This is Part III in our series of articles on setting up and operating a cloud kitchen in India. It provides the key terms contained in a contract for a shared cloud kitchen. Part I provides a summary of various models for a cloud kitchen business. Part II speaks of the key aspects of taking on lease a cloud kitchen premises.
Unlike a single-brand cloud kitchen that has only a single user, shared cloud kitchens have multiple users within a much larger footprint. Even though each user may be located in a specific unit, they share the kitchen space as a whole with several other users. This not only means that the users are under a single roof, but also that they will be using the common areas and common kitchen equipment and facilities together with the other users. This article details some of the key terms typically found in a contract for a shared cloud kitchen space.
Access and usage restrictions:
The contract will provide for highly restricted access to a shared kitchen space. This is important from a health and safety perspective. Typically, key-cards are provided to users and these are on a chargeable basis. A loss of a key-card is to be informed immediately to the operator, and an additional charge will typically be applicable for the issue of a fresh key-card. Each person who is allowed to access the shared kitchen may also need to be registered with the Operator, and they would then be issued separate identity cards. This is to ensure that there is no unauthorised access to the kitchen space. Users should therefore pre-identify their personnel and ensure that only registered and authorised persons are given access to the facility at all times. The contract may limit the number of staff that a user can have in the kitchen. This is to prevent over-crowing in the premises. The contracts may require that only persons above a certain age (i.e. persons who are major) will be granted access to the facility. Users may also be required to covenant that only those persons having proper training (i.e. from a culinary school or training to use specialised kitchen equipment, etc.) to work in a commercial kitchen will be authorised to work at the facility.
Additionally, the operator may restrict persons suffering from an infectious disease to ensure the health of the users’ personnel as well as their end customers. The contract may require the user to undertake regular medical fitness checks on its personnel and provide the operator with the appropriate declarations in that respect. Users should also, therefore, in their respective employment contracts, require their personnel to truthfully declare if they are suffering from any infectious diseases (on an ongoing basis).
Certain contracts also restrict persons wearing strong perfumes/ deodorants from gaining access to the facility. This is to ensure that these external smells are not inadvertently introduced into the food prepared at the facility, or interfere with the cooking process (where the sense of smell is a prized commodity). The operator may also restrict smoking, alcohol, or drug use at or near the premises. However, some menu items may require the use of alcohol as an ingredient (e.g. Beer Battered Fish, Coq au Vin, Irish Cookies, Rum Glazed Pork, etc.), and as such its use may be allowed. However, the users’ personnel are not allowed to consume alcohol during cooking.
“Certain contracts also restrict persons wearing strong perfumes/ deodorants from gaining access to the facility. “
Orientation, facility tour and operating manual:
Contracts will typically require the users to participate in an orientation and facility tour. First-time users may also be required to use the services of a designated kitchen assistant (nominated by the Operator). The role of the kitchen assistant is to provide guidance about kitchen use and protocol. As with any commercial kitchen, cloud kitchens contain expensive equipment. Take for example, a home oven can hit a high of 250 degree centigrade, a commercial-grade wood-fired pizza oven typically reaches in excess of 425 degree centigrade. Users would therefore be required under the contract to ensure that their personnel are adequately trained to handle such advanced equipment.
Operators may also provide an operating manual, a reference to which would be found in the contract. The operating manual would lay-out the applicable kitchen usage policies, including all the restrictions, and will also provide for the ongoing obligations of the user (e.g. maintaining of a pre-calculated liability insurance, use of allergens, appropriate dress codes, etc.). Failure to abide by the operating manual may lead to termination of the contract.
Allergens and latex:
Allergens such as nut may not be suitable for all consumers. Even trace amounts of nuts may seriously affect those who are allergic to them. Some facilities are entirely nut-free. Users are not permitted to use any nuts or nut-derivative products (e.g. peanut butter). Users whose menu items require the use of nuts and related products must consider the contract carefully. Some contracts may allow use of common allergens (nuts, gluten, etc.) but may impose restrictions on their storage and use in the kitchen.
Use of latex (e.g. latex gloves) is often restricted in kitchen environments for safety reasons. Latex can melt or catch fire very easily near heat or open flames and are a major fire hazard in a commercial kitchen. Another reason why gloves (in general) are not recommended in a kitchen is because studies have shown that chefs wearing gloves wash their hands less frequently, and thereby increase the chances of cross-contamination of food produce (e.g. between raw and cooked chicken).
