Restaurant leases are complex documents, and unless you have a strong business background or in-depth legal knowledge, can be totally confusing. In our last article we looked at the pitfalls of signing a lease that you don’t fully understand and some of the potential red flag clauses that could be lurking within. If you have found your perfect restaurant premises, but aren’t sure about the lease you are being asked to sign, then it’s time to use the services of a professional commercial realtor and lawyer.
Leases can be negotiated to fit in better with your requirements. Commercial real estate agents work with clients every day to negotiate the best possible deals and will make sure a restaurant lease fits your own individual business needs. A realtor will also take time to make sure that you fully understand the implications of all components within the lease you are about to sign. It’s worthwhile preparing a list of any questions about the lease where clarification is required.
These questions could include…
Is the tenant me, or is it my business?
This is essential to establish just in case things don’t work out for you. Most restaurant owners will form a limited company, which will then be used as the actual named tenant of the property. This can provide some layer of liability protection for you should your business breach any of the conditions of the lease e.g., inability to keep up with rent payments. But please refer to the guarantor question below. If the tenancy is in your own name, then you will personally take full liability should things go wrong.
Do I need a guarantor?
It’s important to note that even though a restaurant tenancy may be registered in a business name, landlords may require an individual to personally guarantee the terms of the lease too. This is just in case the business fails to meet its obligations of the lease should anything go wrong. There can however be set limits agreed by both parties in the lease to exactly how much a personal guarantor is liable. There are ways to mitigate this, such as limiting the duration or providing a further deposit.
When does my rent start?
The subject of rent can be negotiated between both parties and will form part of the lease agreement. Many restaurants do not start paying rent straight away; the landlord may make provisions for you to get the premises ready for business, even run the business for a few months before you begin making payments. Remember, any leeway provided by the landlord will greatly assist you during those first costly months of starting up. A commercial real estate agent is used to doing this kind of negotiation and can often get a more favourable arrangement than what is being initially offered.
What does my rent include?
Your monthly rent may be made up of several costs – this will depend on the type of lease you sign. The landlord may expect you to contribute towards property taxes, insurance, and maintenance of common areas. These ‘pass-through’ costs would be add-ons to your monthly rental and could considerably increase it. Your realtor will be able to point out these pass-through costs in the lease and may be able to negotiate these on your behalf with the landlord.
What happens if I miss a rent payment?
It’s essential to understand what you are signing and the consequences of breaching a condition. Your lease should clearly outline what happens if you default, so make sure you adhere to the payment schedule you’ve agreed to. Don’t put yourself at the mercy of your landlord and jeopardize everything you’ve worked for.
If things go wrong, can I assign my lease?
Life is never predictable, and the point may come when you simply must stop your business for whatever reason. But how do you stand with the lease you signed? Are you able to assign it to someone else? Your agent will check for the provision of lease assignment and any limitations it may have. There is specific wording an assignment/sub-lease clause should have, most importantly that the landlord cannot be unreasonable about granting consent. Your agent may also be able to negotiate a termination clause for you with the landlord.
The above are just a few of the important areas of your lease that you will want to clarify or have questions about. Using a professional realtor will give you the answers and clarification that you need. You’ll also have peace of mind that you understand what the lease includes and that there aren’t any hidden surprises later down the line.
CHI is dedicated to keeping up with local and national trends in the Restaurant Industry to help serve our customers better and keep them one step ahead. If you are interested in opening, purchasing, or selling a restaurant CHI Real Estate can help. Get in touch with our team today.