Behind the Lease: Supporting Restaurant Expansion Through Real Estate Law

Katya Valasek:

We are joined today by Eric Bernheim, named partner at a small general practice firm. Although his practice is defined by real property, that is land, anything permanently attached to it like buildings, and with rights and limits associated with its ownership and use. You do both real estate and zoning, but this combination is uncommon in Connecticut, which is where you practice. Let's start with some basic information. How do you define these practice areas?

Eric Bernheim:

My land use practice is essentially planning and zoning, conservation commissions, the environmental laws in the state of Connecticut as to what you can utilize your property for, what types of uses and structures can you build, and the such. You need to go and get zoning approval, sometimes conservation commission approval for anything that you do with your real estate. My land use practice revolves around helping property owners and tenants and users of that real estate get the appropriate permits so that they can utilize it for their intended use and their benefit.

It can be going through the conservation commission, which is regulating inland wetlands and making sure that it's not adversely impacting the environment in accordance with the applicable laws, or it could be helping clients and operators to utilize the real estate in compliance with the zoning laws, which govern density and uses where structures can be located on the site and can dive deep into what sort of traffic impacts will they have and the height of buildings and structures and locations of those buildings and structures on sites and the such. A lot of times people refer to them as the entitlements to use your property for what you want to use it for. I help developers and property owners get their entitlements to utilize their property as they see fit.

Katya Valasek:

Are there any other big bucket practice areas you work in with regard to your real estate practice?

Eric Bernheim:

Yes, I do a lot of commercial real estate as well, buy, sell, refinance commercial buildings, representing clients and property groups that do all of those sorts of things. I help a large property management group based out of New Haven, Connecticut, where they own probably a million square feet of real estate. And when they get a new tenant, I help them do their leases, negotiate the leases and stabilize their properties.

One of my favorite parts of my commercial real estate practice is my restaurant leasing practice, which is in Connecticut, but also across the country. We represent emerging brands that are expanding throughout the country, such as Barcelona Wine Bar, Bar Taco, 60 Vines, Mexican Sugar, Hawkers Asian Street Fair, to name a few. And a lot of those concepts are now expanding across the country. And we help to ensure that their leases are all consistent within their portfolio, because most of these emerging brands are looking for developing their unit count, increasing their business and revenues, and then eventually a sale to cash out on their efforts.

Katya Valasek:

Outside of the land use zoning work, it seems to me that having a zoning practice would be beneficial to those other buckets that you mentioned. Why do you think it's uncommon to find an attorney in Connecticut who practices in both those areas like you do?

Eric Bernheim:

I think there are a handful that do practice in multiple buckets. But if you talk to a real estate attorney that just does real estate transactional work, most of them will say zoning is litigation. And if you talk to an attorney that just does zoning work, land use work, they'll tell you that transactional work is a completely different animal than what they do. And I think part of my kind of history of starting at a small general practice law firm right out of law school was to get a little flavor of everything. I did everything from going to criminal court to get somebody a program for getting arrested for drunk driving to wills and trusts to civil litigation, personal injury matters, and then commercial litigation.

And what I resonated with was the commercial real estate matters. And I think having the experience in all of those different areas, it made me a better lawyer because it made me think about things in a different way. Helped me to solve problems because with both the real estate practice as well as the land use practice, you normally are trying to get to the same common ground to close the transaction. Nobody really wants it to fall apart. Nobody wants to end up in litigation. So if there's problems, and there's always problems, you have to figure out a way to get everybody on the same page and bridge that gap. And then I was able to, I believe, do at a very high level, both land use and transactional work. And I liked it because it was, although it's a lot of work to keep up the speed on everything, it makes my days different, right? Like sometimes hot and heavy on the land use matters. And other times I'm hot and heavy on real estate leases and we're solving problems between landlords and restaurant operators.

Katya Valasek:

I actually want to focus on your commercial leasing side of your practice now. And more specifically, I want to focus on your restaurant group clients. I'm imagining a client looking to open a new location and they've scoped out a handful of possible options. At what point do they bring you into the matter?

Eric Bernheim:

Usually they'll bring me in at the letter of intent phase, which is they've gotten to the point where they are either done with the business deal that they struck with the landlord, or they're pretty close and they want me to put my eyes on that letter of intent so that we're comfortable with everything it says. So that when we're negotiating the lease in the coming months, that it's not going to be an issue that we agreed to something in the letter of intent that is now going to be a problem as we're trying to negotiate the lease.

Katya Valasek:

The letters of intent, are those drafted by the landlord or is that something that your client puts together?

