It can be daunting when navigating the waters of restaurant leasing. Whether your restaurant business is brand new or you're moving spaces and just getting ready to enter into a new lease, there are some important terms and leasing principles to keep in mind. It’s important to do your homework as a restaurant owner to ensure that you are up-to-date on leasing terms. It's in your best interest to ask questions and ultimately, to consult an attorney to review the lease with you. It's crucial to remember that you'll likely have this lease for a number of years. It would be a true worst case scenario to be locked into a lease not having an in-depth understanding of what you signed; especially if you discover that it could negatively affect you in some way or even force a restaurant owner to close the doors. A typical restaurant lease can be up to 40 pages long and peppered with provisions, fine print, and words that make your brain hurt.
However, negotiating your restaurant lease terms is not only empowering, but it’s just plain smart. Exploring the three categories below, we've put together a list of terms to examine that will help you navigate the details of your next restaurant lease.
There are some key restaurant lease terms to keep in mind to ensure that your restaurant business and tenant rights are protected. Keeping these terms in mind will help your protect your business from a liability and monetary perspective.
- When reviewing your lease, make sure to check on the rent clause that may include a “percentage rent exclusion.” This is when a tenant is required to pay the landlord a percentage of the gross business revenues generated from that business. By carefully reviewing the definitions of what's included in gross revenue or gross sales, you can ensure that the lease is only including the general exclusions and deductions; and that you're not losing hard-earned business revenue.
Common Area Expenses
- It's important to check the details under the terms of common area operating expenses. This is to distinguish which areas are to be maintained by the tenant and which are included in maintenance responsibilities of the landlord. Protecting your business from potential liabilities or injuries is important; and by checking the specifics of the lease in terms of this will ensure that you know where the boundaries relating to your responsibilities. You'll know ahead of time (enabling you to negotiate if unfavorable) where you may need to put work or resources in under the common area expense clause.
Security and Personal Guaranty Burn-offs
- Generally, as a protection to landlords, burn-offs are required. As a restaurant owner, it's possible to negotiate these clauses in a way that's not so restrictive and allows you to build trust with your landlord. The personal guaranty burn-off requirement is generally required of shareholders, partners, and other stakeholders demonstrating important business connections and serves as a safeguard to your landlord (should you be unable to pay). Security deposit burn-offs are another way for landlords to protect themselves further.By requiring hefty security deposits, landlords ensure that they'll be taken care of, even if you default. Negotiating additional clauses in creative ways allows business owners to demonstrate good faith by possibly paying a higher deposit, for example, with the agreement that the owner will get a portion returned at the end of the lease.
There are also lease terms to be aware of under the umbrella of operating your restaurant. When signing a lease as a restaurant owner, it's important to keep in mind the terms below in order to further protect yourself in your day-to-day business operations.
- When operating a restaurant business, it may be a smart business choice to think about offering samples to your clients. Ensure that your restaurant lease includes a sampling clause so that there are no limitations on offering such a service. Who knows, maybe offering samples while guests are waiting or walking by, will be a part of your future business marketing plan!
Exclusive Use Rights
- One of the worst things to an existing restaurant operator, is for a competitor to open near their business. If this clause is overlooked, it would be a complete nightmare for a restaurant owner; especially if the competition is unexpected. When negotiating a lease, it's detrimental to outline the terms around allowing an outside, competing vendor to do business within your establishment. There's great protection for a restaurant owner who knows that he or she has exclusive use of the space without the threat of competition or confusion. Make sure to clarify this use of property rights provision.
- Generally speaking, most operators choose a specific brick & mortar area, based on demographics, community metrics, and many other business-related factors. As a result, it may not be in a restaurant owner’s best interest to sign a lease that that could possibly force them out of their space and into another less promising area.
- It's imperative for restaurant owners to consider whether or not the lease allows food trucks or other types of enterprise, retail, and/or business carts in front of its location. It will help ensure that you can operate your restaurant in a given space without the fear of unnecessary and confusing competition.
- Restaurant leases may last for many years, however, they do end. How they end is important to keep in mind. The termination of a lease could result for several reasons, many of which may not be in the best interest of a restaurant owner and their livelihood. Keeping the following lease terminology regarding termination in mind will surely protect you and your business from headaches and loss down the line. These are also important to keep in mind should you decide on your own business exit strategy, if that unfortunate situation should arise.
- If you decide to sublease or transfer your lease over entirely, it's very important to have a plan in place that will help you do this with ease and as seamlessly as possible. Even if you're going into your business thinking that subleasing is not something you would ever venture towards, it is a smart business decision to weigh in on this provision and ensure that it protects your business needs.
Delivery of Premises
- When you sign your restaurant lease, keep in mind what your landlord is promising in terms of space, renovations, vacancy from another party, etc. It's up to you and/our your consultant to ensure that the lease takes these promises into account. It's your right to have the premise delivered to you in a way that corroborates what was agreed upon by both parties. An important part of protecting your business is having a clause that allows a tenant to vacate a lease; particularly in the case that the aforementioned agreed upon items are not addressed in accordance to the lease agreement.
Legal Permits and Licenses
- Prior to opening and during the operation of a restaurant business, certain guaranteed documents like permits and licenses must be obtained. These can include city and governmental permits and liquor licenses. As a result, if you find a space to lease before all of these permits are in-hand, it's key to ensure there's a place in the lease that protects you. In the case that you are be unable to obtain these permits in time, this clause will save you time, sanity, and money. Make certain that you're able to get out of a lease without penalties. Especially if something falls through in one of these essential categories, due to something out of your control.
Gross Sales Kick-Out Clause
- This is another thing that can prevent extreme resource loss. A gross sales termination right is strongly recommended to be included in your lease. It allows a tenant the right to vacate the lease should the annual gross sales not reach the agreed upon financial and timing threshold. This will prevent an evolution of several years to pass, where each year the financial loss becomes even greater. Allowing a tenant to vacate the lease under these circumstances truly protects both tenant and landlord from unnecessary financial loss and hardships.
Ultimately, it's in a restaurant owner's and tenant’s best interest to do homework and research before signing a long-term lease. As a restaurant owner, your specialty is to serve up amazing food and provide the best service; while providing a welcoming place for your restaurant team. This is why it is important to allow an expert in the real estate/leasing field to help guide you in this legal portion of your business journey.