Unique Challenges Faced When “Crafting” a Commercial Lease for a Brewery

As craft breweries often merge retail and industrial leasing concepts, they face a unique set of legal issues when negotiating a commercial lease agreement for their production facility and/or tasting room.

License/Permit Contingencies and Permitted Use Provisions are Critical

First of all, it is critical that the lease agreement contain contingencies for receipt by the brewery of the necessary licenses, permits and approvals from applicable governmental authorities, particularly as it relates to approvals from the Washington Liquor and Cannabis Control Board, which may require a copy of the signed lease agreement as part of the license application package.  Without building such a contingency into the lease, a brewery tenant could find itself in the undesirable position of failing to obtain all required approvals to operate in the leased space, but still obligated to pay rent and perform under the lease with no right to terminate without penalty.

The lease agreement should also broadly define the tenant’s permitted use so as to encompass all parts of its short and long term operations, such as manufacturing, distribution, sales, merchandising, sampling, and ancillary food service.  While a start-up brewery may not intend to do more than brew, bottle and sell its beer in the first year or two, it is important to negotiate as broad a permitted use provision as possible so as to give the brewery room to expand the scope of its activities on the leased premises as its operations grow, without having to go back to the landlord later and negotiate a lease amendment expanding the permitted uses.

Nuisance and Other Important Lease Provisions

The nuisance provision in the lease is also of particular importance to a brewery tenant.  Despite cutting edge fermenting and brewing equipment, a brewery can still emit strong odors that might cause adjacent tenants to complain to the landlord, who in turn could look to the lease’s nuisance provision to require the tenant (in some cases, regardless of cost) to significantly reduce or eliminate the odor issue.  Such a pro-landlord nuisance provision could cripple a brewery operation by requiring all operations to cease until the tenant installs very expensive filtration and odor dampening systems (assuming the tenant even has the financial means to do so).  As such, it is extremely important that the landlord acknowledge in the lease that the odors typically produced by a brewery operation will not be deemed a nuisance.

As many craft brewery operations blend industrial, warehouse, distribution, and on-site retail uses, the tenant should independently confirm (above and beyond any representations made by the landlord or any realtors involved in the transaction) that the proposed uses are permitted by the existing zoning classification without the need for a conditional use approval or variance from the applicable governmental authority.

If the tenant’s proposed operations will include a tasting room, the landlord may seek to include in the lease agreement a covenant requiring the tenant to continuously open for business during certain days and times.  The brewery tenant should seek to build in as much flexibility as possible by attempting to limit the continuous operations requirement to the tasting room only.

The items discussed above are but a few of the many complex issues to be addressed when a craft brewery tenant negotiates a commercial lease agreement.  If you have questions regarding commercial leasing, please contact Joshua Pope or another attorney in MPBA’s Real Estate Department.

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