Eric Bernheim:

Usually it's something that my client's broker puts together. So it's usually our form letter of intent, which is why sometimes I'm not involved with it because we put together kind of a form that they use. And if there's not drastic changes or things that I haven't signed off on previously, then they don't always come back to me until it's time for the lease. But letters of intent are not binding contracts. It's exactly what it is. It's a letter of intent, an intent to enter into a lease agreement based upon these business terms.

So anybody can, we call it re-trading, anybody could say, yeah, I know I said that in the letter of intent, but I'm not agreeing to it anymore. And then the other side will say, well, you're re-trading on this and then you have to kind of mend that, which is why sometimes when we're getting, when the clients are changing their letters of intent from our kind of prototypical form, sometimes they'll ask me to put eyes on it and give them my thoughts as to what sort of ripple effects will this have as we're negotiating the lease.

Katya Valasek:

So you've said negotiating the lease a few times now. So what does that actually mean?

Eric Bernheim:

What are you doing when you're negotiating the lease... so my clients, although they are emerging brands, they don't have hundreds of units. Usually they have anywhere from 10 to 30 units. So they're not that big yet where they can go to a landlord and say, here's our form lease, take it or leave it, mark up our form lease, and then we'll work off of this one.

So what we got is a landlord drafted lease on their form. And we do deals with the largest property owners in the country to mom and pa owners that own one property and everything in between. So when I say negotiate the lease, what we do is we take that landlord form lease and we incorporate all of our standard provisions that we have in all of our leases. And we do that for a number of reasons. One is from an operational standpoint, much easier for our operators to run the restaurant efficiently if they know what all of our leases say without having to pull up the lease and actually look at it to see what it says. So there's certain things that they know that we won't give on that we'll get into all of our leases or we won't do the deal.

And then the other important aspect is, is when these clients want to sell all of their restaurants, that the leases be strong enough where when it's going through the due diligence phase, and the buyer is looking at these restaurant leases that we don't want them to say, well, we're going to take 15 out of 20, because we don't like these leases. They're not very friendly. And if they carve off five of the units, when they do a transaction, well, that's going to impact one, what can you even do with those? Because you're selling your assets and the brand and so on and so forth. But two, you know, they're paying you based on your unit count for the most part. And if you're carving off five units, well, the price is going to go way down.

Katya Valasek:

What sort of things might someone consider unfriendly in a lease? Like what sort of things put a group at risk that a buyer is going to want to carve out some of their units?

Eric Bernheim:

Well, the assignment provision is key. Does the landlord have to approve the transaction? And that could, you know, because the old saying of time kills all deals in real estate, right? Well, when you're selling a business, it's not necessarily a real estate transaction. But if you're signing a lease, then it does involve real estate rights. And if you have to go to a landlord to get approval for a transaction of this size, well, chances are they know it's a big transaction. And are they going to put their hand out and say, well, I want to be compensated? Or are they going to say, no, we don't like that buyer. We don't want them to be the operator. We did this deal with you and we want you to continue operating it. So that sort of a thing is always the utmost importance to make sure that our assignment rights are strong when it relates to a corporate transaction like what we're discussing now.

Other things like operations provisions. Can we have a busy first-class restaurant and still get into trouble because of noise and odors and so on and so forth? If we're operating in compliance with laws, can the landlord give us a hard time? And we had matters where we do a lot of deals in mixed use developments and tenants above us were not fans of the noise and the odors coming out of the restaurants and results in litigation with the landlord and against us. And what are our leases say? Are we in default or does the landlord have a right to maybe contribute to our defense of that? And so on and so forth.

Katya Valasek:

You mentioned earlier that your restaurant clients are sort of in the process of expanding their footprint with where they're located. Do you sometimes have to go back and renegotiate leases if maybe their first and second location didn't have that eye on the picture of growing and selling the franchise?

Eric Bernheim:

Yeah, certainly some of the older leases in the portfolios can be problematic. So there's kind of two ways to look at that. One is we've gotten to a point now where we've, in most respects, been good tenants and have a long history with those landlords. And do they want to give us a hard time just for the sake of giving us a hard time or do they want to continue this partnership with us? Because even though it's a landlord tenant relationship, we do look at it as a partnership with our landlord. And if we're successful, then they're likely to be successful.

