The food hall revolution has captured the attention of both restaurant consumers and developers. Consumers are drawn to food halls due to the abundance of menu choices they offer, while developers see them as a way to mitigate investment volatility by licensing space to multiple food service entities under one roof.
The food courts and hall industry in the United States alone is valued at $4 billion. Over the past five years, the number of food halls has increased drastically, with nearly 400 currently in operation. According to real estate services firm Cushman & Wakefield, another 145 food halls are currently under development. Due to their unique business structure, it is essential for developers and operators to carefully assess the benefits, risks, and legal considerations associated with food halls prior to embarking on development ventures.
What is a Food Hall?
Food halls are venues composed of multiple local food and beverage vendors that mainly serve food by counter service for customers to consume in common seating areas. In contrast to food courts, which contain national chain restaurants or contract food services, most food halls feature locally owned entrepreneurial vendors who offer food that is crafted within the facility or in a commissary kitchen and is often sourced locally. Food halls are most frequently located in large, shared spaces, such as redeveloped warehouses or manufacturing facilities. They may also contain non-food retail shops or be located adjacent to popular shopping centers or retail districts.
What are the Benefits of a Food Hall?
Food halls offer numerous benefits for consumers, developers, and food vendors. They provide a wide variety of menu choices, making it easy for consumers to try new things and cater to diverse preferences. Developers can diversify their investments by licensing space to multiple vendors, reducing the risk associated with relying on a single large restaurant. For food vendors, food halls offer low barriers to entry, including low start-up and labor costs. The shared infrastructure and shorter operating hours provide vendors with a better work-life balance.
What are Some Legal Considerations When Operating a Food Hall?
Lease and License Structures
Food hall operators employ a mix of short-term licenses and long-term lease agreements with their vendors. Typically, well-established anchor tenants negotiate standard restaurant or retail leases lasting more than five years. These leases generally require a large security deposit or personal guarantee from the restaurant owner, allow exclusive possession, and include industry-specific clauses. Monthly rent is based on the square footage of the operation.
Meanwhile, newer and trending vendors are generally offered shorter license structures, typically lasting less than three years. These licenses require a small or no security deposit and do not provide exclusive possession. In this model, vendors typically pass the operator a monthly base rental fee along with a percentage of their monthly revenue.
Blending short-term licenses and long-term leases allows food hall operators to manage risk and adapt to dynamic market trends. Long-term leases are reserved for proven retailers and food vendors expected to succeed for more than five years. Those that already have successful businesses established in the city or region often secure long-term leases. Short-term licenses are offered to retailers and food vendors who are still testing their concepts and represent higher investment risks. Operators can license a portion of their floor space for a shorter period while retaining the ability to remove the tenant. This is typically facilitated by a kick-out clause that is triggered when vendors fail to meet a required minimum monthly revenue. If the concept is unsuccessful, the operator can swiftly replace the vendor with a new one.
Joint Employment
If certain conditions are met, food hall venue management may be subject to overtime and tipped wage regulations under the Fair Labor Standards Act (FLSA), if they share employees with one or more vendors. This is because in such cases, the employers involved may be considered joint employers. To limit this liability, food halls should ensure that their employment is separate and distinct from that of the food vendors.
According to current regulations administered by the U.S. Department of Labor Wage and Hour Division, if two or more employers “are acting entirely independently of each other and are completely dissociated” regarding an employee, they are not joint employers. However, joint employment may exist if the “employment by one employer is not completely disassociated from employment by the other employer(s).” The regulation outlines three potential scenarios where joint employment may occur but emphasizes that a determination of joint employer status depends on a case-by-case assessment of all the relevant facts. A joint employment relationship may be deemed to exist in the following circumstances:
- Where there is an arrangement between the employers to share the employee’s services.
- Where one employer is acting directly or indirectly in the interest of the other employer(s) in relation to the employee.
- Where the employers are not completely disassociated with respect to the employment of a particular employee and may be deemed to share control of the employee, directly or indirectly, due to the fact that one employer controls, is controlled by, or is under common control of the other employer.
To minimize joint employment liability, food hall venue management can take several measures to clearly separate their employees from those of food hall vendors. This can be achieved through explicit provisions in contracts between venue management and vendors as well as in employment agreements with venue management employees.
