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Negotiating a restaurant lease can be challenging. Here are 7 tips to get you started and help you negotiate a great deal for your business.
Leasing a commercial property for your restaurant enables you to get started without having to own a structure. Restaurant leases are usually five to ten years long and include a number of industry-specific stipulations. Restaurant leases that are too onerous are a typical cause of restaurant closures, therefore it’s critical to negotiate the best terms possible when renting a restaurant location.
A restaurant lease is a legally binding contract that lasts for a long time. An attorney will be required to evaluate letters of intent and write lease conditions. You don’t have to spend a fortune on one. LegalZoom’s Business Advisory Plan costs $36 per month and provides you with access to local company lawyers that can help you with anything from your lease to your business structure.
1. Weigh the Benefits & Risks of Leasing
When it comes to opening a restaurant, the location is the single most important choice you’ll make. When a desirable facility becomes available, some restaurant owners prefer to acquire it, but the cost of a commercial property may be too costly for small businesses. You may lease restaurant premises for a lot less money upfront.
Leases provide your business the freedom to relocate if the site isn’t ideal. Leasing generally saves you money on property taxes that you would otherwise have to pay. If you’re weary of operating a restaurant near the end of your lease, it’s simpler to relocate or terminate your company. If you decide to go with a business lease, you’ll need to think about the remaining phases, which we’ll go over later.
2. Recognize the Most Common Restaurant Lease Factors
When talking about commercial leases in general, there are a lot of unique terminologies that come up. Before negotiating a restaurant lease, it’s critical to grasp these terms.
- Beginning date of rent: Many restaurant landlords will waive rent payments while your restaurant is being built out. Typically, you’ll have 60 to 90 days, or until you open your doors, whichever comes first.
- Liquidated damages: If a landlord’s inability to perform repairs causes your restaurant’s opening to be delayed, you may be entitled to compensation for your lost time and income.
- Liquor license contingency: If obtaining licenses, such as a liquor license, is critical to your restaurant’s success, you might include this in your lease. You may then drop out of the lease if you are not accepted for the required license.
- Kick-Out Clause: If your gross sales do not reach a pre-negotiated monetary figure by a certain date, you may terminate the lease.
- Sub-Lease Agreement: Being able to sub-lease to another tenant is advantageous. If your restaurant is having trouble, you may locate another company to take over the location.
- Exclusive use: If your restaurant is in a shopping center or mall, an exclusive use provision forbids your landlord from putting another tenant in the same space as you.
- Protection from kiosks/food trucks: Direct competition from kiosks or food trucks is another worry for eateries in shopping malls. This condition is similar to the exclusive use clause, except it focuses on food trucks or kiosks parked within a set distance of your establishment.
Aside from this terminology, there are two key aspects to be aware of before concluding a discussion concerning restaurant leases. Most restaurant contracts include provisions such as burn-offs and Rent as a percentage. They each have a lot of details to examine, so let’s go further into them.
Clauses for Burn-Off
Restaurants, particularly new ones, are usually seen as a dangerous venture. A property owner may be hesitant to rent to a restaurant as a result of this. As a result, commercial landlords often need substantial security deposits or personal guarantees from you and any major company partners. While this protects the landlord in the event that your restaurant defaults on the lease, it might raise your fees and undo whatever effort you’ve done to segregate your personal and commercial assets.
Most restaurant leases divide the difference by including “burn-off” provisions that protect the landlord from defaults while restricting your personal commitments to a certain period of time. A Security Deposit Burn-off provision, for example, mandates your landlord to refund a part of your security deposit if your restaurant has been a good tenant for a given length of time or achieved a certain level of sales.
A Personal Guarantee Burn-off provision cancels any personal guarantees that you or your business partners were obligated to provide in the original lease. A typical Personal Guarantee Burn-off provision ends the personal guarantee once your restaurant has paid rent on time for three years without defaulting.
Rent as a percentage
This is the most crucial phrase to comprehend. In most restaurant agreements, your landlord is entitled to a portion of your “gross sales” as part of your monthly rent. After you cross a certain sales threshold ($100,000, for example), you’ll usually be asked for 7% of your gross sales. These clauses are practically hard to avoid since they are so common. You and your lawyer should continue to work to get it removed. If you can’t get rid of it, this provision should be strongly negotiated.
The importance of negotiating the Rent as a percentage of a restaurant lease cannot be overstated. Sharing your sales information directly with your landlord (as a Rent as a percentage clause essentially requires you to) will make it more difficult to negotiate favorable terms when it comes time to renew your lease. There is a reason that so many restaurants close at the five and 10-year points. These are typical times for rent re-negotiations.
