Negotiating A Commercial Lease for a Restaurant
Restaurant entrepreneurs will commonly do a feasibility study to see if their concept is one that will work in the commercial space being considered. After your feasibility study or due diligence chosen, its time to start negotiating the lease for commercial space.
Commercial leases tend to be one sided and written in favor in the landlord. However, with a good commercial lease lawyer certain changes can be made to give the commercial tenant some built in protections in the case of a business downturn, anchor tenant departure or other circumstances that may come up. Leasing terms are of particular importance to restaurant owners and a good or bad lease can make the difference between success or failure. This is an industry that sees low profit margins and so for that reason special attention is needed to keep the operating costs down. One of your largest costs will be your monthly lease payment.
How many people can the space accommodate? How much space will your theme require? The dining experience is one that is not the taste of the food alone. The patrons will need to be comfortably seated and, in general, to do so, each guest will need approximately 10 to 20 square feet. Don’t forget about the kitchen! In many instances the space will have already been used by a previous restaurateur which makes planning easier. However, with space not formerly used as a restaurant it will take more detail towards planning.
The statistics in the restaurant industry can be daunting. You will read that, “Around 60 percent of new restaurants fail within the first year. And nearly 80 percent shutter before their fifth anniversary.” CNN – https://www.cnbc.com/2016/01/20/heres-the-real-reason-why-most-restaurants-fail.html.Because of statistics like this, added with the fact that most landlords want a personal guarantee, you will want a shorter term lease with options to extend it should your restaurant be wildly successful. Options will allow you to extend the lease at predefined terms and avoid the Landlord taking advantage of you at the time for renewal.
An option is a negotiated clause built in to the lease that allows an extension of the leasing term for a new term when the lessee exercises such. Most often you will be required to exercise the option between 365 days and 270 days prior to the end of the original lease term. Above we discussed that new restaurants benefit from short term leases. Options provide a flexible way to carry on into the future, need be. When negotiating for an option you will want to negotiate the rental rate should you exercise the option. Often is the case that the rental rate for the option term or terms is to be determined by the market rate. Options typically include built in protections for the landlord that prevent the new term(s) rate from dropping below the rent prior to the option period.
Right of First Refusal
Nothing is forever, and neither will be your lease. If you operate in a standalone location, the right of first refusal will assure you the opportunity to purchase the commercial property should the landlord decide to sell it in the future. Essentially this puts you at the front of the line in the case your landlord decides to sell. This assures that if your restaurant is a wild success and becomes a staple in the community it will stay that way.
Maybe you are transforming a Mexican Restaurant to an Italian Restaurant. Taking the ambiance from Mexico to Italy will require constructions costs to create your new theme. Creating a great dining experience is not cheap. In order to cover some of the cost involved in creating the restaurant’s theme you may be able to negotiate an improvement allowance from the landlord. An improvement allowance is where the landlord pays some or all of the costs associated with remodeling/refitting the commercial space. This is usually the case only in situations where a long-term lease is being negotiated.
As goes with any feasibility study factoring in your competition is an important factor in selecting the right location. It could spell a disaster if a new competing restaurant were to open in the same strip mall, shopping center or city block. In the lease you want to control what you can. You have the ability to negotiate an exclusivity clause that will restrict the landlord from renting space within the property the landlord controls. Exclusivity is common and in our opinion a must.
Heating, Ventilation, And Air Conditioning
Restaurant leases are commonly triple net leases which will provide that the heating, ventilation and air conditioning (HVAC) systems are to be maintained and serviced by the tenant. Restaurants often require a higher HVAC capacity (Capacity refers to the ability of a heating or cooling system to heat or cool a given amount of space). With this in mind, particularly where a restaurant is serviced by a shared HVAC system (as opposed to a dedicated system), HVAC capacity is something to be considered when negotiating the lease. And increase may be negotiated in the leasing terms to avoid a large payment later on.
Annual Rental Increases
A matter often negotiated between Landlord and Tenant is what the annual rate of increase in the lease rate should be for the commercial lease.
The Landlord may ask for an annual percentage increase in the lease rate of 3%.
The Tenant may be more inclined to offer a flat lease rate for the entire first term.
A proposed solution may be to have the annual increase pegged to the consumer price index. This way, if the CPI increased by only one percent, then the lease rate would increase by only one percent.
Another way to avoid runaway costs is to cap the CPI (5% to 6% is common). Often, it’s possible obtain lease terms that do not call for a rental increase until year three or year four.
Still have questions about a commercial lease for your Jackson Township restaurant? Contact a Jackson business attorney.