Everything To Know Before Signing a Restaurant Lease
In the beginning, most restaurant owners do not have the necessary money to start their business. To help reduce some costs, they decide to rent a restaurant location rather than buying one. There are many benefits to making this decision, like not having to stress about a mortgage, having to pay property taxes, and more. Signing a lease of any kind is a binding agreement that you should fully understand before making the commitment.
Here, we are going to give you a quick and informative guide to provide you with the important details you need to know when it comes to signing a lease agreement.
What Is A Restaurant Leasing Agreement?
A restaurant lease agreement is a commercial lease agreement that is legally binding between a landlord and their tenant. All commercial lease agreements are different and vary depending on the relationship between the landlord and the tenant. However, there are some things that are included in every commercial lease, like description and size of the location, security deposit, rent, utility payments, payment methods, renewal terms, termination agreement, etc..
There are many differences between commercial leasing and residential leasing. Residential leasing is meant for everyday living, while commercial leasing is meant for business purposes. Residential leases provide tenants with many legal protections that do not pertain to commercial tenants. Lawmakers tend to assume that residential tenants do not have the legal knowledge and skill that business owners should have.
Also, residential lease agreements tend to last for a year and follow up with month-to-month extensions. Commercial leasing agreements are normally longer and last for a minimum of three to five years.
Residential tenants are usually not responsible for much maintenance and repairs; that responsibility is left in the hands of the landlord. However, commercial tenants are left with much more responsibility pertaining to such concerns. In most cases, the landlord is just responsible for keeping the building, itself, maintained.
What To Do Before Signing the Lease
When you sign a lease, you are making a commitment to follow the guidelines listed in the lease and there can be consequences if you decide to break the lease before your lease expires. So there are some things that you should check before signing that binding agreement.
The first thing you should check on before signing the lease is making sure the location you are choosing can pass inspection. Call the fire marshal, building code officer, and health inspector.
They will come to your location and tell you everything that needs to be fixed to make sure your building is in perfect condition and ready for business. Unfortunately, you may find that the inspections call for some expensive renovations. If this happens, you should check with your potential landlord to see what they are willing to pay for. If they are not willing to negotiate on paying for some of the costs, then that may be a sign that you should look elsewhere.
Possible renovations for your new restaurant may include problems like not being equipped with public bathrooms, no outside ventilation system, or a lack of garbage pickup.
Another important step you should take before signing the agreement is doing a background check on the landlord and the location. You can ask past and other current tenants about their experiences when dealing with the landlord. Is your landlord easy to work with? Does your landlord handle issues quickly?
You can also ask past tenants about what they liked and didn’t like about the location. Of course, everyone’s experience is going to be different, so you may not want to take everything that is said to heart, but having some outside opinions couldn’t hurt.
There are also some questions to consider asking your landlord to make sure everything is understood between you and the landlord.
What Are My Renewal Option?
Be sure that renewing your lease is an option at the end of your leasing agreement. The last thing you want to worry about is putting your business on pause to find and move locations. In a situation like this, you could lose more money than you gain.
What Are My Restrictions When Renovating?
Every leasing agreement will have restrictions when it comes to making modifications. It will help you to know these restrictions in the beginning. Also, when making these renovations, will you have to return the space to its original condition when you decide to leave?
You will be spending your own money when making these purchases on fixtures, equipment, and appliances, so you should know whether or not these purchases will remain in your possession or in the possession of the landlord when you vacate.
What Are My Options When It Comes To Parking?
When your business is open, you will need enough parking space for your customers. Not having enough parking space can cause potential customers to look elsewhere for business. Asking your landlord what your options in the area are is a question that could make or break your business. You will also need enough parking for you and your staff as well.
What Are The Responsibilities of the Landlord?
You need to know who is responsible for what to help you save money on things you are not responsible to pay for. Ask your landlord about cleaning responsibility, repairs, grass cutting, building, and parking upkeep, snow removal, and operating expenses.
How To Negotiate Your Lease
When it comes to negotiating a lease, this is the point where a lot of restaurant owners mess up big time. According to Tanya Shea, partner of Shea Design Incorporation, many restaurant owners will sign a lease that puts them in financial trouble where they will be forced to pay more than they would have initially. When negotiating a commercial lease, you should allow an attorney, architect, and/or general contractor to look over the lease before you agree to it.
There may be a lot of room open for negotiation, depending on the restaurant location you are looking to rent. The landlord benefits from you hosting your business in their building. Having a business in a building attracts other business and will soon increase the value of the landlord’s property.
Some common negotiations that you can push for include subjects like not paying any rent until your restaurant are open, paying low rent for the first year of your lease and gradually increasing the rent after that, and including any repairs to the building in your rental cost. When negotiating, make sure to get any agreements in writing.