Most Rent as a percentage negotiations focuses on the definition of the term “gross sales.” It may seem like a straightforward term, but there are ways to refine it:
- Subtract credit card processing costs: Most credit card transactions cost restaurants 3-5 percent in processing fees, which they seldom see in their bank accounts. This should be a simple modification to make.
- Make sure refunds and discounts are not included: Discounted or refunded sales should not be included in your overall income.
- Offer a meal discount: As a show of goodwill, offer your landlord and their property managers a dining discount. It may also assist reduce the definition of your gross income when used in conjunction with the aforementioned technique.
- Gratuities and tips: Any gratuities or tips given to your staff should be excluded from your gross revenue calculations.
- Furniture or equipment sales: If you sell some equipment that you don’t need, such as an espresso machine or a set of glasses, the proceeds should not be reported as income.
Depending on your location, restaurant style, and attorney’s abilities you may find other ways to further define what should and shouldn’t be included in the gross revenue figure that is used to determine your Rent as a percentage figure.
3. Locate a reputable restaurant lease broker.
Leasing agents, tenant brokers, and dual brokers are the three categories of restaurant lease brokers. The property owner, or landlord, of a business building, is represented by a leasing agency. He or she gets compensated depending on the number of flats rented to enterprises. Tenant brokers may assist you in finding the ideal restaurant location. The third sort of broker, known as a dual broker, is permitted in certain jurisdictions. A dual broker is a neutral third party who assists you and the landlord in negotiating the lease.
Working with a tenant broker is the best way to secure a lease that is beneficial to your restaurant’s interests. You’ll have to pay their fees, but a tenant broker can help you understand lease negotiations by translating them into clear English and providing counsel and direction. Because leasing brokers serve the landlord’s interests, they are unable to suggest terms that are more beneficial to you. Dual brokers must maintain their neutrality and are unable to provide direct advice to you.
Most of the time, you can discover a local tenant broker by searching for your area and the term “commercial real estate tenant broker” on the internet. A local broker will have firsthand knowledge of attractive locations and may have already negotiated leases with your potential landlord.
Check online listing services like Loopnet and Commercial Exchange to see what restaurant locations are available for lease in your region.
It’s possible that you won’t be able to locate a renters’ broker, particularly in small markets. A company attorney is even more important in this situation. Even better if you can discover one that works with a lot of restaurant clientele. You might look for suggestions on websites like LegalZoom and IncFile, or ask other restaurant owners in your region.
4. Consult with a lawyer
Restaurant leases range in length from 20 to 40 pages. Commercial landlords, unlike residential landlords, are not required to write leases in simple, conversational language. Working with a company attorney is the greatest way to get a good commercial lease. Any money you spend today on an attorney will save you time and money in the long run.
Look for an attorney who will work with you on an hourly basis if your restaurant and operating budget are limited. Women, persons of color, recent immigrants, and veterans who operate small eateries may be able to obtain business lawyers via local legal assistance groups or law schools. The American Bar Association website may help you locate such services in your region.
You may also get suggestions for a local attorney by contacting other restaurant owners. Attorney databases are also maintained by legal services websites like LegalZoom and IncFile, which you may search by area and specialty.
5. Identify the requirements of your restaurant
It will be easier for you and your broker to move swiftly while looking at various locations if you define your restaurant’s demands before you begin looking at venues. Depending on the sort of restaurant you have, you will have different demands. When considering restaurant locations for rent, there are a few things to keep in mind:
- Square footage: Generally speaking, the greater your square footage, the higher your rent. Also, since heating, cooling, and other expenditures are greater in a larger facility, your sales will need to be higher. Decide on the size you’ll need and stick to it.
- Use-ratios: The quantity of space required for your workers and clients will vary depending on the sort of restaurant. The kitchen typically takes up 30-40% of a full-service restaurant’s square footage, while the dining area takes up 60-70%.
- Customers will not eat with you if they cannot find a convenient parking spot near your business. Check to see whether the space you’re renting has a dedicated parking lot or space for a valet stand.
- Drive-thru windows are invaluable, especially in this era of social isolation. If your design necessitates the use of a drive-thru, be sure the area allows for it.
- Ventilation is important for your culinary equipment, fire safety precautions, and keeping your customers and personnel healthy. Ventilation is especially vital if you have wood-burning ovens or other smoke-producing equipment.
- Entrances and exits: Having distinct entrances for clients and personnel is a good idea. If you’re looking for a site in a shopping center or mixed-use building, be sure to ask about loading docks for suppliers and the availability of trash dumpsters.
Did you know that calculating a restaurant’s profitability by sales per square foot is a typical method? Your restaurant’s sales per square foot should be between $150 and $250.
