On Monday, IHOP err IHOB, announced its plans to change the namesake from the International House of Pancakes to the International House of Burgers. After teasing social media for a week with the new acronym most had logical guess what the “B” would stand for like Breakfast, Bacon, and other breakfast related words. No one outside the company saw this coming.
Even if IHOP’s plan to change from a beloved chain of pancake and syrup to the crowded arena of burgers were to go over well with consumers their landlords may not be as loving. In commercial real estate many retailers like to protect themselves with these little clauses in leases called Use Restrictions or in the case of a sale a Deed Restriction. This could have a significant effect on a number of the restaurants IHOP intends to roll out the meat patty into.
Deed Restrictions (or Use Restrictions for leases) intend to limit the use of the property. For instance, say McDonald’s moves across the street to a new location. When McDonald’s goes to sell their old site the last thing they want is another burger chain coming into their neck of the woods. So before they sell the property (usually outlined in a purchase agreement) they will place a deed restriction on the property that states no other restaurant can serve a certain percentage of their sales to the sale of burgers. I have even seen a former Pizza Hut outright exclude the sale of Chicken, Mexican, and Italian Food on the menu to protect KFC, Taco Bell, and Pizza Hut respectively.
In the case of leases this is a Use Restriction we did for a burger chain last year:
Subject to existing exclusives at the Shopping Center Landlord represents that the Premises may be used by Tenant to operate a restaurant featuring fresh hamburgers, fries, and other food products. Tenant shall the exclusive right to operate a restaurant whose Principal Business is the sale of hamburgers (“Tenant’s Exclusive Use”). “Principal Business shall mean any business, either (i) generating thirty percent (30%) or more of its gross sales from the sale of hamburgers, which by way of example shall include………
Now what is the penalty for that happening, well that depends on the lease language. It can be anything from rent abated by 50% to the tenant that is “affected” by the restriction being broken to outright lease default in which the lease can be cancelled, and penalties applied (aka you’re getting sued).
A lot of people are already questioning the decision of a pancake house trying to sell burgers but if I were a landlord of IHOP with a burger place coming in I would be checking their lease with IHOP to make sure they can even become IHOB!
Aaron McDermott, CCIM, President, Latitude Commercial
Aaron McDermott is the founder and President of Latitude Commercial. Latitude Commercial is a full-service Commercial Real Estate brokerage firm. A few of the restaurants he has worked with include Rock n Brews, Buffalo Wild Wings, Jimmy Johns, Dunkin’ Donuts, Red Robin, amongst others.