And you also have to be careful what you ask for. I mean, we have some locations where our concepts have worked for a decade. But before we took those spaces, they would go through restaurants every 12 months. So they have to be careful how much they push as well. So when it comes time to exercise an option, the question becomes, do you exercise that option and continue underneath that existing lease? Or is it better to go to them and say, we want to stay, but we don't like the terms of this lease. We want to renegotiate the deal. We want to talk about rent. We may even want to talk, if we've been there for that long, we may even want to talk about tenant improvement allowances and free rent and other tenant incentives and increase this to a real market deal as if it's a new restaurant, but and kind of reset the term and so on and so forth. So those are, I would say, higher level business decisions that are made at the C-suite level of my groups. And even with their boards and their private equity boards and the such, do you want another 10, 20 years in this location? Or is it good, but if we had to rebuild and pay higher rent and pay back that allowance with that higher rent, does it make sense in this location? Or are we better off just kind of maintaining the status quo and continuing to under these bad, bad leases?

Katya Valasek:

So to give advice in these situations, to even know if you should go look at an old lease and reconsider the terms, it requires that you have a very good understanding of the business of your clients, their goals, their operations. How do you develop a sufficient level of comfort with such complexity?

Eric Bernheim:

Well, we've been doing this for the same group for a very long time. So I had mentioned I started at a small general practice firm in Norwalk, but after about two and a half years, I got the opportunity to work for a larger Connecticut firm, which had about anywhere from 80 to a hundred lawyers in a satellite office in Westport. And when I started there, shortly after I started, my managing partner, who's now one of my partners of the Westport office, came to me and said, "I've got a really good friend. He owns Barcelona Wine Bar. Do you know the restaurant?" I said, "yeah, I know the restaurant. I love it." "So I've got a really good friend. He owns them. He wants to do a new location in Stamford. I want you to handle it. He came to us once before for when the other locations, he didn't really like how it went with the other lawyer who handled it at the firm. So I'm giving it to you. Don't screw this up." Right.

That was about three months after I joined the firm. Turns out that that guy, his good friend was one of the most brilliant guys I've ever worked with. He was really tough. I can count on my two hands, the number of clients I have who always pushed me to do better and be better and really provide my very best every single time I picked up a file for them. And I think those are the types of clients that kind of help you develop into the type of lawyer that you're going to be. And it wasn't easy that first one because I had never really done a restaurant lease at that level with that sort of critical eye, with an operator who knew what he wanted as clearly as Andy knew.

But when it was all said and done, we got to the finish line and we signed the lease. He sent a nice email to my then managing partner, my now partner, and said that he really enjoyed working with me. It was great. I took all of his feedback. I did a good job. He couldn't wait to do the next one with me. And then that spiraled into, I probably have done close to 40 leases for that group, which is now two different companies because he ended up selling it after we had done leases for a long time for them. But as I did those 40 deals with them, give or take, I really got to understand their businesses. And every time that they had an issue with a landlord, we said, okay, how do we fix that going forward? And we created provisions that now I have like a 30 page standard provision sheet that when I get a lease from a landlord, I go through that standard provision sheet and I make sure that every concept in those 30 pages are worked into that lease. And if it's not, then I put it in and then I also know where we can give and where we can't give.

So it's just experience. It's just doing it over and over again and having a loyal client who's willing to work with you, knowing that things aren't always going to be perfect, but that if I make a mistake or he makes a mistake, that we can figure out a way to work through that mistake and mitigate having that happen again in the future. And that's what we've really been able to do to understand how these types of restaurants operate.

And now our newer clients that we get, not only hear about that from our old clients and existing clients, but from other folks. And I've even gotten referrals from landlords that I've done deals against that were really tough deals to get done. And they've sent me referrals because I think one of the other things that I was able to learn from Andy was there's always going to be concerns that people have and pressure points. But if you understand what everybody's pressure point is, then usually it's not the same thing. We may be fighting over a certain provision in a lease. And the reason why the landlords fight with us about it is completely unrelated to why we're pushing for it. And if you really understand what everybody's concerns are, then you can bridge the gap and address both concerns. And that's what we're really good at. We're good at addressing all of the concerns around the table so that you get to that middle point where you can sign the deal.

Katya Valasek:

Yeah and I feel like that must be really important to understand the concerns helps you keep the framing of what the landlord's perspective is from being seen as unreasonable, right Because in some situations, I think some attorneys might just say, well, they're unreasonable because they're requesting this or they're refusing to give in this area.

So it sounds like Andy really helped you start to see how you understand what those concerns are. How do you keep yourself from getting frustrated, feeling like you maybe need to be more aggressive and instead settling back into, well, let's figure out what the underlying cause is?

Eric Bernheim:

It's not always easy. But I think what I try to do when nerves are getting heated is to just kind of take a deep breath and try to calm down and then start asking questions. And if they're not receptive to the questions, then telling them our story, right?