Make a list of qualities that are required for your restaurant against those that are only desirable. A pizzeria, for example, must have a pizza oven (and the necessary ventilation for one). A specific area for recycling and composting products would be a must-have if you’re building a zero-waste restaurant idea. A horseshoe bar with track-lit cabinets would be lovely to have in any situation, but it isn’t required.
Defining your requirements might also allow you to be more flexible. Depending on how far your restaurant idea has progressed, you may decide to re-imagine your company depending on available space. Consider this scenario: you discover a beautiful location with advantageous lease terms and a flexible landlord, but the space is 80 percent kitchen and just 20% dining area. Rethinking your full-service pan-Latin restaurant as a quick-service, the grab-and-go concept might be beneficial.
6. Keep Renovations in Mind
Restaurants often undergo renovations. It’s possible that the business property you’re leasing already has a commercial kitchen. You may be the first restaurant tenant, in which case you’ll have to install all of the essential equipment yourself. You or the property owner will be liable for paying for the changes, depending on what sort of alterations are required. It’s critical to consider both current improvements and potential future changes.
Improvements to the property
Improvements to the property are repairs or renovations that will forever change the property and increase its market value. Typically landlords pay for all Improvements to the property because the landlord will benefit from them even after your tenancy expires. Examples of Improvements to the property would be replacing roofs or updating the building’s plumbing or electrical systems.
Non-Improvements to the property
Non-Improvements to the property are alterations to the space that are specific to your restaurant business. These are improvements that future tenants may not need or want. Non-Improvements to the property might be Italian glass light fixtures that compliment your Italian restaurant theme.
Spaces for New Construction
Any structural work that has to be done in raw areas is paid for by the landlord. After all, it is the landlord’s property. The landlord is responsible for the building’s water lines, electricity lines, and ventilation systems. The cost of connecting your particular equipment, on the other hand, is normally your responsibility. For example, the landlord may pay for the installation of main water lines, but you would be responsible for the expense of extending that water line to connect to your ice maker.
Did you know that new building may be subject to impact fees? The city or county charges a property developer certain fees for new real estate projects. Some property developers attempt to pass on these fees to renters.
Future Enhancements
During the life of your lease, you may have plans to grow or relocate your business. For instance, you could choose to start your firm as a simple deli and then develop into catering in the coming years. In this situation, you’ll want to increase your kitchen’s prep space and maybe construct a separate door for loading big orders into rolling carts. Before you sign on the dotted line, be sure the facility will be able to expand with your company.
Franchisees
The franchisor may ask you to open your restaurant on a certain date if you are starting a franchise of a bigger business. Delay fines may be included in your franchise agreement.
If this is the case, make sure that any repairs covered by your property owner are scheduled for the same day or sooner. Your lawyer should include a condition in the lease agreement ensuring that the property owner is accountable for any fines you incur as a result of their construction delays.
7. In your letter of intent, avoid using binding language.
A Letter of Intent (LOI) is a letter issued prior to the signing of a lease that documents the terms that you and the property owner have agreed upon. A letter of intent (LOI) may be written by you, the property owner, or one of your lawyers.
The best course of action is to have your attorney draft the letter of intent. If you don’t follow through on a lease agreement after discussions breakthrough, the LOI may be regarded as legally enforceable in certain areas. Your lawyer will make sure that your letter of intent doesn’t include any legally enforceable wording that might put you in a bind.
If the LOI is written by the property owner (or their attorney), have your attorney review it before you sign it. Let the property owner know in writing if there is any wording that you believe is confusing or indicates you have committed to anything you do not agree to, such as paying for specific repairs or future rent hikes. It is not necessary to use a harsh tone, but it is necessary to express your dissatisfaction with the terms in writing.
Keep in mind that a letter of intent is part of the lease negotiating process. Don’t sign the LOI if there is anything in it that you don’t agree with or interpret differently. Request changes from your lawyer. If your landlord becomes irritated with you, remember that losing a possible site is preferable to being stuck into an unpleasant restaurant lease.
Conclusion
There are several benefits to leasing a restaurant facility versus purchasing one. Leases are less expensive upfront and provide your business with greater flexibility. Commercial leases are more complicated than residential leases, and they do not have the same level of consumer protection. The landlord’s stipulations must be negotiated as part of the leasing procedure.
Frequently Asked Questions
What is the best type of lease for a restaurant?
There are a few different options when it comes to leasing a restaurant. The best type of lease is one that allows you to pay the rent in advance, usually 6 months at a time.
How do you write a counteroffer on a commercial lease?
You can write a counteroffer to the tenant by drafting and sending your own lease agreement with an accompanying letter stating that you are making a counteroffer for the rent.
