Cloud kitchens are commercial kitchens without any front-of-house; i.e. they do not have any dine-in option. They often tie up with third-party aggregators that collect orders and undertake delivery of food to end customers. But they can take many other forms. You may read Part I of this series to understand various cloud kitchen business models. These kitchens can be set-up in relatively small spaces, sometimes as small as 250 to 300 square feet. The cost for setting them up is relatively low, and so is the entry barrier.
It is because of the specialised and specific use of the cloud kitchen space, that there are aspects that must be borne in mind prior to signing the lease for a cloud kitchen premises. The lease for a cloud kitchen could be (i) merely for the premises, or (ii) for the premises along with pre-installed kitchen equipment and appliances. Start-up restaurants may also opt for taking on a space at a shared kitchen on a license-to-use basis. Shared kitchens are multiple-unit commercial kitchens where each kitchen unit is occupied by a separate user. You may read Part III of our series to understand the key terms contained in a contract for a shared commercial kitchen.
As with any commercial kitchen, the cloud kitchen space can be broadly divided into two – the preparation area and the storage area. Kitchens that have a cold storage area may also have a freezer room. Kitchens may also have specific areas to receive delivery of raw materials, packaging and labelling area, and areas from where the cooked food is sent out to be delivered to the customer. All of this may require significant structural alterations to the premises to create a self-contained kitchen. Lease contracts should therefore provide that the operator of the cloud kitchen shall have the right to undertake necessary structural alterations to the building. However, this may not be needed if the kitchen requires a limited cold storage area, or where the cold storage is limited to independent moveable freezer units. Certain premises may also be purpose-built for commercial kitchen operations (e.g. where an existing space was previously used as a commercial kitchen), and as such many of the required areas and additions may already be in place. However adequacy of storage areas will be a key concern for operators – including both dry as well as cold storage areas.
Physical kitchen space: For most operators, the first step towards leasing a space is to determine the physical space it needs to install necessary kitchen equipment, and ensure proper space for storage, room for its personnel, etc. Different cuisines may require different kitchen configurations – based on the menu items and the type of kitchen equipment that may be required. Operators should therefore determine the size of the kitchen that is required. Attention must be paid to the carpet area (i.e. the net usable area of the space excluding the thickness of the walls, etc.) to ensure that the premises proposed to be taken on lease has adequate space for the equipment, storage and personnel. Operators may also need to consider if they intend to go in for pre-fabricated kitchens – i.e. a pre-fabricated and composite kitchen unit that can be installed within a standard space. In case of use of a pre-fabricated kitchen, the layout of the space should be considered to ensure optimum efficiency of operations, and adequate working space for the personnel in the kitchen.
Third-party users: Operators setting up commercial cloud kitchens for use by third parties, or as part of shared kitchens, should also ensure that the lease agreement allows for the use of the premises by third parties (i.e. the users). Therefore, the lease agreement should include the right to license or sublicense the premises to third party users.
Nature of usage: Additionally, the operators should ensure that the lease agreement should specify the nature of usage of the premises in broad terms. Terms such as “cloud kitchen”, “ghost kitchen”, etc.” should be avoided as these terms can be ambiguous and restrictive in nature. Instead the usage may be described as “setting up and operating a commercial kitchen having one or more kitchen units.” This will ensure that both single unit kitchens for use by a single user/ operator and shared kitchens that contain multiple units for use by multiple users are covered.
Loading bay and parking spaces: Commercial kitchens require regular supplies to be brought in, as well as outgoing deliveries being made of packed food. Operators should ensure that the premises has adequate ingress and egress spaces, and appropriate areas that would be used as loading bays. Loading bays may be marked out in a map attached to the contract. Lease deed may also provide that the loading bays should not be used for storage.
Cloud kitchens depend entirely on deliveries to reach their products to their end customers. Typically deliveries are conducted using two-wheelers. Lease agreements should therefore provide for adequate parking space/ slots for the delivery personnel. Operators should ensure that the parking slots made available to it are adequate keeping in view the scale of their operations.
Statutory requirements: Cloud kitchens need not occupy prime retail spaces, but they do need an adequate captive customer base in their immediate vicinity. These can be individuals, families or office-goers. While cloud kitchens remain unseen by the customer, they are nevertheless a commercial operation. It is therefore pertinent that the premises where a commercial kitchen is established is a commercially licensed property and the same is operated in compliance with the guidelines issued by local authorities. Additionally, the operator would be required to obtain operating licenses including FSSAI licenses, Health/Trade licenses, Fire NoCs, and PCB NoCs as may be applicable from state to state.
