Your restaurant lease can be one of the most important documents that you enter into, and can ultimately make or break your restaurant. It is basically your key source of success, and is a key criterion when evaluating the value of your restaurant. Consequently it is highly advised that you spend the time reviewing your lease carefully with a qualified solicitor prior to signing. The following are some considerations when negotiating your lease: 

Remember that you are not the enemy and be confident when you approach a landlord. Leasing agents are no longer looking at restaurants as second class citizens. Successful landlords realise that a well run restaurant operation enhances the area's property value and attract customers to surrounding businesses, thus he will be very open to a well thought out concept.

With high vacancy rates and the need for good food service establishments, it is quickly becoming a buyer's market for lease space.

Negotiating a lease is basically a point-by-point process. Don't be intimidated by the legal jargon, and be sure to get clarification on any point that is unclear. Each provision is basically spelling out the responsibilities of the landlord and tenant, and consequently one point could have a financial impact on the business of thousands of dollars over the life of the lease. You should review each point from a worst case scenario so you have a clear picture of the potential financial impact over the life of the lease.

Lease Term

Lease terms generally range from 5-20 years. The longer the lease the better. If you should decide to sell, you will be selling out a good lease term. We recommend that you ask for a 5 year lease with a minimum of three 5 year renewal options. That way if for some reason things don't work out (i.e., you have to sell) you won't be stuck paying out a long term lease.

Rent Reviews

A maximum of six months prior to the end of the lease term and minimum of 3 months you must take up the option of the lease by writing to the landlord to take up the option. Based on the lease it will specify how the option period will be handled in respect to rent increases if any for the new option. For example CPI + 1%, 5% or review to market rent. Often the landlord send back a letter saying the rent will be X. Caution is required if it is considered that the review is not fair and reasonable or current market rent a licensed valuer will be appointed to which the cost is shared between the landlord and tenant and the rent will be determined. Should agreement still not be reached it will go to a tribunal for final decision.

Option Periods

These can be 1 – 2 – 3 – 4 – 5 years or more based on a total of years that the landlord will agree, Stamp duty in NSW is charged on the first option so check with your solicitor or accountant as to the best way to structure the initial and subsequent options of the lease.

Annual Rent Increases

This is by negotiation, Nil, CPI, CPI + 1%, 5%

Outgoings

May be included in the base rent, or payed separately by the tenant which may include land tax, building insurance and rates. Excess water charges, Trade waste, garbage, electricity, gas etc is normally paid by the landlord however in some cases may be incorporated into the base rent.

Base or Minimum Rent

The rent that you would pay and is generally market rent for the area rather than simply by the square meter depending on the location. You need to seriously consider the maximum amount of rent you can pay, and not allow the landlord's claims about their high cost of real estate and return on investment, forcing you into a lease that you cannot afford. Also, make sure that you measure the total area that you are renting if paying by the square meter, as landlords do not always accurately state the total square footage in a lease.

Percentage Rent

This is the amount paid to a landlord over and above the base rent (usually shopping centres). It is based on a percentage rent of gross sales. For example, you may have a base rent of $80,000 vs. a percentage rent of 10 percent, which means that if you achieve sales of over $900,000 per annum you will begin paying percentage rent on top of your base.

Some contracts such as Government or historic buildings charge a flat percentage of turnovers usually 10% of gross revenue. Rent should be expressed as 7-10% of revenue.

Gross Sales Defined

When entering into a lease that includes a percentage rent provision it is of utmost importance to define gross sales as favourably as possible to you. I recommend that gross sales would exclude sales from outside catering, non related revenue to the venue, Equipment hire, decorations, entertainment, wages charged back to the client etc that are not revenue generating for the business rather service related. In addition, you should also deduct from gross sales any credit card fees and GST from the total. In short, take out as much from sales as possible, and leave it up to the landlord to put the amounts back in. Unless the landlord is really experienced in negotiating a restaurant lease, he/she may not see the potential long-term economic impact of these exclusions.

Rent Abatement

You should ensure that your lease provides for rent reduction or total abatement in the event of some unforeseen disaster (e.g., fire, flood, road construction, earthquake, other acts of God, etc.). You should not be expected to take the total hit from interruptions in your business that is outside of your control. The trick is determining how long and how much the abatement should be for. I suggest putting a clause that would say that it is up to the landlord and tenant to come up with an agreeable amount and term, and if it cannot be resolved that it be taken to arbitration.

Use of Premises

This provision basically tells the tenant when and how he/she will be utilising the space. Make sure that you read this carefully and include a broad enough definition as to how you will be using the space so as to not restrict you or a future subleased tenant's activity. Be especially careful as to any requirements to be open at a certain time (e.g., breakfast) that may not be profitable for your business but that would be profitable to a landlord.

Assignment and Subleasing

Assignments of leases provide the opportunity to transfer the leasehold interest in the property to a third party. The criterion is normally based on the ability to provide a sound financial statement of assets and liabilities, sufficient operating capital and to have suitable qualifications and or experience to run the business. Terms of assignment may differ based on the landlord however unreasonable withholding of consent is not allowed under the standard terms of the lease unless the landlord is able to prove the prospective tenant does not have the financial resources or technical ability to sustain the business and honour his financial commitments under the lease. It is important to check with the landlord and have it confirmed in writing the terms of assignment to expedite the process.

Make sure that you also have a provision that allows you to sublease the property, without additional charge, and that the landlord will not withhold any sublease from any reasonable tenant. If your restaurant is profitable, and you decide to sell it, you should not be restricted in who you sell it to. Subleasing would only be in a situation where there is a peppercorn rent in place and the principal hold the head lease or in the case of some contracts such as unique venues.

The purchaser is required to pay the legal costs of the landlord in the assignment of the lease, Caution is required to check what the costs could be, in some cases this may be $1,000 to $20,000 based on the law firm concerned.

Repairs and Maintenance

In some cases you may be renting premises where there is plant and equipment in place that is owned by the landlord or a third party. You should be certain to clarify who pays for the maintenance of the equipment and how often they should be replaced and at whose cost.

Plant & Equipment owned by third parties

Ensure that any plant and equipment owned by third parties is noted in the lease as when it comes to selling the business there may be a dispute over ownership of items such as mechanical ventilation, cool rooms, sinks, hot water system etc.

Disclosure Document

Retail leases require a disclosure document to be provided; these outlines all the expenses and terms of the lease in plain English read it carefully and ensure you understand all the terms and conditions. Many lessees do not read the leases carefully and totally rely on their solicitors, you have to pay the rent and abide by the terms and conditions of the lease not your solicitor so READ THE LEASE CAREFULLY and understand it fully, if in doubt consult your solicitor.

Negotiation of Leases

Close Encounters Trading Network will act on your behalf to negotiate rent reductions and or conditions with landlords then hand over to your solicitor for the legal documentation. We are professionals in this area of expertise and as consultants will present a sound case to the Landlord in the negotiation process on your behalf.

We offer you peace of mind by working together to enhance your strengths and support you in the areas of entrepreneurship, business and technical skills for sustainable growth, development and profitability.

To view the retail tennants information kit please visit: http://www.retail.nsw.gov.au/