When starting out, new restaurant owners are very excited about the potential and opportunity of their business. They’re often relieved when the landlord approves them as a tenant. The focus on a restaurant lease is often centered around how much the landlord is going to charge. But there are many other details that are important. Some are negotiable and some are not, depending on the landlord.
A few years back two couples where excited about opening up their new franchise ice cream store. Rent to continue to increase and they wanted to lock in the best rate possible. Additionally, they were financing this venture with an SBA-backed bank loan. Since the loan was for 10 years, the buyers had to have access to the premises for the full term of the loan-10 years. They could have 10 one year renewable leases, or a five-year lease with another five-year option. They were advised by their franchise or to just block you in the full 10 year lease – no options.
But this was just before the great economy turned down. People cut back spending, especially on ice cream and other non-essentials. Sales were down. The owner had to make some difficult decisions. When they realize that they will go to lose money on their investment they decided to consider closing down the business. But, since they had agreed to a 10 year lease, the landlord was now holding them accountable for the remaining 8 1/2 years of rent due.
In another case, tenant created an amazingly popular restaurant. When he started he had very little experience and like many was very excited with the landlord agreed to let it become a tenant. Many years later he went to sell the restaurant. The buyer was secured and prepared to pay several hundred thousand dollars in cash. The only hold up was the lease? The founder of the restaurant did not have any language and his lease that allowed him to transfer the lease as part of the business sale. There was actually a clause in there that allowed the landlord to come and take away a third of the restaurant if another tenant came around. And he had not secured any exclusivity to the type of restaurant. In fact landlord when the new buyer was brought them mentioned that they were thinking of bringing in another very similar concept and one of the new buyer to sign off saying that they knew a very similar competitor was coming into the same center. The deal fell through and the founder of the restaurant lost out on earning hundreds of thousands of dollars.
We highly recommend that you have any lease that you’re getting ready to sign be reviewed by a professional who truly knows a lot about leases. Many business attorneys have great experience but not all attorneys have expertise in the field so select someone who does. There are also lease consultants. They are not necessarily attorneys but sometimes have an even greater insight into how to protect the new owner because they have been on the other side of the process of creating leases for many years. They know what’s negotiable and what’s typically not.
No matter what you do, make sure you get an unbiased professional review of your lease terms. That way you know what to expect as the years pass and you won’t be hit with nasty surprises or unexpected expenses.