Things To Look For In Leasing Agreements To Maximize Your Start Up Success
Leasing space for your restaurant—as opposed to purchasing or renovating a property—can lower your start-up costs and alleviate some of the pressures of starting a restaurant.
However, before entering into any retail leasing agreement, it’s important to be aware of the terms and provisions that can be negotiated to maximize your chances for success.
Start the rent negotiating process by knowing comparable rents in your market. Then estimate what you can afford based on the projected total sales in your business plan. Generally speaking, rent should be 8-10% of total sales.
A provision is a condition that must be met in your leasing agreement. A percentage rent provision requires restaurants to pay a percentage of their revenue once their sales reach a certain level. While this is a common provision, it divulges financial information about your restaurant and can ultimately hurt your future negotiations. If you agree to a percentage rent provision, make sure you negotiate a lower fixed rent, and a higher threshold to hit before the percentage kicks in.
Other rental terms you can try to negotiate to make your start-up phase easier include having lower or pro-rated rent for the 1st year of the lease, and getting rent payments waived for up to 90 days during the build-out phase.
In addition to rent, your lease will outline operating expenses you are responsible for which fund the operation and maintenance of the building. These include your portion of the building’s property taxes, property insurance, and common area maintenance fees (CAMs). While CAMs may be negotiated or capped, property taxes and insurance usually cannot.
Sometimes leases will incorrectly list items as operating expenses that are not—such as property marketing costs, leasing commissions, debt service, and CAPEX (capital expenditures on the property that increase its value or lifespan). These are not operating expenses and therefore, you are not responsible for paying them.
Provisions that restrict or limit your landlord from leasing to direct competitors will prevent your business from facing unexpected conflict. However, watch out for stipulations in your lease that limit your growth—such as restricting you from opening another location within certain boundaries.
Change of Use/Subletting
Negotiate flexibility regarding your leased space in case you ever need to transfer the space to someone else, or sublet.
Limit or remove your landlord’s right to delay or prevent you from subletting to another tenant, make unreasonable rent increases in the case of a sublease, or require the subleaser to have the same experience or net worth as you.
Delivery of Premises
Getting into your space as soon as possible is critical to your success. Your lease should have provisions to ensure your timely occupancy, and stipulate your landlord’s responsibility to take action in order to gain possession of the space from existing tenants.
If you are prevented from moving in on deadline, your contract should stipulate that no rent is due until you occupy the space, while giving you the right to have your security deposit returned with the option to terminate the lease.
Gross Sales Kick-Out Clause
A gross sales kick-out clause, or gross sales termination provision gives both you and your landlord an exit strategy should your gross sales fail to meet a pre-negotiated dollar threshold. There are several factors in this provision to be negotiated such as the threshold itself, the time period by which to measure sales, the termination notification lead time, and any termination fees.
Some leases include a relocation clause. If you decide to move forward with this clause in the lease, you should protect yourself by limiting how many times you can be relocated and where you can be relocated. Also, make sure that your landlord is responsible for costs associated with relocation, and that the new location is comparable to your existing location.
Security Deposit Refunds
Landlords can require hefty security deposits to guard against tenants that default on their leases. Get some much-needed capital back in your account by negotiating a clause where your security deposit will be refunded if you do not default within an agreed-upon time period.
Leases are legal, binding agreements, so work with an experienced commercial retail broker and an attorney to help you negotiate terms.
And remember—it’s likely that a variety of spaces fit the needs of your new restaurant concept, so you can always walk away from a deal that does not work for you..