Seven Top Tips on Structuring a Restaurant Lease to Support its Operation
When planning a new restaurant, every restaurateur has a vision and a dream. You picture a house full of satisfied customers who rave about the cuisine, service, and overall experience. Much of your focus is on creating a superior dining experience, from the food to the ambiance to the staffing. But there are many considerations before you reach that step, including negotiating and signing your commercial lease. How you structure your lease can go a long way in ensuring that you are able to realize your dream of running a successful restaurant. Below are tips for ensuring your lease supports your restaurant’s operation.
1. Keep Your Dates Flexible
In lease negotiations, landlords may try to hold you to a hard opening date. Since many factors can and do delay a restaurant opening, especially in this era of COVID-19 and supply chain woes, be sure to keep the open date flexible to avoid penalties from the landlord. An obligation to diligently pursue opening, as opposed to a hard opening date, will allow breathing room if things don’t go as planned and help to ensure that you are not in default before you even open your doors.
Thinking ahead to when your lease expires, you don’t want to have to worry about closing up shop or relocating right before the holiday sales bump that most restaurants enjoy from November through New Year’s Eve. If your lease has an expiration date between October 1 and December 31, protect your holiday sales with a provision that extends the lease to January 15 or January 31.
2. Include a Self-Help Provision
Typically, landlords are responsible for maintaining structural elements of a building as well as the electrical, HVAC, and other shared systems. Yes, sometimes landlords do not respond in a timely manner to tenants’ requests for repairs. For instance, we often get calls from tenants complaining that something is leaking into their restaurant and the landlord isn’t doing anything about it. Your lease should contain a self-help provision that states if the landlord fails to fix an issue that is adversely impacting your operations in a reasonable period of time, then you have the right to fix it yourself and offset your rent to recoup the repair costs.
3. Protect Yourself from Noise Complaints
Landlords like to include a provision that prohibits you from doing anything to disturb fellow tenants in your building or development. However, in the current mixed-use environment, restaurants often share properties with retail, residential, and/or office tenants, some of whom may object to the noise and odors that are part and parcel to restaurant operations. It’s important to carve out a clause that states, in your lawful operation of your restaurant, you won’t be found in violation of the lease agreement just because, say, the tenants above you do not appreciate that there is a noisy restaurant below them.
4. Prevent Landlords from Double-Dipping
Landlords typically pass on the costs of repairing, maintaining, and cleaning common areas of a leased property to the tenants. It is important that your lease agreement include an itemized list of what is and is not included in these common area management fees. Sometimes, landlords will try to double-dip by charging you both property management fees and administrative fees, which are typically intended to cover the management of the property. Scrutinizing the itemized list of charges can help you avoid paying twice for the same thing.
5. Include an Assignment and Assumption Provision
The restaurant business is unpredictable; therefore it’s important to have flexibility in your lease in case you decide to sell your restaurant or relocate it. A tenant-friendly assignment and assumption provision allows you to transfer the rights and obligations of your lease to a third party without first obtaining the landlord’s consent.
6. Assure Your Guarantee is Limited
Landlords typically require a personal guarantee from restaurant tenants. A restaurant is normally a single-purpose entity; if you decide to walk away, the landlord will have nothing left to go after, so it wants the ability to go after you or the parent company. Make sure the guarantee you grant is limited. The current market guarantee is a one-year rolling guarantee; you are only responsible for the next 12 months. The landlord will often push for a longer period. For instance, if your landlord had significant costs at the beginning of your lease, it may insist on a longer term to the unlimited portion of the guarantee that then converts to a one-year rolling guarantee after a certain period of time. Our first ask is always a one-year rolling guarantee, yet there are other ways to come to a reasonable agreement.
7. Do Due Diligence on Zoning Issues, Site Conditions
Prior to signing a lease, restaurant owners need to engage in sufficient due diligence to ensure they won’t be subject to any restrictions based on zoning, liquor, or other local laws or that they won’t have unexpected construction obligations due to site conditions. It’s better to invest money upfront to make sure you are allowed to do what you plan to do in a particular location. For instance, if you are converting the space from a clothing store to a restaurant, a change of use permit may be required, which may mean you will not be able to open as a big a restaurant as you may need to for your business model to work. If there are hazardous conditions on the site, such as asbestos or mold, which could require costly abatement, it’s important to determine who is responsible for the cost of that remediation and if this is a cost you can absorb before you sign on the dotted line.
Before entering into a lease agreement, it’s advisable that you seek counsel from an attorney experienced in commercial real estate law and the hospitality industry.
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. Contact Eric at bernheim@flb.law or 203.635.2200. For more information about FLB Law, click here.