“Studies have shown that chefs wearing gloves wash their hands less frequently”
Operators will require that users obtain adequate liability insurance in respect of its operations from the shared kitchen Liability insurance is meant to secure the users from its liability arising out of any accident at the kitchen, or from equipment damage, or damage to the property housing the shared kitchen, and even minor accidents suffered by other users due to the fault or negligence of the user. The contract may require that the operator shall be made an additional insured party. In many cases the minimum amount of the insurance will be provided in the contract/ operating manual.
Cost of service:
Users should remember that its use of the shared cloud kitchen space is not the same as leasing a unit. Instead, it is a service rendered by the operator to the user. The services may be charged for in different ways: (i) Hourly rates: rates for usage of the kitchen space may be charged on an hourly basis. However, in most cases for hourly charges, the contract will also provide for minimum hours that would be chargeable irrespective of whether the user has actually used the kitchen for such duration. Additional hours will be chargeable as an extra. Certain contracts may provide that additional hours be chargeable at enhanced rates to offset the costs of keeping the kitchen open for only few users. This will be typical for users who are in the late-night food business. (ii) Fixed rates: these may be chargeable on a periodic basis (weekly, fortnightly, or monthly) and as such the rates are not variable. (iii) As a percentage of sales: rates are typically a percentage of the sales recorded by the user from the facility. In such cases details of sales are to be provided to the operator on a periodic or a real-time basis (typically sales information is shared via a MIS system directly from the POS system of the user to the Operator’s system) and the rates are pegged to such quantum of sales receipts. The contract will also typically provide for a minimum guarantee – i.e. a minimum amount that has to be paid as usage charges irrespective of the actual sales recorded. If the usage charges are calculated to exceed the minimum guaranteed amount, the additional payment should also be made.
Start-up restaurants typically have a gestation period of 2-3 years before they become profitable. Operating out of a shared cloud kitchen may partially help to reduce the cost of operations, and reduce the gestation period. However, start-up restaurants need to be careful of their cash outflow. Sales-based charges are variable in nature and may therefore not be an optimal option for start-up restaurants who may not have visibility into their future sales and revenue figures Start-up restaurants should ideally opt for either an hourly rate (to gain more flexibility in payments), or on fixed rates (that give a certainty of costs to be incurred for using the facility.)
The contract may also provide for the payment of a refundable security deposit for the use of the facility. This will cover unpaid charges and damage to equipment or property. Additional charges may be levied for storage facility. Certain shared kitchen establishments may also provide centralised POS systems, and data analytics services which may be additionally chargeable.
The contract will provide for stringent indemnity provisions to safeguard the operator for act or omission of the user. Since the facility is shared between several users, negligence or failure to abide by the terms of the contract and the operating manual by the user may affect all the other users in the facility. The operator would therefore seek an indemnity to save itself from claims raised by the other users.
“Negligence or failure to abide by the terms of the contract and the operating manual by the user may affect all the other users in the facility.”
However, the indemnity, because of the nature of a shared kitchen, cannot be one-sided. The operator has the responsibility to ensure the safety and the security of the facility, and to take appropriate remedial and/ or disciplinary actions against other offending users. In the event the operator fails in its duties and the user suffers a loss, then the operator should indemnify the user . This can be in regards to the failure to prevent unauthorised persons to gain access to the facility, inability to ensure an allergen-free space, not maintaining the general cleanliness, hygiene of the facility, not ensuring that persons entering the facility are free from infectious diseases, or failing to ensure the safe working of the equipment provided in the facility, etc. The indemnity should also extend to the operator’s failure to obtain and maintain the appropriate licenses for the kitchen operation, and any other act or omission that renders the facility unfit for use by the user thereby rendering losses or claims for the user.
Operators typically provide standard equipment at the shared kitchen (sometimes on an as-is-where-is basis) for the use of the user. It is the responsibility of the users to ensure that the standard equipment provided to them is sufficient for their purpose and that the same is in good working order. Appropriate confirmation in regards to the same should be obtained from the Operator. Certain equipment may also require specialised training to be provided by the operator to the user’s staff. Contracts may provide that the user’s staff undertake a course of equipment and food handling, and sanitation, and obtain the requisite certificate in respect to the same.
