Negotiating a lease is one of the first steps on the path of becoming a successful restaurateur. Not to sound overly-dramatic, but this legal agreement holds the potential for success or sleepless nights all on its tiny dotted line. Let’s learn from those that came before and the leasing mistakes you new restaurateurs will not want to make.
Ed Thanhouser wrote about his restaurant nightmare in the Willamette Week. It started with a lease he’d negotiated for four months that ultimately led to unexpected and expensive renovations that included important safety considerations such as bringing the plumbing up to code and sorting through an electrical debacle.
Lesson #1: Inspect a buildings “bones” and the property condition report. Then, negotiate building repairs. Many landlords, if asked, will deduct money spent on building repairs from the monthly rent.
The international law firm, Perkins Coie, LLP, reported on a lawsuit between White City Shopping Center and Panera Bread. Their exclusive clause read, “Landlord agrees not to enter into a lease…for a bakery or restaurant reasonably expected to have annual sales of sandwiches greater than ten percent of its total sales…” In addition, it listed several chains that would be prohibited, and it did not contain a definition of “sandwich.”
When Qdoba leased a space in the shopping center, Panera protested. The court found in favor of the shopping center claiming that Panera had failed to define “sandwich.”
Lesson #2: Craft an exclusive clause that protects you and your investment.
Nate Adler, founder of the Eastville Restaurant Collective and managing partner of Huertas in New York, believes a common error for those going into the restaurant business is their failure to read the fine print of their lease which often includes unexpected fees. One of these is the triple net lease. In these types of agreements, the tenant is responsible for the ongoing expenses of the property which includes real estate taxes, building insurance, and maintenance. When you add in the rent and utilities, you may be looking at over-the-top fees and unsustainable costs.
Lesson #3: Read the fine print including fees and stipulations.
It may be hard to imagine when you are just at the beginning of an exciting business venture, but there may well come a time when the love light dims or another opportunity has you looking to release the ties that bind and head to distant shores. In order to make this an easy transition, make sure that the lease holds the same benefits for the future owner of your establishment.
The Morris Law Firm, LLC, reported looking over a client’s potential lease only to see a provision that “the exclusivity would not survive assignment of the lease.” This means that, should they sell, the new owner would no longer have an exclusive clause. Fortunately, they spotted this before the entrepreneur accepted the lease and they were able to negotiate with the landlord.
Lesson #4: Look to the future.
There are a myriad of potential landmines that exist within the pages of a restaurant lease. From protected parking areas, to accessibility, landlord disruptions, pro-rated rent, necessary contingencies, and an exit strategy or lack therof. Do your due diligence and either study up on all the possible loopholes and important elements that need to be included, or look to a restaurant consultant or law firm that have a proven track record in successfully negotiating lease agreements. Your future success depends on it.