Learning how to open a restaurant? Negotiating your restaurant lease is the first step of ensuring the safety and integrity of your restaurant business. As you embark on this initial step, there are several things to keep in mind in order to guarantee that your restaurant lease will fit your personal and business needs effectively.
Firstly, it's important to remember the purpose of your lease; which is to ensure that both parties understand each other’s responsibility regarding the space. The lease will protect your business against potential liability concerns and your rights as a tenant. Negotiating your restaurant lease provides a firm foundation for your business. This will be the physical presence of your business while your professional restaurant business plan will provide the integrity needed to negotiate your lease effectively.
Here are 6 key things to keep in mind when negotiating a restaurant lease.
1 - Have your attorney with you.
At this point, it is important to already have selected, or at least consulted, an attorney. Before signing a lease, you will want your attorney to review it thoroughly. An attorney will be helpful to advise on further negotiations as well as explain terms that are sometimes confusing to those not familiar with legal jargon.
2 - Get "your people" on board.
Before deciding upon a space, getting “your people” on board and invested in the space is essential. These individuals include architects, designers, and contractors. It’s important to have these stakeholders involved when discussing the budget, design, and logistics that can impact the lease. You will want these professionals to work collaboratively to ensure that the space will work for your business. Examination of space layout, function, and aesthetics will work best from a team approach.
3 - Negotiating timing, terms, & contingencies.
Timing is everything. This old adage is true with your restaurant lease negotiation process. With this type of leasing, you are able to negotiate the start of your first rent payment. Even if you begin occupying the space, you may be able to either prorate or postpone your initial rent payment. Many landlords will waive rent during build-outs, until building permits are obtained, or until a tenant actually opens their restaurant for business.
Along with timing decisions, there are also term and renewal options to consider. Regardless of what is proposed, lease terms can vary and have that wiggle room needed to personalize the lease. An ideal option for restaurant leases are generally a minimum of 10 years with renewal options of two 5-year terms. Aligning these terms of renewal as close to the original set of lease negotiations as possible is also important.
Make sure you also negotiate contingency options. This will protect you should something go wrong between the time you sign the lease and open your doors. Some examples are city/county permits or liquor licenses. Timing is crucial and contingency option negotiations can prevent you from being locked into a lease if a certain aspect of your business fails to come through in the timeline expected.
4 - Negotiating the space.
When negotiating your restaurant lease, it is imperative not to overlook a subletting and assignment clause. This will protect your business if things do not go as planned and you choose an option to sublet the space. Include a clause in the lease that discusses this more specifically, including restrictions, terms and renewal options relative to the potential subleasing party. This negotiating can also protect restaurant owners and leaseholders if the nature of the business changes in any way.
Another part of space negotiation to consider is usage. If a business owner realizes that, after some time that they are not as successful as they thought in business A, maybe they choose to open business B under the same roof, but a different category. Maybe the metrics of the community makeup have changed more significantly than anticipated. Pre-negotiate these situations as they may affect the lease terms.
Another space concern that could arise is that of exclusivity. This can protect against any unnecessary competition in the immediate neighborhood or area. It is strongly encouraged that restaurant owners include an exclusivity clause ensuring that there is an acceptable radius where competition cannot reside. This also includes negotiating whether food trucks or other vendors can set up shop outside of your business, thus causing confusion of your brand.
5 - Negotiating repairs and work.
When the landlord turns over a space for usage, the tenant must be crystal clear about current and future repairs, work, and maintenance. Who is responsible for the gas, plumbing, electric etc.? Who is taking care of the common areas? Knowing who is responsible for what and by how much is exceptionally important. Everything should be clearly defined in terms and understood by all parties involved.
For example, including in a clause in your lease that if you repair something, you can deduct it from the monthly rent. Consider including things that may need to be installed or added to the space for it to function as a restaurant such as kitchen equipment or specialty items that are not currently part of the space.
Before signing a lease, you should also include a landlord work letter in case any work needs to be done before you move in. Get in writing what the landlord is willing to comply to and make sure they're included in the lease. The landlord should comply to any verbal agreements made during a walk-through of the space up until the signing of the lease.
6 -Operating expenses & payments.
Operating expenses can and should be negotiated in the process of restaurant leasing. This is important as there are a number of expenses that many business owners may not even think about. For example: discuss “hidden” non-standardized items such as caps on improvement costs and potential administration fees. Discuss and outline who is responsible for property taxes, when the first payment should be made for the space, etc. These negotiable items may provide the grace period you need while starting out and getting things in order.
Another payment consideration is that of percentage payments. On average, restaurant owners can wind up paying 5-8% of annual revenue to landlords. Keep in mind what you are willing to include and what is fair in your lease negotiation regarding these items. It is wise to limit, or ideally remove, personal guarantees. This means that even if your business does not do well and you need to close, you will still be responsible for the life of the lease (unless negotiated about beforehand).