Seven End-of-Year Lease Considerations for Restaurant Tenants
The end of the calendar year brings certain responsibilities and considerations for restaurant tenants. As 2024 approaches, here are seven items to review to make sure you are in compliance and/or asserting your rights within the terms of your commercial real estate lease.
Gross Sales Statements
Restaurant leases typically require that the tenant submit gross sales statements to their landlord annually (and, in some cases, monthly). With a typical lease, you will have a certain amount of time after the end of the year to submit your annual gross sales statement so that your landlord can see how much money the restaurant took in for the year. Depending on the lease language, failure to comply by the deadline may result in fines, late charges, and an audit by the landlord.
CAM Reconciliations
As a commercial tenant in a multi-tenant building or shopping center, it is likely that you pay common area maintenance (CAM) charges in addition to your rent. Typically based on a tenant’s proportion of a building, CAM charges cover operating and maintenance costs such as snow and trash removal, common area utilities and maintenance. Some landlords estimate CAM charges for the year based on historical charges and then reconcile the total against actual charges at the end of the year. The landlord may have tenants utilize an escrow account to allow for CAM reconciliations. If you paid less than the actual charges, you will be billed for the difference. However, if you paid more than your share of actual CAM charges, you should ensure you are reimbursed accordingly. Now is a good time to request the annual CAM statement that your lease should require the landlord to deliver to you.
Rent or CAM Charge Increases
The end of the calendar year may trigger an increase in rent and/or common area charges. This is especially true if you opened your restaurant less than a year ago and you were paying a prorated rent based on being open for only a portion of the year. Depending on the language of your lease, paying the incorrect amount could result in late fees or, in some cases, tenant default. When structuring a lease, we typically include a notice and cure period, which requires that the landlord notify you if you paid the incorrect amount and allow a certain grace period, such as five or 10 days, for you to correct the amount – therefore, you will not be penalized for a clerical error that was made in good faith.
Real Estate Tax Reconciliations
Like CAM charges, landlords may estimate real estate taxes for the year and then reconcile them at year-end. If you have overpaid your share of taxes, your lease may prove that the landlord can either reimburse you for the overage or apply it to next year’s tax bill or the next rent installment. If you owe money, you will need to pay the difference. As with CAM charges, there may be an escrow account in place to facilitate tax reconciliations. This is also a good time to discuss with your landlord whether a real estate tax appeal to the municipality may result in cost savings for you and your fellow tenants.
Assessments
It’s not uncommon for a landlord to receive an assessment from the town or city for which tenants will be required to pay their share. If you receive notification of an assessment, it is important that you understand your responsibilities and rights under the terms of your lease. When we negotiate a lease for our clients, we ensure the tenant is only liable for the portion of an assessment that applies to its lease term. For instance, if your landlord receives an assessment in the ninth year of your lease, and you only have one year remaining, you will only be liable for one year’s worth of installments toward the assessment.
Permitted Closure Language
Most landlords require that restaurant tenants be open for business on specific days and during specific hours. Negotiating a permitted closure carve-out in your lease will allow a tenant to close its doors when they are expected to be open for things like repairs, inventory or staff holiday time off. Oftentimes, there is a limit to the number of days during a given year or over the course of the lease term that a tenant is permitted to close. For example, a tenant may wish to close for a period of time in order to refurbish its interior but may only be allowed to do so once in any five years. As the end of the year approaches, it is important to keep your total allotted dark days in mind or seek permission from your landlord for extra days to ensure you remain in compliance with the terms of your lease. Looking ahead to 2024, anticipate in advance when and why you will need to close your doors so that you can proactively plan your days off for the year.
Holiday Period Carve-Out
To protect your interests around the holidays, your lease should contain carve-out language that states you cannot be forced to initially open or shutter your restaurant or accept delivery of the space from November to January or a similar black-out period. Many tenant responsibilities are triggered when the landlord delivers the space to you, and start-up tasks such as the build-out or employee training are more complicated during the bustling holiday period, especially for owners who are busy with other operating restaurants. Thinking ahead to the end of your lease term, you don’t want to have to close or relocate right before the holiday sales bump that many restaurants enjoy during the last two months of the year. For leases that expire between October 1 and December 31, the language should include a provision that extends the lease to the middle of January.
To stay on top of your end-of-year responsibilities, we suggest you synchronize all your annual lease responsibilities to one consistent date – such as the end of the calendar year. Managing a lease is complicated, so keeping all your deadlines consistent will prevent things from slipping through the cracks.
Eric D. Bernheim, a managing partner at FLB Law in Westport, Conn., represents local restaurants and national hospitality groups, as well as developers, municipalities, lenders, and individuals, in transactions of all kinds, including leases, acquisitions, dispositions, and financing, in addition to handling zoning and land use matters. Eric can be reached at 203.635.2200 and via email at bernheim@flb.law. For more information about FLB Law, click here.