Ghost kitchens & virtual kitchens: Legal issues to consider before opening.
Updated: Jan 24
If you are contemplating establishing a ghost kitchen or a virtual kitchen, then you should consider the following topics:
What’s in a name?
Ghost kitchen. Virtual kitchen. What do these terms mean?
A ghost kitchen is a cooking facility that exists for chefs and restaurant operators to launch a delivery-only virtual brand. Ghost kitchens provide chefs and restaurant operators the necessary equipment and space to prepare their meals.
A virtual kitchen is a delivery-only restaurant concept that operates within an already existing brick-and-mortar restaurant. The primary restaurant uses its existing kitchen and staff to generate additional income and reach new customers via the virtual brand.
Every off-premise dining business will need to analyze its state’s sales tax sourcing rules. For example, what sales tax (and potentially use tax) applies when a delivery service picks up an order at a ghost kitchen in Town A and delivers it to a customer in Town B?
Another tax consideration concerns who is responsible for collecting and remitting tax to the revenue officials. Depending on the state, the responsibility may fall on the third-party delivery service or the off-premise dining business.
Lastly, some jurisdictions apply special taxes to certain beverages like alcohol and sugar-sweetened beverages.
Listings on food delivery apps.
It’s important for all restaurants to control their online presence. This is particularly important when it comes to listings on third-party delivery services’ website and apps. Third-party delivery services have often taken it upon themselves to add restaurants to their websites and apps without the restaurant’s consent. This can cause numerous issues such as: confusing a restaurant with another (perhaps a lesser quality restaurant), cancelled or erroneous orders, and failed delivery. Each of those issues can severely damage a restaurant’s reputation.
In 2015, In-N-Out sued DoorDash for delivering food without its permission. The underlying causes of action in that lawsuit were trademark infringement and unfair competition. As that case illustrates, it is imperative that off-premise dining businesses selectively choose which third-party delivery services they want delivering their food and remove themselves from all other third-party delivery services.
Food delivery is essential to ghost kitchens and virtual kitchens, and thus legal issues regarding delivery drivers are of paramount concern. If you are hiring your own delivery drivers, you need to determine if the drivers should be classified as employees or independent contractors. This determination can have severe ramifications if done improperly. Also, you should review your insurance agreement to determine who is responsible if an employee or contracted delivery driver, who is using his or her own vehicle, damages property or injures another driver or pedestrian.
The agreement between the landlord and the ghost kitchen/virtual kitchens must carefully define the rights, obligations, and liabilities of the respective parties. Standard leases are generally not appropriate vehicles for this type of relationship because the arrangement is for the use of the kitchen and other facilities rather than occupancy of the premises. License agreements should address the following issues:
Grant of license: The agreement should clearly identify the intention of the parties to create a revocable, non-exclusive license to use the space for a specific purpose.
Term: The agreement should reflect a specific start and end date.
Hours of operation: Licensees should consider negotiating for late-night hours to capitalize on late-night delivery orders. However, licensees should be aware that landlords may correlate this expansion of hours with an increase in utility costs.
Permitted use restrictions: Licensees should negotiate for minimal to no permitted use restrictions regarding cuisine type so they can rapidly adapt food concepts.
Indemnification: With multiple licensees utilizing one kitchen, there are issues of liability that are unique to ghost kitchens and virtual kitchens. Who is liable if food temperature or cleanliness standards are not followed? Who is liable if a licensee is injured in the kitchen? All of these liability issues should be negotiated and reflected in the agreement.
Maintenance, cleaning, and repair obligations: The license agreement should reflect who is responsible for maintenance, cleaning, and repairs to the kitchen.
Fees and utilities: Licensees may want to negotiate for a single, all-inclusive monthly license fee rather than a typical rent with additional variable costs.
Early termination rights: If your goal is to springboard a successful ghost kitchen into a brick-and-mortar establishment, then you should negotiate for early termination rights and limited to no termination penalties.
If you are serious about opening a ghost kitchen or virtual kitchen, then I recommend that you speak with legal counsel who is well versed in this industry. The legal considerations stated above are only an overview of some key idea to contemplate.
This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-attorney relationship between the Texas Hospitality and Non-profit Law Center, PLLC and any recipient.