If you're ready to sign a lease because you've agreed on a monthly price, think again.
The typical restaurant lease is 20 to 40 pages with provision after provision.
When negotiating a lease, look beyond your monthly payment to ensure you
protect your assets and control your costs.
An
experienced retail commercial broker can help negotiate terms, often at no cost
to you, because landlords typically pay broker commissions. It’s also wise to
have a lawyer review the lease. You might be living with this document for 15
years or more, given renewals.
“It’s worth
paying an attorney up front to make sure you have the best protection,” says
Richard Muhlebach, a retail broker working in the Seattle and San Francisco
areas. This article isn't intended as legal advice; seek legal counsel as
needed.
“When
negotiating lease terms, you must decide what’s essential, and be prepared and
willing to stand your ground. It’s rare that you have to be at a particular
site,” says attorney Gregory Apter, president of Hilco Real Estate, where he’s
helped hundreds of clients negotiate leases. “Prioritize, weigh the costs and
benefits before making concessions and then be willing to stick to your plan,”
he advises.
Here are
nine negotiable items to consider before signing on the dotted line:
Percentage rent. Some leases
require “percentage rent.” Once a tenant’s sales reach a certain level, the
tenant must pay the landlord a percentage of the restaurant’s revenue. “I’m not
a big believer in percentage rent if it can be avoided,” Apter says. “It’s
generally no one’s business but yours as to how you are performing.” Sharing
this information can hurt future negotiations. “If the landlord knows the
financial performance of a particular retail location, it can materially—and
negatively—impact your future flexibility,” he says. Nonetheless, percentage
rent is fairly common. If you ultimately agree to it, negotiate the terms.
Exclusivity and radius restrictions. Try
to preclude direct competition in the same shopping area. It’s unusual to block
all restaurants, but you might negotiate exclusivity within a category, such as
pizzerias or burger joints. On the other hand, your landlord might want to
impose radius restrictions, preventing you from opening another unit close-by.
“Try to avoid these restrictions, which impinge on your business’s flexibility,
Apter says.
Assignment and subletting clauses. You’ll
want the right to sublet or assign the space to another tenant, should you need
to close or sell your restaurant. Avoid restrictions that require the
transferee to have the same net worth or experience as you, advises retail
broker Muhlebach.
Option to renew. “Negotiate for as
many options as you can get,” says Muhlebach. “An option is an obligation for
the landlord and a right for the tenant.” Avoid making renewal contingent on
your remaining the tenant, or your resale value will plummet, advises
real-estate consultant Lewis Gelmon, president of Gelmon Enterprises based in
San Diego.
Tip: You can
negotiate renewal terms, rather than automatically taking your option to renew.
Gelmon suggests starting negotiations early. “If you don’t like the way
negotiations pan out, you still have the right to exercise your option to
renew.”
Future rent prices. Negotiate
future rent terms. Prices tend to be based on percentage increases or tied to
fair market value. Given a choice, opt for percentage increases because they’re
easier to budget for, Muhlebach advises. Otherwise, you could be shocked with a
large increase.
Kick-out clauses. Consider
negotiating for a kick-out clause, giving you a one-time right to cancel a
lease after a specified time period if your sales haven’t surpassed a certain
amount.
Start date of rent. Many landlords
will waive rent payments during the build-out period. Typically they’ll waive
payments for 60 to 90 days or more, or until you open for business, whichever
comes first, says New York City restaurant real estate broker Frank Glasgall,
of Glasgall & Associates. Consider asking to delay the clock from ticking
until you get a building permit, Muhlebach advises.
Change of use. Try to maintain
flexibility so you can change concepts if needed or can sublease/assign the
space to a different business, Apter says.
Operating expenses. Negotiate
whether you or the landlord are responsible for operating expenses, including
property taxes, insurance and management fees. “Some landlords add in zingers
that aren’t industry standard,” Muhlebach says. Watch out for administrative
fees and capital improvement costs. “You’ve got to catch those things,”
Muhlebach urges. “Once they’re in black-and-white and you’ve signed the lease,
you have to hold up your end of the deal.”
