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Cooking Up The Right Lease: Restaurant Owners Need a Different Menu When it Comes to Leases

You found the perfect site for your new dining establishment. You receive a restaurant lease that exceeds 40, even 60 pages. Now what? When negotiating lease terms, here are some key concepts any restaurant entrepreneur needs to keep in mind:

1.Percentage rent. Some leases require “percentage rent.” Once a tenant’s sales reach a certain level, the tenant must pay the landlord a percentage of the restaurant’s revenue. This isn’t always ideal, as a tenant’s success shouldn’t determine how much the Landlord receives. Nonetheless, percentage rent is fairly common. If you ultimately agree to it, negotiate the terms.

2. Exclusivity, use and radius restrictions. Try to limit direct competition in the same shopping area. You probably cannot block all other restaurants from leasing in the area: no savvy landlord will agree to such terms. However, you  might be able to negotiate exclusivity within a category, such as pizzerias or Asian food. Planning to open multiple locations within a relatively small radius? Be careful. Your landlord might want to impose radius restrictions, preventing you from opening another unit close-by. Tenants who remain open past normal center hours need the area surrounding their restaurant to remain attractive and safe for customers, which results in additional costs to either a landlord or tenant.

Parties will want to clearly define hours and allocate increased costs necessary for things such as additional lighting, security, parking, and access.

Parties should explicitly delineate who will cover the extra expense of any after-hours operations. Use the counsel of an attorney or skilled negotiator to help you navigate through these various restrictions.

3. Assignment and subletting clauses. You’ll want the right to sublet or assign the space to another tenant, should you need to close or sell your restaurant. Don’t gloss over this section or assume that you will never be in a situation where you are seeking to assign or sublet. No one thinks this will happen at the onset of a long restaurant lease, but if it does, be prepared.

4. Option to renew.  Negotiate for as many options as you can get. An option is an obligation for the landlord, but a valuable tool for you. Going back to point 3 about assigning and subletting, try to make sure that any option to renew does not require you to be the tenant. What if you assign the lease and the new tenant can’t stay on the premises for the renewal term? A clause like this will hurt your negotiating power with a potential transferee.

5. Future rent prices. Negotiate future rent terms. Prices tend to be based on percentage increases or tied to fair market value. Given a choice, opt for percentage increases because they’re easier to budget for. Otherwise, you could be shocked with a large increase.

6. Kick-out clauses. Consider negotiating for a kick-out clause, giving you a one-time right to cancel a lease after a specified time period if your sales haven’t surpassed a certain amount.

7. Start date of rent. Some landlords may be willing to waive rent payments during the build-out period. Typically they’ll waive payments for 30 to 60 days or more, or until you open for business, whichever comes first.

8. Change of use. Try to maintain flexibility so you can change concepts or sublease/assign the space to a different business. Landlords favor narrow use provisions in order to protect their ability to maintain a mix of tenants in their developments, including the types of restaurants operating therein. Ideally, Landlords prefer to attach a menu as an exhibit to a lease to establish the parameters of a potential tenant’s use. However, you will certainly prefer a broad use clause such as “restaurant or any lawful use”. What a lease states about what a tenant may or may not do at the onset will go far towards determining the extent of control a tenant has over its business over the life of the lease.

9. Operating expenses. Negotiate whether you or the landlord are responsible for operating expenses, including property taxes, insurance and management fees. If you are paying CAM expenses on a triple net lease, anticipate (and try to limit) future increases.

10. Deliveries, Ventilation, Bathrooms and Cooking Equipment.

A. Lack of public bathrooms– ADHA bathrooms require a certain amount of stalls per seats and all must be ADHA compliant. If all you have is a one-seater, is there enough room to add more bathrooms?

B. Lack of outside ventilation– Restaurant kitchens produce a lot of smoke, grease, and odors. Therefore, ventilation is necessary, not only to keep the dining room free of smoke but to keep the kitchen a healthy work environment.

C. No Garbage pickup– Restaurants produce a lot of garbage. Is there a place for a dumpster nearby? Or can you share with other local businesses?

D. Utilities: Remember that unlike other commercial spaces, existing sewage, water and other utilities are often inadequate for restaurant owners. Look into this early on. Another question to consider: are the water and sewer lines something that the landlord maintains as part of the common area, or will you be responsible to maintain them?

11. Tenant Build Outs. Even before considering design, you need to figure out if the premises can be built out in a way to meet your restaurant’s needs related to unique needs related to heating, ventilation and other issues. Are you adding hoods? Upgrading electrical? Installing a grease trap? Adding or upgrading HVAC? If you are doing any of those things the dollars can add up fast. The big ticket items for a commercial kitchen are plumbing, ventilation and refrigeration. Ventilation can be very expensive as well, costing upwards of $1000 per square foot of hood area. Finding a space that has been a commercial kitchen in the past can save you large sums of money because many of the leasehold improvements you will need should be in place already.

Is access to sports channels via satellite a piece of your restaurant puzzle? If so, come talk to us. There are some complex rules, regulations and loopholes you should know about when it comes to anything obstructing or touching the roof.

If you find a space that needs major build outs, ask the question: who will install and repairs the necessary equipment? Will Landlord install it and you will pay? Will Landlord cover all? Will you? Find out.

12. Signage. Signage is the lifeline to any restaurant. Tenants want people to locate and identify their restaurant and should be aware of any limitations on signage, whether those limitations are coming from the Landlord or the County. You may have restrictions on the type and size of signage you can use. Discuss this early on.

13. Liquor License. Planning to serve alcohol at your establishment? It is absolutely imperative that you consult an attorney or other local liquor licensing expert. Some of the things you need to think about are whether there are government or landlord restrictions regarding the sale of alcohol. Often, there are restrictions about serving alcohol past a certain hour, or in regards to proximity to hospitals, schools or religious establishments. Liquor license issues can tangle quickly. Consult an expert before problems begin.

14. Parking and Accessibility. Convenient and accessible parking is absolutely critical to the success of any restaurant. Talk to the Landlord about which spaces will be available to you, as well as the location of these spaces. If there is the possibility of obtaining a “quick pick up” spot for customers picking up food, it may be worth the additional hassle and expense of asking about this. Similarly, if a drive through is a critical component, ask for a contingency allowing you to walk away if proper permits cannot be obtained.

In terms of accessibility for handicapped persons, be aware that complying with local, state and federal laws may come at an additional cost. Things to consider include ingress and egress, bathrooms, and parking.

15. Casualty and Insurance. Commercial kitchen equipment and their high utility usage naturally increases the risk of fire or other casualty. Make sure to obtain the proper coverage. If you aren’t sure what type of amount of coverage you need, just ask.

16. Trade Fixtures. If a tenant desires to sell or remove trade fixtures to a new location upon lease termination, the lease should explicitly reference the removable property and/or define what constitutes a trade fixture so as to ensure a landlord cannot force any such item to remain.

17. Guarantees. In order to secure your lease, you will be ask to provide a guarantee. It is quite likely that the Landlord will seek a personal guarantee. When this happens, and it likely will, try to limit the duration of the guarantee to a limited number of years.

Have additional questions for us? Call our offices at 703. 539.2518 or email our team at anjalip@argentplace.com.

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Argent Place Law, PLLC is dedicated to the vision of having an entrepreneur in every household. Our law firm’s mission is to provide entrepreneurs with legal business counsel and support in managing your business relationships and protecting your ideas.