So I say all the time, we have a 30 page standard provision. So who knows at this point, maybe it's 50 pages, but we've got a good story for everything in there. And at least one out of every five leases, we send back with a sea of red on it, right? Of all the changes we've made. And we'll get a note from either the broker representing the landlord or the attorney saying, we've never seen anything like this. The client is just at a loss. How are we ever going to get to the finish line? And what I'll always push for is just a conversation. Let's talk through it. I said, I've got a good reason for everything that we did there. And if you have concerns about it, we'll figure it out. We've never lost a deal because we're being unreasonable. Let's just sit down and have a conversation. Yeah, it may take some time, but we can always bridge that gap. And if they're not receptive to my questions when I'm trying to prod to get their concerns, so I can try to address them, which they don't always understand what I'm doing when I'm doing it, especially if they haven't worked with me before, then I'll start telling them why we put in what we put in and what issues we've had in our past operations that resulted in us putting that provision in to get them to be more open and talk to us about, okay, well, you know, you may be concerned about the neighbor above you, the noise levels, but we're concerned about this and that.

Katya Valasek:

Can you think of a provision that's standard for you all that often surprises landlords when they see it come through?

Eric Bernheim:

You know, one of our kind of catch-all provisions is that nothing in this lease shall be deemed a default if we are operating a restaurant in a first-class manner. And that's kind of in compliance with all laws. And that has to do with noises, has to do with odors, has to do with construction and so on and so forth.

So a lot of times landlords don't like that kind of catch all provision. Other things that we do that's a seasons for our restaurants and most restaurants busy seasons are around the holidays. They get the holiday sales and the holiday parties. So in most of our leases, we'll put in a provision that if the lease is set to expire between October and December, that it automatically extends to the end of January the following year. And sometimes landlords don't understand what that's there for. And then we explain the, you know, the holiday season is strong for us and also who wants, if it's a big complex with lots of retailers and the such, who wants a business to close, you know, 10 years down the road in November and then it's vacant for the holiday season. You don't have that foot traffic and the such. So that sometimes surprises landlords.

Katya Valasek:

So you mentioned earlier in our conversation that you worked for some time at a larger Connecticut firm. So when we look at your firm today, the B in FLB is Bernheim. So you are a named partner and co-managing partner. And you founded the firm with two others in 2021, when you broke away from that larger firm. You'd been there for 15 years and it can be hard to leave. So who broached the idea initially of you starting your own firm?

Eric Bernheim:

Well, it was during COVID and, you know, I think a lot of people did a lot of soul searching during COVID. Steve and Tom, my two partners and I, we really ran the Westport office of that larger firm. We drove most of the business to the office and the such. And I think with anything, you know, relationships run their course at times. And Tom and Steve had both been there for even longer than I had. I think Steve was a summer associate at the larger firm. So he had been there his entire career. So it wasn't an easy decision for any of us really, but certainly for Steve and Tom, it was hard for them because they'd been there for so long and they're comfortable with it.

But, you know, we weren't thrilled with the trajectory of everything. And we felt like maybe it was time for something new, something where it was the three of us who had all the say and, you know, we had a really good relationship and good communication. And why aren't we calling all the shots as opposed to having the politics of a larger firm and the such. And we had a meeting about what the plan was and what did we want to see happen? And somebody in that meeting said, why don't we start our own firm? And then that was kind of the start of it. And we are where we are today. It's been great.

Katya Valasek:

Connecticut isn't a huge legal market. So what does it look like now coexisting with that larger firm that you broke off from?

Eric Bernheim:

Again, I think in Connecticut especially, and I would be willing to bet in a lot of the suburban markets to larger cities, that people hire lawyers. They don't hire law firms. And in Connecticut, and I would imagine it's like this in most states, when you are responsible for a client file, a client matter, when you decide you're going to leave whatever firm you're at, you have to send that client a letter and you say to them, I'm leaving. You've got three options. You can stay at this firm and your file will be assigned to a new attorney. You can come pick up your file and you can find a new attorney. Or you can authorize them to release your file to me and you can come with me to my new firm or wherever I'm going.

Because the public policy is that clients have the right to choose who their lawyers are. So when we left, I would say 98% of our clients left with us and came with us. And the only folks who didn't sign the letter for us to take their file were actually kind of quite funny. Some of them said, well, we don't have any ongoing matters with you right now. Why don't you just let them hold my file and when I need you, I'll call you. Why are you going to take the file with you?

So I don't necessarily see us as competing with that firm or other firms. I see myself competing with every land use attorney. I see myself competing with every real estate attorney because people hire lawyers. They're not going to choose a firm and go to that firm just because of the name on the door. They're going to go to the person who they're going to be dealing with and who do they want.