The utility connections in the premises must also be commercial in nature. These connections would be in the name of the owner of the premises, and it is the responsibility of the owner to ensure that the proper category of connections have been obtained, and maintained for the premises. Failure can result in fines or disconnection of the utility services.
Technical due diligence: Adequate due diligence over the prospective premises should enquire inter alia into the nature of the premises (commercial, residential, or mixed), the type of utility connections provided and their adequacy, the availability of adequate drainage and waste-disposal facilities (for food/ oil waste), adequate extraction facilities for kitchen fumes, and adequate facility for receipt of raw goods. Adequate availability and storage for fresh water is also an important consideration. Appropriate provisions for drainage and waste disposal and extraction facilities may need to be built in to the existing structure of the premises, if not already provided. Certain premises may also require increased additional fresh water storage to be provided. These must be pre-negotiated with the owner, and provided in the contract.
Equipment: Furnishing a kitchen space with appropriate equipment may be an expensive proposition for many. Operators therefore also have the option to take on lease not only the space, but also the kitchen equipment from a third party vendor. Operators taking kitchen equipment on rent should ensure that the contract provides the exact specifications of the equipment they propose to take on rent, as well as copies of their manuals, and warranty details. Delivery of such equipment should be deemed to have been made only once the equipment has been confirmed to be operating in the manner as desired. A lease for a typical modular commercial kitchen setup may also include installation and removal of the same by the vendor, and the terms for the same should be provided in the agreement as well. The term of the equipment lease should in no case extend beyond the term of the lease, as upon expiry of the space lease, the operator would be required to hand-over the vacant possession of the space to the owner.
Since there is limited scope for alteration in a cloud kitchen space, restaurants that need specific equipment to create specific menu items (e.g. a Hobart Dough Mixer, coffee roasters, etc.) may have to struggle. While many kitchens will provide standardised set of equipment and earmarked area to place it, users should nevertheless ensure that they have the right to use such equipment/ areas in their contract (if required by their menu choices). If specialised equipment is not available in the kitchen, users should ensure that these can be procured externally and integrated into their kitchen unit/ operations. Users may also check if the use of the kitchen units also allows them access to cookware, in which case such items should be recorded as an inventory in the agreement, and it would be the users’ responsibility to return/ replenish them.
Agreements with shared kitchens: In view of the costs involved in setting up a commercial kitchen, start-up restaurants may opt to take up space at shared cloud kitchens. These are large purpose-built spaces (e.g. converted warehouses, remodelled industrial buildings, etc.) containing a large number of kitchen units each of which can be occupied by a user. These operate like a typical co-working space, and provide better kitchen infrastructure and relatively lower user costs. Such shared kitchens will have specific areas demarcated for each user, and will also have common facilities to be used by all the users. Specific user areas may include the kitchen units, storage units, etc., while refreshment areas for staff, washrooms, unloading bays, common large kitchen equipment etc. will constitute common areas. These agreements may follow a standard-form contract with less room for negotiation. Please see Part III of our series to understand the key terms contained in a contract for a shared commercial kitchen.
Lease term: Leasing a space to set-up a kitchen and taking up a unit in a co-working kitchen space are two distinct ways of starting up a food business. However, as with any food business, it is best to bear in mind that many restaurant start-ups do not make it past the first year of operations. Therefore for self use kitchens (i.e. single unit kitchens for use by the operator itself) it is advisable to have a smaller lease term initially for the kitchen space with the option of renewing it periodically. This may be a critical point for negotiation since many owners may insist on an extended lock-in period to ensure continuous occupancy of their premises/ units. Alternatively, they may charge a premium for a smaller initial lease term.
However, operators who take premises on lease for converting them into commercial kitchens for use by third party users should ensure a long-term lease. This is to ensure continuous and uninterrupted operations. Lease agreements should also have a non-disturbance/ right to continued usage provision in favour of the operator to ensure that the use of the premises is not adversely impacted in case of a change in the ownership of the premises.
This post has been authored by Sayanhya Roy, Principal Associate with inputs from Anirudh Rastogi (anirudh@ikigailaw.com), Managing Partner at Ikigai Law. For more on the topic, please feel free to reach out to us at contact@ikigailaw.com.
Disclaimer: This article is meant for general informational purpose only and is not a substitute for professional legal advice. This article is based on the laws applicable in India as on the date of publication.
