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Restaurant Leases: Your lease should be an asset, not a liability

Restaurant Leases: Your lease should be an asset, not a liability

When opening a restaurant, the restaurant owner’s top priority lease concerns typically are the financial and business aspects of the deal: rent, landlord’s work, tenant’s work, common area maintenance charges, utility charges etc. However, there are other aspects of a lease that could complicate a restaurant’s finances and obligations. When the non-business related lease terms are not negotiated properly, they can financially affect the restaurant in ways not anticipated during the negotiations. The following is a partial list of lease provisions that restaurant tenants should pay careful attention to in order to minimize the risk of their contractual commitment.

1. Assignment and Subletting: Most leases condition assignments and subletting upon landlord’s consent. Minimally, this should be negotiated so that Landlord’s consent is not to be unreasonably withheld, denied or conditioned. Beyond this, tenants should look to negotiate pre-approved assignments and sublets based on certain criteria. For example, so long as the incoming tenant meets a certain financial threshold, or perhaps is another restaurant of the same franchise (if applicable) etc., then the incoming tenant would not need landlord’s approval.

2. Change of use: If the lease’s permitted use is too specific, it could restrict a potential assignment or sublet. Tenant should negotiate as broad of a use as possible, such as, “general retail space” or “restaurant” rather than “Asian Fusion” or “Italian Eatery.”

3. Guaranties: Most landlords will require a personal guaranty for corporate tenants with little or no assets. Guaranties should be negotiated so that the document is either (i) a “good guy” guaranty, allowing for a guaranty of the lease only until tenant vacates, or (ii) a guaranty with a limited term. Otherwise, an all-encompassing guaranty will have an owner on the hook for the entire balance of the lease, even if the business goes under and the tenant is forced to vacate.

4. Term: Restaurants typically establish themselves, or don’t, within the first 6-24 months of operation. Restaurant tenants should negotiate shorter lease terms, with options to extend, rather than committing to a long term. This way, a tenant is protected with a short term termination date just in case the business does not profit as hoped for. If business is profitable, tenant would simply exercise its option to extend the lease term and continue its tenancy.

5. Unexpected Expenses: Tenants should be wary of certain terms in the lease, such as, real property tax provisions and the obligation to “comply with all laws.” Even if a prospective tenant is provided an accurate tax share projection prior to lease signing, the building’s real estate taxes may be subject to an abatement that expires during the life of tenant’s lease or other tax increases. In that case, the tenant would be left with the responsibility to pay their share of a major tax increase. Tenants can ask for a cap on increases. Secondly, tenant’s obligation to “comply with all laws” may subject the tenant to responsibility for complying with expensive renovations that should be the landlord’s responsibility.

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