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Choosing a space to open up a new restaurant is not an easy task. However, selecting the best option is an incredibly crucial task. Important factors such as location, price and, especially, the restaurant lease terms directly impact a business's success. Because a commercial lease agreement plays such a prominent role in a restaurant's success rate, most restauranteurs hire restaurant lease review services.
As a restauranteur yourself, you also need to get professional assistance if you want to launch a profitable business. Read this post to learn the top clauses your restaurant lease review services should analyze.
Restaurant lease review services should focus on the liquor license section of your lease. As you likely know from experience in the industry, liquor licenses are both advantageous and costly to obtain.
Restaurant owners pay large sums to be able to sell alcohol on premises.
However, they typically make that capital back quickly when they attract of-age crowds.
If you want to sell alcohol at your restaurant, you need a restaurant lease review service to analyze this term in your lease carefully.
You should be able to terminate your lease in the event that you cannot retain a liquor license within a contingency period. The best restaurant lease review services offer expertise in this area.
The best restaurant lease review services also analyze the tenant build out clause.
This clause in a lease agreement includes rules and restrictions regarding how much the tenant can build out their space.
This term is especially crucial for restaurant owners because they typically need to add on to their commercial spaces in order to comply with the ADA (Americans with Disabilities Act).
Your restaurant lease service can determine whether your lease allows you to add more public bathrooms, outside ventilation and plumbing in order to meet the industry standards.
In addition, restaurant lease review services need to inspect the exclusivity clause in your lease. Without this typical restaurant lease term, you risk losing potential business.
If a Mexican restaurant does not have an exclusivity clause, their landlord has the right to lease the neighboring space to another, more popular Mexican restaurant.
Therefore, the lack of exclusivity could lead to major profit loss.
If you want to open a restaurant in a shopping center or a business-oriented area, you need your restaurant lease review service to ensure that your lease includes an exclusivity clause.
The exclusivity should pertain to both the existing services and any potential future uses if possible.
Most restauranteurs also want their restaurant lease agreements to include an assignment and sublease clause.
This clause is crucial because it enables business owners struggling financially to make ends meet without terminating their leases.
If you undergo a financial setback, you might not be able to afford rent.
If you have the right to sublease your restaurant space, you can do so until you get back on your feet.
Moreover, the assignment portion of this lease clause allows restaurant owners to put their restaurants up for sale without tarnishing their values.
Hire a restaurant lease review service that has experience examining sublease and assignment clauses.
Furthermore, restaurant lease review services should always analyze maintenance and repair clauses. Landlords often try to hide fees in this section of commercial leases.
They trick tenants into agreeing to unfair terms. Most try to get tenants to pay for their full rent along with all additional maintenance and repairs for their restaurants.
If you have full financial responsibility for these costs, you could end up in a capital deficit. Many restaurant lease review services analyze this portion and offer better options.
These options typically include getting major repairs deducted from your rent or negotiating a cap on CAM (common area maintenance) charge increases. If you want to maintain a comfortable financial situation, you need a restaurant lease review service to analyze this clause.
A great example of this is that most restaurant leases allow for the landlord to amortize capital costs at their discretion or not at all (capital costs are big ticket items like new roofs, parking lots, HVAC units).
A proper clause will enforce the landlord amortizing capital cost items over the useful life of the improvements, in accordance with generally accepted accounting principles. So a new roof will be charged back to tenants over 15 years instead of one, as an example.
Once the term is finished and you are leaving the premises, most leases have a restoration provision or “makegood” clause. This obligates you to remove your additions and installations at the expiry – sometimes bringing the space back to a “base building” condition.
The problem with this clause is that it is very expensive for restaurants. There can also be ambiguity on what is considered a leasehold improvement vs a fixture vs equipment.
It is best to ensure that you itemize all the items you would like mark as fixtures and equipment as you may be able to sell those assets and otherwise can leave all other improvements in place for the landlord to either demolish or lease the premises as-is to the next tenant.
This will typically save you $5 - $10 per square foot.
Since there is risk and turnover in the restaurant business, most landlords want a Personal Guaranty Agreement.
This is not favorable for the restaurant owner.
Not only will you be spending a significant amount to invest in the leasehold improvements in the space, if you default on the lease, you will owe the remaining balance of rent personally.
As a general rule – just do not sign the guaranty.
It is easier said than done, so the compromise positions are to increase the security deposit, or scale back on incentives (such as free rent or tenant improvement allowances).
If there is no way around signing the personal guarantee, then at least attempt to cap the amount of rent due (example: 6 months instead of the remaining balance), and put an expiry date on the obligation (example: the guarantee expires on the one year anniversary of the lease).
More on that topic here: Limiting Exposure on Personal Guarantees.
Since your restaurant lease directly impacts your restaurant's success, you need to hire a lease review service for assistance. They can analyze your liquor license rights. They also have the knowledge to assess the build out limits within a lease. Exclusivity is another crucial term that needs to be reviewed in a restaurant lease agreement to ensure your sales are not cannibalized by a similar tenant. The sublease and assignment clause in your lease should allow you to sell your restaurant without decreasing your value. The maintenance and repairs section of leases can get tricky, which is why it almost always calls for negotiation. Finally, ensure you are not personally liable for the entire rent due if you happen to default on the lease. For these reasons, you need to hire a restaurant lease review service to analyze your documents.