The operator may also allow the user to bring in its specialised equipment into the kitchen space. However, the contract will provide that such equipment shall be the sole responsibility of the user.
Typically, the cost towards the maintenance of the kitchen equipment provided by the operator at the facility shall be borne by the operator itself. User should ensure that provision in respect to that is adequately captured in the contract.
Loading dock and waste disposal violations:
Commercial kitchen are required to maintain the highest standards of health, hygiene and sanitation. In the shared kitchen space this becomes even more important given the large number of operations being undertaken from a single facility. Contracts will therefore heavily penalise any violations that affect the safety and wellbeing of the users’ personnel and their end-customers.
Loading docks can be used for receiving raw goods by prior appointment. This is to prevent cross-contamination of produce, and to ensure that the raw materials are safely received and in a clean and hygienic environment. Since multiple users may require access to the loading dock, it becomes imperative to ensure that there are no conflicts of slots either. Contracts therefore will provide for penalties in case of usage of loading docks for purposes other than receiving raw materials, or unapproved use of the loading dock that conflicts with other users, or actions that adversely affects the sanitation and hygiene at the loading dock.
“Since multiple users may require access to the loading dock, it becomes imperative to ensure that there are no conflicts of slots”
Commercial kitchens are also mandated by law to ensure safe and efficient disposal of waste products generated during the cooking process. Kitchen waste may include spent oil, animal tissue, plastic and cardboard wastes, etc. Contracts may require that the waste generated at the kitchen be segregated and the disposal of the same to be carried out in the manner prescribed under the operations manual. Failure to abide by the waste segregation and disposal terms may incur a heavy penalty, and may even result in the termination of the contract.
Licensing requirements: Even though the operator is required to ensure appropriate licences have been taken for commercial kitchen operations, the user may also be required to take appropriate licenses to undertake a restaurant business. The contract may require that the licenses be obtained by the user as a pre-condition to the execution of the contract. The user would be required to ensure that the licenses remain valid for the duration of the contract, and the contract may have provisions for termination in case of a lapse of such requisite licenses.
Signage: Since cloud kitchens do not have a dine-in facility, and no customer is expected to visit the facility, operator may not allow for additional signage to be displayed in the facility. The kitchen units would typically be numbered, and the signage in place at the facility would be keeping in view of the required local health and safety guidelines (i.e. statutory declarations, emergency numbers and directions, etc.)
Cleaning: Cleaning will primarily be the responsibility of the user to ensure the cleanliness of their respective units. However, the overall responsibility to ensure the cleanliness and hygiene at the facility (including of the common areas) shall lie with the operator. Users should ensure that such obligation of the operator is clearly provided in the contract. Additionally, due to fears of cross-contamination, operators should also be obligated to ensure that all users abide by their respective cleaning obligations, and to take appropriate actions in case of any identified default. Failure to ensure the overall cleanliness of the facility should give the user the right to claim indemnity/ damages from the operator, and/or seek termination of the contract.
Facility failures: Kitchen equipment may suffer failures, and there may be occasions when the kitchen or any portion of it is rendered unfit for use (e.g. in case of a fire, or obstruction in the drainage system, non-receipt of utility services, etc.). Fixing of faults and ensuring the kitchen facility is normally operational is the responsibility of the Operator. However in cases of crippling issues, the user should be able to refrain from paying the usage charges for such time as they are unable to use the kitchen facility. In the event they are required to relocate to a new premises due to closure of the kitchen, the user may also negotiate appropriate reallocation costs and damages with the operator.
Operator lease: Cloud kitchen operators may not necessarily own the premises wherein they have set up the kitchen facility. Operators may have taken the premises on leasehold basis. Consequently, the term of the shared cloud kitchen contract would be co-terminus with the original lease. Users should ensure that the lease term is long enough to allow them uninterrupted operations from the facility.
This post has been authored by Sayanhya Roy, Principal Associate with inputs from Anirudh Rastogi (email@example.com), Managing Partner at Ikigai Law. For more on the topic, please feel free to reach out to us at firstname.lastname@example.org.
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.