The relatively recent phenomena of “ghost kitchens” and “virtual restaurants” have flourished during Covid-19. Creating a “virtual brand” that is only available through delivery apps provides various benefits to a restaurant in your property, particularly at a time when governmental orders have restricted the use of dine-in options. These virtual brands still require bricks and mortar locations for the production of their menu items and to serve as pick-up locations by those making the deliveries.

Although the terms ghost kitchen and virtual restaurant is often used interchangeably, the main difference between a ghost kitchen and a virtual restaurant is that a virtual kitchen is usually part of a restaurant or franchise system using their existing kitchens to produce and promote products for delivery only through delivery apps under a brand not associated with the restaurant itself. Conversely, ghost kitchens tend to be brands that rent the use of kitchen facilities. Ghost kitchens may produce multiple brands for the same owner using similar ingredients but packaged in completely different ways. Stand alone ghost kitchens can also be used by more than one company at one time in shared facilities.

Since ghost kitchens are a good way for a new chef or an existing brand to test out new concepts or new items without making the investment into a brick and mortar location, they may share an existing restaurant’s kitchen space.

Here are some things landlords should consider.

Trade Names, Use Clauses and Exclusivity Clauses

Typically, ghost kitchens and virtual restaurants typically have no visible signage and are not promoted in the same way typical restaurants are promoted. Does your restaurant lease specify only one trade name? How are the other brands promoted virtually and to the deliver apps? Will this create confusion in your market when your restaurant also displays and promotes other brands from its physical location?

If as a landlord wishing to allow a restaurant to have a virtual presence then a lease amendment is needed to permit the general use of take-out or delivery and must not be restrictive to a particular brand. Consideration must also be given in these circumstances to whether there are any exclusive use obligations contained in any other lease which might restrict what products can be sold out of a virtual restaurant.

We recommend that the addition of a virtual restaurant or ghost kitchen be temporary and frequently reviewed by the Landlord. Therefore, a time period should be included in amendment, and claw back provisions should be included to maintain merchandising flexibility.

Operating Hours

Care should be taken that the restaurant providing a virtual environment doesn’t simply go dark and only operate virtually. This is particularly true whereby other tenants expect each tenant to contribute to ‘footfall’ and exposure.

Sales Reporting

All sales from the virtual operation should be recorded as sales from the premises, and the tenant sales auditing process should be reviewed and amended as required.

Subletting and Profit Rent

Make sure you have all your subtenancy protections in place, including any so-called ‘profit rent if others are using the kitchen facilities as their ghost kitchen. Make sure that any and all other users of the facilities have a signed subtenancy agreement, and the tenant is liable for the subtenant’s actions.

Numbers of Restaurant Covenants

Some other tenants in a property may include restrictions on the number of restaurants in a property. Ostensibly, this is related to the use of the parking field for dine-in eating where the other tenant doesn’t want to have restricted parking availability affecting their business.

Insurance

Check with your insurance agent if the Landlord needs additional coverage, particularly if the facilities are used by others. Obtain a letter from the tenant’s insurance carrier that the expanded virtual operations are covered and obtain a revised certificate of insurance, if needed.

Each subtenant will also need to provide certificates of insurance if the facilities are used as a ghost kitchen by others.

Permits

Verify that the restaurant offering either a virtual restaurant or ghost kitchen has all the permits required. Additional business licenses and modified health and safety permits may be needed, etc.

These are just a few of the items a Landlord should consider prior to permitting a virtual restaurant or ghost kitchen. These new operating models may prove to be the lifeline your food services tenant needs, but it is equally important for the Landlord to protect its position, by conducting proper due diligence and documentation.