As seen in Craft Brewing Business – by Stacy Allura Hostetter

Commercial leases are no small matter. Most run the gamut from 35 to 55 pages, yet many businesses simply sign on the dotted line without any review when given the opportunity. Craft breweries are no exception, and the desire to do so comes at little surprise — not much brewing can occur without a location. But even established breweries make the same mistake when crunched for capacity or looking to expand. This can be a very costly error, however, as breweries have unique considerations (like with so many other legal areas) that the standard lease does not cater to and with potentially disastrous effects.

This article will briefly examine a handful of items to consider before signing leases that are either unique to craft breweries or rank as a top priority.

Commercial leasing basics — beware the “industry standard”
Before we delve into those items, let’s briefly talk about the lease as a whole and the associated negotiation dynamic. Chances are, if you are looking for a space or entering a lease negotiation, the landlord will have a “standard commercial” lease at the ready. There are in fact a number of standard leases and related documents, such as guarantees, floating in the ether that are widely used in the commercial real estate setting.

By and large, those documents were drafted by landlords and for the benefit of landlords. The rights and obligations are far from even-handed. While that likely does not come as a surprise, it is worth reiterating because it is an almost painfully common refrain during lease negotiations for the landlord to oppose an edit or edits because the language originally provided is “industry standard.”

The way these terms became industry-standard was for the landlords to collectively adopt them, so it should really come as no surprise that they are fairly one-sided.

Tip: Bargaining before you sign.

So, remember your bargaining power. You only have it once — and that is before you sign the lease. This is true of any contract, but it bears special note in leases because the stakes are so very high. The premises you are looking at will be your business’ home, hopefully for a long time. Your customers will identify it with your brand, and exit from that location will be difficult from not only a legal standpoint but also very messy in terms of branding and business.

Never enter a lease lightly and know that once you sign, it is basically carved in stone.

Far too often a brewery says “My landlord is a really great person, a friend of mine. They will not actually follow the lease to the letter. We have an understanding.” The underlying sentiment may be true, but what will happen to your business if that accommodating landlord decides to retire and sell his or her property?

Always imagine that the buyer of that property is a huge conglomerate that intends to enforce the lease exactly as written and negotiate with that landlord in mind. Also, by way of an administrative note — real estate law is state-specific, so we always recommend you consult an attorney about the laws in your particular jurisdiction before signing.

Licensing contingencies can save you

The first unique brewery lease consideration is licensing. A licensing contingency should be the big ticket item in almost every brewery lease.

In its simplest form, it is an emergency exit from the lease if you do not receive the required licensing to operate your business. Alcohol is a very highly regulated industry, and businesses are not allowed to manufacture or sell alcoholic beverages at a location unless it is duly licensed by both the federal and applicable state government.

For example, in California, the ABC licensing process frequently requires a copy of the lease for the location being licensed. This creates a bit of a “chicken before the egg” situation because you must agree to the lease before knowing the premise will be approved and duly licensed.

You do not want to get tied into a lease and be forced to pay rent for a location that is ultimately going to be denied the appropriate licensing. This is where the contingency comes into play, by providing a mechanism where the lease will automatically terminate if the tenant does not acquire all of the necessary licensing for the intended use of the space.

In order to use this contingency, landlords will often require some form of compensation in exchange, as they are themselves taking a risk by allowing you to occupy the space and build it out as a brewery. The form and amount of compensation will vary based on what you negotiate, but the important thing is that you do not obligate your company to pay rent at a space that is ultimately useless for you.

Watch out for relocation provisions

Another quick note to make while we are on the subject of licensing is “relocation.” Licensing is not a guaranty at any location — whether because of public protest processes, water considerations and any number of possible issues.

So be on the lookout for “relocation provisions” in a prospective lease. These generally come up when leasing a single unit in a large commercial unit, such as a strip mall. The purpose of a relocation clause is to allow a landlord to relocate a tenant from their leased space to a different space within the overarching project.

These are not very tenant-friendly provisions for any business since there is value in the goodwill built on a stable presence of location that can be compromised if customers have to go looking for you in a new spot. To boot, the new location may not be laid out the same or with comparable access or visibility.

For the craft beer industry, the new space also may not be eligible for the necessary alcohol licensing, in which case that relocation effectively shuts down your brewery. Relocation provisions are not uniformly standard in leases, but if you do encounter one, it is advisable to remove such language from your lease.

Breweries require alterations — so, get consent

Alterations are another classic example of how the needs of a brewery differ from the standard commercial tenant. Breweries are usually, though not always, a hybrid of industrial manufacturing needs and retail needs — the brewery and tasting room combination.

Most spaces that you find to lease will likely be one or the other, not both. Making the required alterations (ideally in consultation with an architect and engineers) frequently involves substantial changes to the physical location, such as puncturing the roof for certain equipment, adding structural support, sloping the floors, adding water-resistant finishes, rehauling the plumbing, etc.

Many of these alterations are commonly prohibited under the standard lease or are permitted only with the landlord’s consent or sole discretion. If you need that equipment and your landlord decides, in their discretion, that puncturing the roof is not going to be permitted — what will you do?

To avoid this scenario, any clauses regarding alterations either need to provide advance consent or be conditioned only upon reasonable consent. Consent is something that you should consider structuring such that it cannot be unreasonably withheld in just about every circumstance but in this area of special importance.

Even reasonable discretion can be a bit vague, so clarify whether the landlord can reasonably withhold consent by requiring you to use their contractor or perhaps providing a lien if the alteration is deemed too expensive. If this is the case, make sure that the contractor they want knows their way around a brewery before agreeing and stipulate what the amount is that triggers lien requirements.

Beer isn’t a “nuisance” — but you have to stipulate this

Nuisance provisions are a mainstay of commercial leases and, at their core, are designed to allow the landlord to kick you out if you bother other tenants. Most nuisance provisions read something like this:

“Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance or that disturbs occupants of or causes damage to neighboring premises or properties.”

That language is obviously a bit broad and while there is case law to supplement the meaning, the average brewery does not have that on hand if they get a complaint from their landlord.

To make matters a bit trickier, some people consider alcohol inherently to be a nuisance, especially if it will be served and consumed on site as opposed to a pure manufacturing facility. But even setting aside that extreme end of the spectrum, your neighboring tenants may not love the smell of wort as much as you do. We therefore always recommend that an acknowledgment be added that stipulates service and sale of alcoholic beverages for on-site consumption will not be deemed a nuisance in and of itself.

Don’t forget about the big picture

Many breweries prefer space in an industrial center. While there are many excellent reasons for this, your industrial complex landlord likely has little to no experience with a tasting room designed for regular consumer visits.

Discuss with your landlord how you envision such a space to be run since the standard lease may prohibit what we think of as givens.

Tip: Talk about dogs, overflow parking, food trucks.

Being a dog- or pet-friendly location is a huge part of many brewery brands, and it is vital to make sure this is allowed in the lease if you plan on inviting the furry friends to partake in the experience.

Similarly, you may well have greater parking needs than the machine shop next door, so be sure to discuss reserved spots and overflow capabilities up front. The standard lease will usually only allow personal-sized vehicles to park on site, so if visiting food trucks are part of the big picture, make sure to get that in the lease.

While these may seem like small details in the beginning, they shape the big picture of how consumers visit your space and conceive of your brand down the line.