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National Restaurant Association - Leasing terms: Up for negotiation

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Leasing terms: Up for negotiation

If you’re ready to sign a lease because you’ve agreed on a monthly price, think again. The typical restaurant lease is 20 to 40 pages with provision after provision. When negotiating a lease, look beyond your monthly payment to ensure you protect your assets and control your costs.

An experienced retail commercial broker can help negotiate terms, often at no cost to you, because landlords typically pay broker commissions. It’s also wise to have a lawyer review the lease. You might be living with this document for 15 years or more, given renewals.

“It’s worth paying an attorney up front to make sure you have the best protection,” says Richard Muhlebach, a retail broker working in the Seattle and San Francisco areas. This article isn’t intended as legal advice; seek legal counsel as needed.

“When negotiating lease terms, you must decide what’s essential, and be prepared and willing to stand your ground. It’s rare that you have to be at a particular site,” says attorney Gregory Apter, president of Hilco Real Estate, where he’s helped hundreds of clients negotiate leases. “Prioritize, weigh the costs and benefits before making concessions and then be willing to stick to your plan,” he advises.

Here are nine negotiable items to consider before signing on the dotted line:

1. Percentage rent. Some leases require “percentage rent.” Once a tenant’s sales reach a certain level, the tenant must pay the landlord a percentage of the restaurant’s revenue. “I’m not a big believer in percentage rent if it can be avoided,” Apter says. “It’s generally no one’s business but yours as to how you are performing.” Sharing this information can hurt future negotiations. “If the landlord knows the financial performance of a particular retail location, it can materially – and negatively – impact your future flexibility,” he says. Nonetheless, percentage rent is fairly common. If you ultimately agree to it, negotiate the terms.  

2. Exclusivity and radius restrictions. Try to preclude direct competition in the same shopping area. It’s unusual to block all restaurants, but you might negotiate exclusivity within a category, such as pizzerias or burger joints. On the other hand, your landlord might want to impose radius restrictions, preventing you from opening another unit close-by. "Try to avoid these restrictions, which impinge on your business’s flexibility," Apter says. 

3. Assignment and subletting clauses. You’ll want the right to sublet or assign the space to another tenant, should you need to close or sell your restaurant. Avoid restrictions that require the transferee to have the same net worth or experience as you, advises retail broker Muhlebach. 

4. Option to renew. “Negotiate for as many options as you can get,” says Muhlebach. “An option is an obligation for the landlord and a right for the tenant.” Avoid making renewal contingent on your remaining the tenant, or your resale value will plummet, advises real-estate consultant Lewis Gelmon, president of Gelmon Enterprises based in San Diego.

You can negotiate renewal terms, rather than automatically taking your option to renew. Gelmon suggests starting negotiations early. “If you don’t like the way negotiations pan out, you still have the right to exercise your option to renew.”

5. Future rent prices. Negotiate future rent terms. Prices tend to be based on percentage increases or tied to fair market value. Given a choice, opt for percentage increases because they’re easier to budget for, Muhlebach advises. Otherwise, you could be shocked with a large increase.

6. Kick-out clauses. Consider negotiating for a kick-out clause, giving you a one-time right to cancel a lease after a specified time period if your sales haven’t surpassed a certain amount.

7. Start date of rent. Many landlords will waive rent payments during the build-out period. Typically they’ll waive payments for 60 to 90 days or more, or until you open for business, whichever comes first, says New York City restaurant real estate broker Frank Glasgall, of Glasgall & Associates. Consider asking to delay the clock from ticking until you get a building permit, Muhlebach advises.

8. Change of use. Try to maintain flexibility so you can change concepts or sublease/assign the space to a different business, Apter says.

9. Operating expenses. Negotiate whether you or the landlord are responsible for operating expenses, including property taxes, insurance and management fees. “Some landlords add in zingers that aren’t industry standard,” Muhlebach says. Watch out for administrative fees and capital improvement costs. “You’ve got to catch those things. Once they’re in black-and-white and you’ve signed the lease, you have to hold up your end of the deal," he says.

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