A food entrepreneur has a lot in their hands when opening a restaurant. Hiring space, appointing staff, and designing a menu are some of the most crucial tasks a business owner needs to do. Along with the said tasks, a food business is also liable to follow regulations, hire services from third parties and form agreements with parties to run their business. Every restaurant must keep a list of these restaurant operating agreements and get all the check boxes filled ticked before launching their business.
Restaurant operating agreement with clauses and clearly defining duties of both the parties involved is a must to avoid legal hurdles for any business. Below mentioned are the types of contracts the restaurant business needs to run their venture smoothly:-
Leave and license agreement:-
In most of the instances, the restaurants rent the premises due to high real estate expenses; this is where the leave and licence agreement or the lease agreement comes into the picture. The signing of the leave and licence agreement occurs between the owner of the premises and the restaurant entity granting them the right to conduct business in the premises for a specific period. Various terms of agreement like duration of the lease, duties of the leaser and the lessee, notice period, security deposit, and lock-in period, if any, need to be understood and drafted accordingly to avoid confusion or conflict later.
However efficient the entrepreneur is, it is often impossible for them to look into every aspect of the restaurant business. A food business owner may not have the expertise to conduct statutory compliance, which is mandatory under local laws like maintaining cleanliness, employee payrolls, human resource management, etc. Due to these reasons, restaurants have to take help from third-party vendors.
The agreements signed between vendors who provide service and restaurants are administrative agreements or management contracts. These agreements need to clarify the service provider’s duties, the number of staff delegated to complete the task, fee charged by the service provider, Force Majeure, consents, general approval, and each party’s obligations
Franchise restaurant operating agreements:-
Many restaurants operate on the franchise model, especially in the quick service restaurants (QSR) segment. QSR chains like MacDonalds, Pizza Hut, Dominoes, Subway, etc., prefer to expand their brand rapidly through franchisees. They sign agreements with the franchisee to open their outlets on a profit-sharing basis in specific areas. As per a franchise agreement, the franchiser provides a licence, brand name, expertise to run the brand and the business to the franchisee. The peculiarity about the QSR models is uniformity in service; anywhere you go in the country, the service standards, the taste of food and the brand remains the same.
People visit franchisee restaurants due to the brand name and the service standards. The partons expect the same kind of service; hence, the franchisers follow very stringent clauses when signing the agreement to safeguard their brand name. The franchiser retains the right to terminate the contract in case of breach of contract, and the franchise agreement is non-transferable.
In a franchise business, a franchisee is given the training to handle the brand image and service standards; hence terms relating to the same need to be mentioned with clarity in the agreement. Other than training, profit sharing ratio, the terms of the agreement, renewal clause, and intellectual property rights also need to be mentioned in the contract.
Due to heavy investment and stiff competition restaurant business is often operated on a partnership basis; hence partnership deeds have become a vital agreement in the food industry. Terms of partnership deeds need to be clearly defined for the smooth functioning of the business. The financial structure of the contracts, like profit sharing ratio, investment provided by each partner, percentage of ownership, the role of each partner in the food business, are critical components of a partnership deed.
Government and private entities issue tenders for catering companies. The catering tender lays a foundation for the terms of the catering contract by mentioning the conditions like rules of daily operations, inclusions of the menu, facilities in the mess etc. A catering contract is drafted once the tender is finalised and a successful bidder is chosen. Private firms may or may not issue tenders and select caterers through negotiations.
A catering contract should include general terms and conditions, cost of the menu items, local government body approvals, public liability insurance, termination of contract etc.
Restaurant operating agreements are one of the cornerstones of a successful food business. You must get all the terms and conditions desired to be mentioned in the contract to avoid future conflict of interest. A business must hire the services of an advocate to manage the contract, and all the documentation need to be vetted to avoid legal hassles in future.