Restaurant leases typically consist of dozens of pages. Reading them is not for the faint of heart (unless you need a foolproof way to fall asleep at night!). All the provisions and fine print in a lease need careful oversight, ensuring you as a tenant receive the most beneficial terms possible and don’t end up with unforeseen—and avoidable—liability.
Include Key Terms in the Letter of Intent (LOI)
Are there deal terms that cause you indigestion? For instance:
- The landlord includes his sprinkler riser as leasable space;
- You realize you need a 25% tint on the exterior windows to reduce sun glare, but the landlord only agrees to pay for the standard commercial models;
- The landlord can use his expensive contractors to fix and maintain the grease trap then pass all the maintenance costs and responsibility on to you;
- The landlord promises you a 30 ton per square foot HVAC unit, but you need 35 tons (and now you’re stuck paying the extra costs).
Consider including these non-typical terms in the letter of intent (“LOI”) rather than addressing them only after you have forwarded the first draft of the lease to your attorney. You might have your attorney create an LOI addendum that outlines in plain English these non-typical, “let’s avoid indigestion” terms. And as you expand your footprint, this addendum can become a standard add-on to the LOI – a point in lease negotiations where the landlord is most likely to give you what you want.
An important tip. Make sure to get your attorney involved on the frontlines (e.g., LOI stage) and not the backlines (e.g., “here is the 70 page lease we received from the landlord”) so he or she can gain the necessary context to know what is really important to you and your vision for the new restaurant.
The Right Site
Some sites seem like they were made in Restaurant Heaven. The right site goes beyond location, location, location and includes demographics, parking availability and other factors. However, no matter how great that Buckhead site may seem, prepare to walk away if the landlord’s lease demands are unreasonable. Really, another site on Peachtree Road will come along soon enough.
The lease negotiation includes when you actually start paying rent, and the best scenario delays payment until after your establishment opens for business. Pro-rating the rent for the first year is also common, with the rate going up a specific percentage annually.
Lease Lengths and Renewals
When you’re signing a lease for a new restaurant, the initial terms generally range from five to 10 years. Fifteen year leases aren’t unusual. When you’re renegotiating a lease, you might not plan to stay another decade or more at the same site. A shorter renewal—five years or so—gives you more options if retirement or another life change looms.
Nobody needs to tell you the restaurant business is risky. As many as 80 percent of restaurants fail within their first three years. That’s why it’s imperative that a lease includes a clause allowing you to sublease or assign the lease—and you want as much flexibility as possible on that front. The landlord, meanwhile, will likely agree, but with less leeway than you desire. The bottom line: The landlord wants the rent, and you must have the means to pay it.
In the restaurant world, percentage rents are relatively common, but it’s generally best to avoid this lease clause. Under a percentage rent, the landlord in effect gets a cut of your revenue once your sales reach a predetermined amount. If the landlord insists on a percentage rent, an attorney can negotiate the best terms for you.
If you’re opening a restaurant in a shopping center or similar planned development, consider an exclusivity clause. If you want the exclusive right to have a “country-style restaurant,” “high-end restaurant” or whatever is pertinent in the shopping complex, define those terms clearly in the lease, to avoid competition in your backyard.
The only certainty is change, and that’s an axiom of the restaurant industry. You want the lease to permit you to make as many changes in signage, interior design and other aspect of the industry as possible. For example, a lease will often lock you into a specific concept and experience (“upscale Persian cuisine”); if that concept doesn’t sell, then you will want the freedom to adopt the concept to the market (e.g., “fast casual Persian cuisine”). Unless you’re a franchise, you don’t want to get locked into a look.
Does the lease clearly state who pays for what type of building repairs? Major, unexpected repairs should be the landlord’s responsibility, particularly for anything affecting the structural soundness of the building. But for smaller, day-to-day maintenance, many restaurateurs prefer to assume responsibility for certain repairs (such as repairs to the grease trap), instead of having to wait for the landlord to get around to calling the plumber, HVAC pro or others, and risking a shut-down until help arrives. If that’s the case, then the lease should address this division of maintenance, including how a tenant’s money spent on repairs is deducted from the next month’s rent.
Leases often detail who is responsible for any type of operating expense. While insurance, property taxes and utilities are nearly always outlined in leases, some landlords may try to slip in other fees that trap the unwary, such as monthly “promotional” and “advertising” fees. Also be careful of lease terms regarding any sort of capital expense or improvement.
Almost every landlord asks for a personal or corporate guaranty. But guarantees come in many shapes and sizes, from broad form (you’re on the hook for every bent nail) to the narrowly scoped. Narrowing the scope of the guaranty will significantly limit your potential personal liability, and it is likely just the fair thing to do. Understandably, the landlord wants you to have some personal investment in the success of the restaurant; but if you pay your rent on time every month for five years, then that guaranty should roll off and become void. You can also negotiate a rolling one-year guaranty, meaning at the time of default, you are only responsible for up to one-year of base rent (and not additional rent), plenty of time for the landlord to find and secure a new tenant.
More than an Attorney Review
While it’s wise to have an attorney review your lease, it’s also smart to have your architect or designer take a look at it. The lease could include constraints making your desired look or ambiance of the restaurant difficult, if not impossible. If your designer or architect has objections to clauses in the lease (especially the exhibits addressing buildout) that may affect their work, have them bring those issues to your lawyer’s attention.
Lease Summary & Critical Deadlines
After lease execution, ask your attorney to prepare a lease summary and critical deadlines checklist. Click here for an example we typically prepare for our restaurant clients. This critical document outlines in plain English important dates for submitting to the landlord your plans and specifications, open date, option renewal dates and many other obligations you must keep track of during the lease term.
An important tip. Many attorneys prepare this document after lease execution (if they prepare it at all). Ask your attorney to prepare it before placing your John Hancock on the dotted line. Doing so will provide you a concise overview of the major lease obligations, potential penalities and deadlines before you fully commit your financial resources.
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