10 Things to Look Out for When Negotiating a Lease for Your Restaurant
So you have found the space you want to open your restaurant in, you have negotiated the price and you are ready to go. What are some key things to think about as you negotiate the lease for the space? I spoke with Brett Orlove, an attorney with Grossberg Yochelson Fox & Beyda in Washington D.C. to find out. Brett has negotiated hundreds of leases for both landlords and tenants in the restaurant space and was kind enough to give me some tips based on what he has seen over the years.
These, of course, are just guidelines to help you know what to look for. You should hire your own real estate attorney to help you negotiate the lease. Your landlord will have one and you should too. It costs money (in the neighborhood of $5,000), but the money it could save you by protecting you from mistakes is huge. To find a good real estate attorney, you can ask friends in the industry for recommendations and the broker who found you your space should be able to recommend someone.
1. The Term: Landlords will want a reasonable term for the lease. It is expensive for them to find new tenants. So, much as you may want to lease from year to year to allow yourself the maximum flexibility, you are very unlikely to find someone to rent on a year to year basis. Most leases will require a 5 or even 10 year term. The longer the lease term, the more likely you will be able to negotiate other items in the lease – the landlord is getting a longer term tenant and more likely to be willing to be flexible on other items.
2. When Rent Payment Obligation Begins: Be sure to negotiate when you have to start paying rent. The landlord, of course, would like you start paying rent as soon as possible. You want to make sure the space will be ready for business. The first question is whether the date on which you have to start paying rent is fixed or floating. The landlord would prefer the date be fixed – putting some pressure on you to get the build-out done more quickly and open for business. You would prefer that it be floating – meaning that you don’t start paying rent until it is ready for business. You want to make sure that the premises have been delivered to you 1) as promised; 2) that any buildout the landlord promised to do is complete; 3) that plans have been approved; 4) that permits have been issued; and 5) that you have opened for business.
Delayed rent payments: For restaurants with a 5 year lease, it is common for you to not have to start paying rent for 6 months, giving you time to build the space out. For a 10 year term, you may be able to negotiate 12 months rent free while you outfit the space. (Note: Be sure to negotiate up front who is responsible for paying real estate taxes and utilities during this time.)
Gradually increasing rent: Landlords understand that tenants are often short of capital when they start. They want you to succeed. As a result, landlords are often willing to start off with a lower rent and increase it over time. For example, you might be able to get a year free to build out and then a year with rent payments at half what they will become. The landlord has a number he/she needs to get over the entire term, but they are usually willing to start out with lower payments in order to give you a chance to get up and running.
Another structure that some landlords and tenants agree on is a percentage of profits payment. The idea behind this structure is that it is a shared risk between the landlord and tenant. In exchange for a lower rent, you agree to pay the landlord a percent of your gross sales over a certain amount. So, if your rent was 5k every month for 12 months, and the agreed upon break point was sales over $1,000,000, then you would pay 5k per month and then you would pay a previously agreed upon percent of sales on every dollar of sales over the $1,000,000.
3. Right to Extend: You may be nervous about assuming the term of the lease, but make sure also to negotiate the right to extend the lease. It is common to negotiate 2 five-year extensions, for example. That way, you can negotiate up front the rent increase and keep it minimal. If you are successful, you won’t want to move anyway, and the Landlord would prefer to keep you there so will be willing to negotiate a reasonable increase and extension.
4. Right to Assign the Lease: There is always a possibility, of course, that things don’t go as you plan. Protect yourself up front. Make sure you have the right to assign the lease during the term. The Landlord will need to have the right to approve the new tenant, but make sure that the landlord doesn’t build in an unreasonable rent increase. Brett said he has seen leases with a 10% increase for any tenant assigned the lease – that is only going to make it harder (if not impossible!) for you to find a tenant to take over the lease.
5. Size of Space: Check the square footage you are supposed to be getting. Make sure either that the measurement has been done by a reputable firm and is certified or hire your own architect to measure. It may not be deliberate or done in bad faith, but it is not uncommon for a space to be smaller in actual square footage than it is supposed to be.
6. Condition of Property: Make sure you understand and negotiate the condition of the property you are getting. Some landlords will deliver the space “cold” - as is – 4 walls and a floor. Other times, you may negotiate some build out before you assume the space. Just be clear up front. If sprinklers are required, insist that the Landlord provide them. In addition, if the space has not been a restaurant before, ensure that there is sufficient utility service provided by the Landlord, including water and sewer, electric, gas to meet your operational requirements.
7. HVAC: Make sure the property has a working HVAC system and that it is guaranteed for at least one year. If it is working when you get it and it dies within the first year, it was probably about to go anyway and you should not have to pay for that.
8. Outdoor Considerations: Does the property have outdoor usable space? If so, there should be no rent for that space. That is great because you can have extra seating there during nice weather and you are not paying for those square feet!
Signage: The Landlord will have to approve signage, but make sure it is clear where the signage will be and the size approved. Try to have the Landlord pre-approve your signage plan as an exhibit to the Lease.
Parking: Is there parking on site? Will there need to be a valet? If so, who is paying for that? Be sure to negotiate up front who is paying for parking, if it is paid, while your contractors are building out the space. That can be an unpleasant additional cost if you have to pay for parking on top of the build-out.
Trash: Make sure the dumpster will be close enough to the back of the restaurant that your employees don’t have to walk too far.
9. Hours of operation: A retail lease will usually specify the hours you are expected to be open for business. Make sure you are comfortable with those hours. In addition, be sure to negotiate the right to close a certain number of days each year for general maintenance (as well as for weather related events).
10. Security Deposits/Guaranty: Be prepared to give the Landlord a security deposit of anywhere from 1-6 months’ rent. If the Landlord insists on a higher deposit, try to negotiate a burn-down so that it reduces over time. Avoid personal guaranties if possible, and if required, limit your total liability to a fixed amount such as 12 months’ worth of rent.