When it is time to negotiate your lease agreement, having an attorney consult you during this process will be extremely beneficial to you, especially if you are thinking of signing a long term lease, paying a lot of money for the location, or if you are dealing with a complicated landlord. Your attorney will sit in during all negotiating sessions and be your spokesperson.
Yes, hiring an attorney will be another added expense you will have to pay, but it is a beneficial investment to your business as well and could save you a lot of complications and stress later on.
Someone else that can assist you in negotiating your lease is a designer or architect. According to Opentable.com, many firms look to hire architects and interior designers to help make beautiful designs. However, that does not mean that you will have to hire a firm, but finding a designer and architect that work well together will help you a lot. An interior designer is typically in charge of designing the spaces and choosing what furniture and other details will create a desired aesthetic for your space.
An architect will be a licensed professional who will create construction documents and sign and submit them for approval from the government. These two individuals are experts in their field and know what your location will need when it comes to renovations and can also assist you in making sure you are getting your money’s worth when bargaining on your location’s price.
Brock Ray, director of marketing with planforce.com states that
you should bring in a designer and architect team into the process early on; waiting until the deal is closed is bringing in unnecessary risks to your business.
If you are not convinced that the assistance from an attorney, designer, or architect will help you get the best deal, maybe you will consider a general contractor. A general contractor is someone who will oversee the coordination of a construction project and hire your subcontractors like plumbers and electricians.
They will also apply for licenses and permits you will need when doing construction and renovation. General contractors will work with your design team to help make your restaurant space everything you want it to be. They can help you get the pricing for everything you will need done and provide you with a better understanding of some construction issues you may not be educated on.
While all of these professionals will be beneficial to you in the negotiating process, an attorney will be the best ally you can have in negotiating your terms. While every lease varies from tenant to tenant, there are typical restaurant lease terms that every attorney will be searching for when finalizing your restaurant lease proposal.
If you are looking to sign a long-term lease, you will want to know what your renewal options are. You will most likely want a minimum of a 10-year lease, although some businesses prefer to shoot for a 15-year lease.
Assignment and Sublease Clause
Every lease must have an assignment or sublease clause. This clause allows you to sell your business or sublease your business space. Your lease term and its renewal options must be assignable. If not, you will not be able to attain the value of your business if you ever decide to sell it.
As your business begins to grow, landlords usually want some benefit from this as well. When transfer premiums appear in your lease, this is your landlord’s way of getting in on your success. For example, if you ever decide to sell your successful restaurant, your landlord will get a portion of the sales price. In any case, they can receive around 50 percent.
When signing a lease, having personal guarantees is something you don’t want listed in the agreement. Your attorney will most likely try to remove or limit this from your lease. Having yourself be personally guaranteed to your lease is basically stating that you agree to pay the rent for the complete duration of your lease term, whether your business succeeds or not.
In order to limit your risk, you can try to limit the time listed on the guarantee statement, increase your initial deposit, or get a rolling guarantee that lasts for 12 months. This means you will only be responsible for paying a year of rent if things go wrong.
Credit Requirements for Commercial Lease
Obtaining a commercial lease does not require the same credit requirements that obtaining a residential lease does. You will most likely have to give your landlord business statements and financial statements to prove your financial security.
Your landlord may also want to see other information, such as your credit report, personal financial statement, bank statements, business plan, and business budget, etc. Of course, all of this information must be current and updated.
Renewing Your Restaurant Lease
When your renewal date is approaching, it is up to you to decide whether to renew, extend or renegotiate your lease. Hopefully, by the time your renewal date approaches, you will have already made sure that renewing your lease is an option and included this detail in your lease. Without this detail listed in your lease, your landlord is under no obligation to allow you to renew your commercial lease.
When renewing your lease, everything should be explained in your leasing agreement, including your renewal notice date. Normally, you must give notice of your wish to renew your lease at least 12 months before your lease expires. If you decide to not renew your lease agreement, you are not under any obligation to notify your landlord unless it is stated otherwise in your lease. The only problem with renewing a commercial lease is that you only find out what your new rental rate is after your commitment to renew.
Deciding to lease your new restaurant space has many cost benefits. However, you are deciding to sign a lease, which means you are making a long term commitment. There may be some things you do not like that you will have to agree to in order to have the location you want, but that does not mean that you should be forced to settle. With the help of some professionals, along with other information given in this guide, you will feel confident in making the commitment and signing the lease.
A lease is a legal document, and you should take time and careful consideration before agreeing to the specifics listed in the leasing agreement. Remember, you don’t have to figure out everything at once. This is a big decision and you should take your time in finding the right team to help you achieve your big goals. Hopefully, this leasing a restaurant checklist helps make things a little easier for you.