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Negotiating a Commercial Lease, Especially Restaurants

I just finished negotiating a commercial lease for a restaurant and thought this would be a good opportunity to relay some real time advice on the topic.

  1. Everything is negotiable in a lease agreement.  You simply have to ask for it in a sensible and compelling manner.  But just because everything is negotiable doesn’t mean you should try to negotiate everything.  Pick your battles, and accept some reasonable offers.
  2. When you’ve been emailing red-lined lease drafts back and forth with the landlord and you’ve reached a stalemate on several key issues, schedule a face-to-face meeting to hammer out the rest.  It will usually help drive things to completion.
  3. Be reasonable.  Don’t try to hammer the landlord on every aspect of the lease.  For example, if the price per square foot is reasonable compared to the market, then offer to pay the full rate and focus on other things like build out assistance, CAM, start of lease payments, hiatus of lease payments for remodeling, personal guarantees, etc.  Some landlords hold dear the price the receive per square foot but will heavily negotiate many other things.
  4. List everything in an exhibit what you will take with you at the expiration or termination of the lease, or the landlord will claim it as a permanent fixture or improvement and not let you take it.
  5. Most parties routinely start a lease negotiation with a Letter of Intent (“LOI”) to hammer out the big details like pricing, tenant improvements and the like.  A minority of other will recommend not starting off with a LOI, such as the self-proclaimed “Lease Coach” who touts his $1k-$7k services at the National Restaurant Association trade shows.  What’s my opinion?  In a perfect world I’d prefer starting out with the lease but I don’t think in the end it really matters whether you start negotiations with an LOI or lease.  Either way your negotiating the same details.  If the landlord insists on an LOI to start things off and you refuse, the landlord will view you as a pain-in-the-butt difficult tenant and he will be less likely to make concession on your lease demands.  Landlords will definitely make extra concessions for tenants they like and trust.
  6. Support your reasonable requests with research.  For example, if you are attempting to lease a shell with a dirt floor and you are asking for a vanilla box plus $35/sf of tenant improvement (“TI”) money for a new build out, then have comparable offerings from neighboring landlords.  Often the landlord doesn’t know what the competition is offering to lure in tenants.
  7. Economic Abandonment.  Include an out in your lease that gives you the option to accelerate the termination of your lease upon 60 days notice if the trailing twelve months sales are below a certain amount (i.e. $375,000).   This is a huge benefit and basically gives you a way to end the lease early if sales aren’t good.  I’ve seen several tenants do this like GNC and I think it’s a great idea.
  8. Vanilla box is a generic term.  Always define it very specifically and list exactly what you want the landlord to provide in the vanilla box – ADA bathrooms, size of hot water tank, plumbing issues like size of water line and PSI, separately metered utilities, minimum 4-inch concrete depth with 4000psi strength and termite treatment, emergency lighting, electrical and HVAC details and capacity (i.e. 1 ton of A/C per 200sf), tap and meter fees, drop ceiling specifications, fire alarms up to code, electrical J box for outdoor sign, lighting, etc.
  9. Have your architect inspect the premises before you finish the LOI.  Make sure the ingress/egress comply with the state code or you may need to install additional exits.  Make sure the square footage provided by the landlord is actually square footage that is usable by you and doesn’t include pillars, angled corners, etc.
  10. Always try limit your personal guarantee as much as possible.  You never know what can go wrong, even things outside of your control like a war, natural disaster, or 10 new competitors within a few blocks.   If they landlord insists on a personal guarantee for the entire lease, try to ask for just the initial 5-year or 10-year term, or if you have the cash offer to pay an extra deposit that will be refunded in a year or two in exchange for a shorter personal guarantee.
  11. Pay attention to insurance requirements.  There are some things that are cheaper for the landlord to insure as a rider to his insurance than you.
  12. Possession Date.  This is the date you will have the right to start building in the space.   If the landlord is performing some build out on the space for you, make sure the landlord gives you sufficient notice such as at least 4 weeks so you have time to get your general contract organized and ready.
  13. If parking is on site, make sure it is enough. Try to negotiate your own dedicated parking spaces.
  14. Exclusivity is a big deal.  Can the landlord rent to your competitor?  If the landlord won’t grant you an exclusive (i.e. Deli sandwiches for Jimmy Johns), then ask for an option to terminate the lease or get an automatic reduction in rent if a direct competitor moves in.  Often it will be defined as someone generating more than 10% of sales from “ice cream” if it is an ice cream exclusive.   But, be careful and make sure terminations are not automatic but optional for the tenant or tenant can easily remove you by letting a competitor move in.
  15. Landlords can be sneaky and unethical.  If they see a successful pizza shop in their shopping center, a leasing manager may want his lazy son to open up pizza shop there and thanks to you proving the concepts work in that spot, he’ll figure out how to get you out of your lease quickly.  What will automatically terminate the lease?  What are breaches and how are they cured?  A favorite method is using a failure to timely notify the landlord within the Notice Period of your intent to extend the lease for another term.

About Ryan Knoll

Attorney and advisor with an interest in franchising. Feel free to email me comments and questions on the "Contact Us" page.
2 comments
FranchiseClique
FranchiseClique

This is all great information. Some franchisers can put you in touch with realtors with whom they have established connections to aid you in making these decisions, or help you scout locations to ensure your best shot at success.

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