counsel to determine whether the licensor needs to be added to the liquor license, as some jurisdictions require that any party taking a percentage of revenues or sharing in the profit of an operation be added to the liquor license or otherwise approved by the licensing authority.

3. Third-Party Management

The third model, management of the restaurant by a third-party, is similar to the license and consulting agreement, and most of the discussion above applies equally to the terms of the management agreement. In some cases, the manager does not have their own brand or trademarks, and the outlet is operated under a name owned by the hotel owner. The average term of a management agreement may be slightly longer than the license and consulting agreement at around five to ten years. The fee structure and termination rights are generally similar to that noted for the license and consulting agreement.

In the management model, however, the hotel owner turns the day-to-day operations over to the manager. The manager will prepare budgets; purchase food, beverages, and supplies; advertise and market the outlet; determine the menu and set pricing; maintain the premises; keep the books and oversee the payment of operating expenses. The manager is also typically the employer and is responsible for hiring, training and supervising the outlet personnel.

Of course, the manager is doing this all on the hotel owner’s behalf (and at the hotel owner’s expense), so the hotel owner will want to carefully bargain for approval rights and limitations on the manager’s authority. In this regard, an F&B management agreement is similar to a hotel management agreement. The hotel owner will look for limitations on the manager’s ability to contract on the hotel owner’s behalf (i.e., requiring approvals over contracts longer than one year or above a certain monetary threshold), approval over key restaurant positions such as the restaurant manager and head chef, approval over annual budgets and so on.

Given that the restaurant is an integral part of the hotel, an important component of the management agreement is the coordination of services with the hotel - which may include catering services, in-room dining, reservations, advertising programs and, of course, permitting guests to post charges to their hotel folio. The manager must be required to cooperate with the hotel manager to ensure the hotel and restaurant appear as a seamless operation to the hotel guests. The agreement should also specify the hours and meal services that the restaurant must be open, and the standard of restaurant operations should be consistent with the standards of the hotel. Attention will also need to be given to determine whether a particular activity is performed by restaurant staff or by the hotel operation and whether an allocation of operating expenses should be made to the hotel (or vice versa).

4. Leasing

The final model is to lease the F&B outlet to a third-party. This is a complete outsourcing of the restaurant and a grant of a real property right in the location to the tenant. The hotel owner is not responsible for the operations and the operating costs are borne by the tenant. In turn, the hotel owner receives the relative predictability of rental income through base rent and may also participate in the success of the restaurant through percentage rent.

The lease is usually for a minimum term of ten years; a tenant will want automatic extension rights, whereas a hotel owner may want the right to recapture the space after the initial term. Because the hotel owner will have no control or input over the day-to-day operations, negotiating the use clause will be critical. It should set out the restaurant type or standard (fine dining, casual, fast casual, etc.), the operating hours (for example, it may be required to be open for breakfast) and the type of cuisine. The tenant must also construct and maintain the restaurant improvements consistent with the quality of the hotel, and the hotel owner will want to ensure that periods of closure (for renovation or otherwise) are limited. The hotel owner will also want any tenant’s ability to assign or sublet the space subject to its approval.

Similar to the third-party manager, the lease will need to provide for a certain degree of coordination with the hotel, especially if the outlet is in an interior location (as opposed to a street-facing outlet that a guest may not assume is part of the hotel). The hotel owner should consider carefully what areas of the hotel, if any, the tenant will need access to (such as the loading dock) and the security implications. The parties may need to provide for the ability of the hotel guests to sign charges to their folio or coordinate the provision of food for the hotel’s room service operation. Parking may also need to be addressed - whether valet parking is provided by the hotel or the tenant and how many parking spaces may be reserved for the operation. Finally, the liquor license will need to be considered. The tenant may need to apply for its own license, and the hotel’s license may need to be amended if it previously included the leased space.

Conclusion

As illustrated above, there are several different models that can be used to operate a hotel F&B outlet. If the hotel owner wants to maintain a high degree of control over the operations, it should consider running the outlet itself or licensing a trademark from a recognized brand. On the other hand, if the hotel owner does not want to be as “hands-on”, it may look to hire a food and beverage manager to operate on its behalf. Alternatively, the hotel owner can remove itself from the operation entirely by leasing the space to a third party. Once a model has been selected, the hotel owner will need to consider the key issues, many of which have been highlighted above. Experienced counsel can guide a hotel owner through these items, including the negotiation of related agreements, to help bring the F&B concept to life.

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You hereby authorize HotelExecutive's Internet Payment Service Provider to charge your credit card to pay for your membership to HotelExecutive. You further authorize HotelExecutive's Internet Payment Service Provider to charge your credit card for any and all purchases of products, services in association with HotelExecutive. You agree to be personally liable for all charges incurred by you in association with your access or other use of any content provided by HotelExecutive or any third party in association with HotelExecutive. You acknowledge and agree that your liability for all such charges shall continue after termination of your access or any type of membership arrangement with HotelExecutive.

In the event that you have chosen to have your membership automatically rebilled, unless and until you notify HotelExecutive that you wish to cancel or terminate your membership to HotelExecutive, you hereby agree and authorize HotelExecutive's Internet Payment Service Provider to automatically renew your membership to HotelExecutive on a continuing basis and to charge your credit card (or other payment means you have selected) to pay for the ongoing cost of your membership. You hereby further authorize HotelExecutive's Internet Payment Service Provider to charge your credit card (or other approved payment means you have selected) for any and all purchases of products, services and entertainment provided to in, at, through or in association with HotelExecutive.

13. PRIVACY POLICY

The following is the Privacy Policy for HotelExecutive

We can be reached via telephone, email, or online at our contact page. When you visit our site we do not log any information regarding your domain or email address. Information Sharing: We do not share user information with any third parties other than via press release distribution as described below.

Hotel Newswire is a newswire service that distributes press releases on behalf of our users. If you decide to submit a press release for distribution through our system we will transmit your entire press release including any personal information therein contained to our media contacts and online distribution points including search engines. This is the only redistribution of your information that we engage in. Your submission of press releases through our system indicates consent with this policy. The information we collect during your registration process is used to notify users about updates to our service and inform users of any special events hosted by Hotel Newswire. This information is not shared with other organizations for commercial or non-commercial purposes.

Cookies: Our system requires the use of cookies to enable the user to log back into our website to access information from the newswire, without having to log in each time using the required username and password.

If you do not want to receive email from us in the future, please let us know by following instructions included in our communication with you. Users who supply us with telephone numbers online may receive telephone contact from us regarding their account, or informing them of new products and services available on the HotelExecutive website. If you do not wish to receive such telephone calls, please edit your account and remove your phone number from your account profile. This can be done from your user account menu.

Ad Servers: We do not partner with or have any relationship with any ad server companies. From time to time, we may use customer information for new uses not previously disclosed in our privacy notice. If our information practices change at any time, we will post the policy changes to our website to notify you of these changes and provide you with the ability to opt out of these new uses. If you are concerned about how your information is used, you should check back at our website periodically.

Upon request we provide site visitors with access to all information (including proprietary information) that we maintain about them. Users can access this information by logging in to their account.

Security: We always use industry-standard encryption technologies while transferring and receiving user data exchanged with our site. We have appropriate security measures in place in our physical facilities to protect against the loss, misuse, or alteration of information that we have collected from you on our site. We do not store credit card information in our systems.

If you feel that this site is not following its stated information policy, you may contact us.

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