First, contracts between food hall vendors and venue management should include specific clauses, such as the following: (1) prohibition of any arrangement to share employee services between the parties; (2) a stipulation that no employee of venue management shall act in the interest of a food hall vendor while performing work for venue management; and (3) a stipulation that no food hall vendor shall exercise any form of common control over employees shared with venue management.
Second, venue management employment agreements can include clauses restricting employees from concurrently working for a food hall vendor while employed by the food hall venue management company. However, it is crucial to consider that the Federal Trade Commission has proposed a rule that may prohibit noncompetes imposed by employers. If this rule takes effect, the use of noncompete clauses could expose employers to joint employer liability. In such an event, it would be even more important for food hall venue management and vendors to limit the employment of similar employees and maintain a complete separation between their respective employment structures.
Permitted Use and Product Exclusivity Provisions
To maximize the benefits for both food hall operators and vendors, maintaining a diverse mix of vendors within the food hall is crucial. Operators can accomplish this by incorporating a clause in the licensing agreement that grants them the authority to approve or deny any changes to a vendor’s operations. Similarly, vendors can negotiate with the operator to include a provision in their licensing agreement that ensures product exclusivity, thereby preventing the approval of vendors with similar concepts.
By mutually agreeing to prevent vendor replication, both operators and vendors can gain a competitive advantage. Operators can attract more customers by offering a wider range of food and retail options. Meanwhile, vendors can enjoy the exclusive right to sell their particular products without concerns about internal competition. While the decision to implement these protections ultimately depends on the agreement between the food hall vendors and operators, most food hall agreements incorporate provisions such as permitted use or noncompete clauses to ensure the food hall attracts a diverse set of vendors to capture a greater share of the consumer market.
Local and State Government Regulations
In addition to the contractual rights between the food hall operator and vendors, it is crucial for both parties to have a comprehensive understanding of local and state regulations that can impact their business operations. Operating a food business inherently involves compliance with food safety regulations, which are generally enforced by state or local agencies. For example, these agencies often require food vendors and operators to maintain food safety and/or manager certifications, with a certified individual present during all operating hours.
Local health departments also conduct food safety inspections for food hall vendors. Prior to opening, food hall operators and vendors should consult with their local health department prior to establish specific licensing, certification, and inspection requirements.
Food hall operators often oversee a central bar or allow vendors to sell alcohol, requiring adherence to alcohol sale and service regulations. If a food hall operator runs a central bar, they must maintain a valid liquor license and ensure their staff undergoes proper beverage service training and certification. Alternatively, a food hall operator may permit vendors to sell alcoholic beverages under the operator’s on-premises liquor license, but certain precautions should be taken:
- Restricting areas where alcohol consumption is permitted;
- Ensuring that vendors possess appropriate alcoholic beverage service training and certification;
- Complying with local and state regulations governing alcohol sale;
- Requiring vendors to carry liquor liability insurance.
Food halls are a rapidly expanding sector within the food service industry, presenting unique legal considerations for food and retail vendors, operators, and developers. To ensure success and mitigate risks in these innovative business structures, meticulous attention must be given to license and lease agreements. As food halls venture into new markets, new regulatory and legal considerations are likely to arise. It is essential for vendors, operators, and developers to seek guidance from local health departments and hospitality attorneys who specialize in licensing and regulatory matters.
Critical Considerations for Food Hall Venue Management and Food Hall Vendors:
Below is a list of key areas food hall venue management and vendors should address when seeking legal advice. Each food hall concept will have its own unique legal issues, so this list is not exhaustive but provides a starting point.
- Managing joint employment liability by regulating simultaneous employment between venue management and vendors.
- Requiring vendors to possess appropriate general/product liability insurance, with the food hall listed as an additional insured and loss payee.
- Establishing indemnification clauses to ensure vendors hold venue management harmless from any claims, costs, liabilities, losses, or expenses arising from facility use and negligence.
- Defining standard operating procedures and maintenance requirements for shared areas (e.g., common prep kitchens storage spaces, trash areas, grease disposal).
- Designing vendor licensing and lease terms that facilitate adaptation to changing market trends while balancing the investment risks for venue management.
- Ensuring that vendor licensing and lease agreements have staggered expiration dates throughout the calendar year to avoid simultaneous expirations.
Matthew Giguere is a labor relations attorney and consultant specializing in the hospitality industry. Eric Barth is a consultant specializing in food hall & casino F&B. Stephen Barth is the founder of HospitalityLawyer.com as well as a professor of law and leadership at the Conrad Hilton College of Global Hospitality Leadership.
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