Five Questions to Ask About Restaurant Leases
Posted Friday, February 14, 2020 by Kim Sandher
1.Do You Have to Sign a Personal Guarantee?
If you are a brand new business or have not done business with the landlord before, the landlord will most likely have you sign some form of personal guarantee in which you will be personally liable for debts/damages in the event your entity is not able to pay them.
If the landlord requires a personal guarantee, you should negotiate to have limits or caps put on it. For example, negotiate to have the guarantee limited to the landlord's cost of doing the deal (i.e. tenant improvements, lease commissions, etc.), limited to a certain dollar amount, or limited to a certain number of months of rent. You should also negotiate to have the personal guarantee amount reduced after a certain number of months, years, etc. Try to negotiate to limit your personal exposure as much as possible.
2. Are You Able to Get a Liquor License?
Find out if the location is capable of getting a liquor license. If it is, find out how much it will cost. You want to find out prior to signing the lease, whether the cost is too high or something prohibits the location from getting a license.
3. Can You Change the Type of Restaurant After Signing the Lease?
Make sure your lease gives you the ability to change the concept or type of food served in case the original concept does not work or you decide to retire and/or sublease the space.
4. When Do You Start Paying Rent?
Make sure you negotiate enough time to build out the space for your specific type of restaurant before you have to start paying rent. Depending on the existing condition and use of the space, restaurant build outs can take up a minimum of 6 months. You ideally don’t want to have to pay rent while you are still building.
5. Should you Sign a Lengthy Lease?
Make sure you understand what happens after your lease term is over. It is common for leases to have a "hold over" rate once your lease ends. Many times, the rent will jump up to at least 150 percent of the base rent. You want to negotiate this down.
If you are just starting out and this is your first restaurant, it may be a good idea to pick a shorter term for the lease so you are not bound to pay rent when you're no longer operating. Whether your lease term is short or long, keep multiple options to renew. You want options to renew because once you are established, it is costly and likely not good for business to change locations every few years because of lease expiration.
If you have questions about your commercial leases, feel free to contact Kim Sandher at (206) 805-1490 or KSandher@PivotalLawGroup.com.