RESTAURANT LEASES – Key Terms
1) Duration of Lease: Generally, the longer the duration of the lease the better. Especially if given the ability to assign the lease with a minimum of Landlord intervention. Typically, I attempt to negotiate for a 15-year initial term with an annual increase of no more than 3%, and an option to renew the lease for another five-year term exercisable at the discretion of the restaurateur. Do your homework to determine the fair market rental value for the premise.
2) Assignment: Always attempt to retain the ability to assign the lease to a third party (e.g. in the event you want to, or are forced to sell your restaurant). The Landlord will insist that he must give his prior written consent for any assignment to be valid, but you must in turn, insist that his consent can not be unreasonably withheld, delayed or conditioned. Too many restaurateurs do not realize the importance of having the ability to assign their lease until they are at the point where they have decided to sell their restaurant. At that point, the sale of the restaurant will be thwarted because they will not have the ability to offer the lease to the potential purchaser and the Tenant will be forced to just walk away from the premise with nothing. Also be sure that the lease and personal guaranty shall void in the event of a valid lease assignment. Otherwise, you remain liable for any damages, included but not limited to unpaid rent, caused by your Assignee.
3) Liquor License Contingency Clause: If you intend to apply for a liquor license for your premise, most restaurant attorneys strongly advise that you insert an escape clause in your lease in the event that your liquor license application is rejected by the NYSLA. A fair escape clause would be that the tenant gets to void the lease in the event their NYSLA application is rejected BUT are required to pay all rent incurred (included any abated months) to the date of rejection. The personal guaranty, if any, must also void as of that date.
4) Free Rent: Attempt to get the premise rent-free until the latter of (i) the day Tenant opens the establishment to the public, or (ii) the date Tenant receives its liquor license from the NYSLA. Most landlords will agree to this request with some limitation or outside rent commencement date depending on the present demand for the premise and the caliber of the proposed restaurant tenant.
5) The Personal Guaranty: Generally, if the lease is going to be signed in the name of a corporation, all landlords will ask for your personal guaranty. Most landlords, however, will waive this personal guarantee if he/she is presented with other options that may reduce his/her risk in the event of your breach. For example, if you request that the landlord remove the personal guarantee clause and he/she initially refuses, you can offer him a larger security deposit in exchange for eliminating the clause. The larger security deposit will give him/her a greater level of comfort in the event of your default; his goal for including the personal guarantee in the first place. If you don’t have the capital to offer a greater security deposit, then you can offer to compromise and provide the Landlord with a limited personal guarantee or a Good Guy Clause which provides that you will be personally liable only up to the date that you surrender the premises back to the Landlord (a/k/a give him the keys).
GENERAL RULE: Lock in the longest lease term possible with the right to assign the lease. Get a Liquor License contingency clause and make sure the lease and guaranty void in the event of an assignment or a failure to obtain the Liquor License.
There are many other clauses in a commercial restaurant lease and just because I highlighted the ones above does not mean that the others don’t warrant great attention. A restaurant lease negotiation and review should be handled by a qualified restaurant attorney.