What to check for when signing a restaurant lease.
26th January, 2020
What to check for when signing a restaurant lease.
Signing a lease for any business is a complicated process, however when renting a restaurant, the contractual complexity is compounded with the multiple operational and municipal requirements that every restaurant must face.
If we were to give any advice about signing a lease, it would be to first hire an expert and deeply experienced attorney who specializes in this niche property law.
Naturally, every city, state and country will have their own requirements, however the following outlines a range of issues that we have experienced with client leases across the board.
The Following details are areas that we recommend attorney and client cover in lease negotiations. This list should not be considered fully inclusive of every eventuality, however, is considered comprehensive to operate most restaurants.
Concept description: should be clearly drafted, we recommend including renders and layouts to negate any landlord approval issue later on.
Restaurant interior design and façade design approval process should be very clearly stated, especially on matters such as signage.
Non-Compete: clause with similar product categories should be stated, especially in malls and shopping centers (including airports, train stations etc)
Marketing fee:in event that the Landlord charges a marketing fee, certain comfort levels should be set, including but not limited to:
All tenants pay same cost per sq ft
Determine if there is a tenant committee for marketing spend
Determine what happens if budget is not spent
Percentage rent:If a percentage rent is required, the formula for calculations should be very clear with examples stated in lease. The Next Idea Restaurant Consultants have regularly been involved with after the fact Landlord negotiations, where the Lessee was not fully aware of the % rent requirements, and subsequently faced onerous rent costs that were unexpected.
Tenant Improvement[TI]: In the event that Landlord TI, is part of occupation or construction funding, the method of re-imbursement or payment should be clearly detailed (with payment timelines), within the lease. It is not uncommon for Landlords to pay at the end of construction and place difficult documentation requirements on tenants. It is essential that tenants understand the TI paperwork requirements that will release the funding, in order that they may keep track of the paperwork and be ready to submit the documentation immediately once construction has been completed and permitted.
Restrictions regarding audio limitations:If included in the lease terms, any audio level requirements should be evaluated by client carefully. This applies to both construction regulations and general trading hours. During construction there may be ‘quiet times’, especially when the location is near or, part of residential buildings. This can add both considerable time and cost to the Lessee’s project. Equally when the Lessee is open for business, if for example, the Lessee plans to play load music, any audio level restrictions will likely impact their ability to execute their concept.
Opening Hours:In many leases there are clauses that address the number of hours a business is required to be open, there may also be times specified whereby the Lessee is not permitted to be open for business.
Opening hour limitations or requirements, is an important part of a lease given the potential impact on profitability; either through restrictive opening times where demand is outside of the opening hour window, or by having to remain open at non-productive hours. We recommend that during the lease negotiations, a large degree of flexibility is built into this section, to allow for unknown future business trends and eventualities.
Grease trap accommodations: In today’s restaurant environment, grease traps are more often than not required. Therefore, the lease should establish whether the lessee is responsible for the grease trap or if the landlord is providing a centralised grease trap? In either option, details are needed to identify connections and usual plumbing requirements.
Air conditioning [HVAC]:HVAC is regularly, (not always), provided by the Landlord, therefore it should be clear who owns and who is responsible for HVAC installation and maintenance. Also, if connected to the landlord’s building system, a maintenance and repair process should be stated or referenced in the lease or tenant manual
Parking: Parking is of course critical for any restaurant; however, it is surprising how often this is not addressed. In every lease it should be clear that sufficient parking is available per local municipal code, and that the landlord will address any site-specific parking issues or deficits at the Landlord’s cost.
Signage: Signage represents the business’s billboard. Maximum signage requirements should be stated in lease (with dimensions). In addition, clarity regarding the use of windows for promotional signs should be documented with any restrictions understood by the lessee. It is important to negotiate for any property signage, such as placement on a monument sign or communal building signage.
Design approvals: It is very common for Landlords to require approval of both interior and exterior design, and this should be clearly stated in the lease. In order to prevent design rejection by the landlord, TNI Designrecommends including draft layouts and renders of the caféor restaurantas an Exhibit.
Fit for Purpose:We recommend that the LL warrants the location is ‘Fit for Purpose’ in the Lease. We have clients who signed a lease and it turned out the space was not allowed to be converted to a restaurant.
Exterior Patio:The Plans within the lease should include any and all outside areas and should be measured / drawn clearly with all dimensions stated
Approval Process:Lease’s often contain certain approvals required by the Landlord, these may include a range of areas, such as signage, utility installation, design, and so on. It is recommended to ensure there is a reasonable Landlord approval process that does not exceed 1 week or 5 business days, and that the landlord may not withhold approval without a reasonable reason.
Waiver of rights: These are where a tenant waives certain rights that they may have under law. It is recommended that any “waiver of rights’ clauses are discussed carefully with tenant / client attorney to understand the implications. We recommend negotiating away from waiver of rights as much as possible.
Physical utility connections (at location): Utility connections are an essential part of restaurant construction, and these services are regularly connected to other areas managed by the Landlord. In order to avoid additional costs, the utility and connection requirements should be detailed in the lease, with the landlord being responsible to locate the correct connections at the location.
Trash removal: Trash removal is a critical part of a restaurant’s operation. All trash removal costs and procedures should be stated in lease
Fire Life Safety System: The Fire Life Safety System should be defined in the restaurant lease, and who is responsible for the connectivity. Usually it is the tenant’s responsibility, however sometimes the LL specifies who can install if it connects to the main system. The fire life safety system is an important part of the construction program and should always be documented in the lease.
Relief Clause: There should be a rent relief or abatement clause that addresses when / if the LL impacts the tenant’s right or ability to operate; this applies to events like construction or location events that inhibit usual customer traffic.
Permits: It is very valuable to always check with the city for local code requirements. It is common for the Cities to require that Tenant provides entire site plan, as well as Handicap parking and general ADA access which are in the hands of the landlord. The lease should include a clause that the landlord will provide non site-specific drawings as required by the city.
Kitchen Exhaust: If a kitchen exhaust system is required this should be clearly stated from onset, with agreements on where the exhaust will be located as well as any structural and or construction implications to the building. It is critical to ensure the ducting location, and that the building can accommodate this installation, to avoid construction delays once the development project is under way.
The above list should not be considered fully inclusive, however addresses many of the primary issues our clients have experienced over the past 20 years. As with all contracts, specialist legal assistance is advised.
Robert Ancill is the CEO of TNI Design. Based in Los Angeles, TNI Design specializes in architecture, interior design and property consulting.