Commercial Restaurant Lease Agreement
A commercial restaurant lease agreement is a contract to rent an office or retail space between a tenant and a landlord.3 min read
2. What Are Liquor Licenses and Permit Contingencies?
3. What Are Exclusive Use Rights?
4. What Are Common Area Operating Expenses?
A commercial restaurant lease agreement is a contract to rent an office or retail space between a tenant and a landlord. The tenant will pay a monthly amount to the owner of the property in return for being allowed to use the premises for their commercial restaurant. Commercial restaurant leases are usually longer than residential types, between three to five years, and it's common for the tenant to have the option to renew the lease on predetermined dates.
What Is a Delivery of Premises?
What happens when a landlord fails to deliver possessions of the premises in a timely manner with its construction substantially complete? What happens when an existing tenant fails to vacate the premises in a timely fashion that the landlord intends on leasing? Without the correct protections, a tenant may find themselves without the ability to move their project forward because of a negligent landlord. For example, the tenant may be forced to open during an unpopular period that causes the restaurant to perform poorly.
At a bare minimum, restaurant tenants should require their landlord to earnestly pursue possession and broaden their rent-free period to align with the actual delivery date. On the other hand, tenants should attempt to negotiate the right to cancel the lease in cases where the landlord's obligations are not substantially complete or possession has not been delivered by a specific date following the execution of the lease. Other items that should be negotiated include:
- The reimbursement of any miscellaneous costs that are incurred in pursuit of business.
- Prepaid rent.
- Terms for refunding the security deposit.
What Are Liquor Licenses and Permit Contingencies?
It is recommended that restaurant tenants always consider their ability to procure the required government licenses, permits, and approvals to alter, build, or otherwise operate their restaurant from the premises. For example, restaurants that are planning on serving alcohol will need to work with their local and state regulators to ensure that they're following the proper regulations. It's a good idea for restaurant tenants to build special terms into their lease agreement that allows them to terminate the lease in cases where critical permits/licenses cannot be obtained within the contingency period. Important items to negotiate related to the right to terminate include:
- Termination fees.
- Whether the landlord will be allowed to obtain the permit/license on behalf of the restaurant.
- The type of permits that will qualify (liquor licenses, conditional use permits, health permits).
- The length of the contingency period.
What Are Exclusive Use Rights?
Exclusive use clauses prevent landlords from allowing other occupants in a shopping mall to operate a similar concept that may compete with the business of the tenant. The need for this clause in the agreement is unquestionable and is critical for the future success of the restaurant. On the other hand, landlords are also looking to protect their investment and do not want to inordinately restrict themselves from leasing to other potential clients. The exclusive use clause is usually one of the most challenging issues to negotiate in a commercial restaurant lease. In cases where the landlord is easy to work with, important issues to consider include:
- Triggering events that would terminate the exclusive use right.
- The scope of the landlord's obligation to protect the exclusive use right.
- Determining to whom the prohibition applies.
- Defining the exclusive use.
What Are Common Area Operating Expenses?
Another interesting aspect of negotiation relates to the tenant's obligation to share in the expenses to maintain, manage, and operate the common areas in shopping malls. Smart tenants will try to decrease the pooling of expenses to be passed on to them by:
- Limiting the definition of common area costs.
- Excluding certain costs from the definition of common area costs.
- Limiting the landlord's ability to exclude specific portions of the shopping mall.
- Requesting a maximum cap amount.
- The cap will usually prevent the tenant's portion of common area expenses from substantially increasing by more than a predetermined percentage over the life of the lease. The cap amount is usually a fixed percentage, but it may also be based on an index, such as the consumer price index.
Savvy landlords will attempt to exclude all items from the cap that are out of their control, including:
Landlords my also try to ensure that the cap is cumulative. Meaning, all prior unapplied carryovers may be applied in future years. It is recommended that tenants require that the cap be calculated based on a noncumulative basis.
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