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Texas Restaurant Law

The Absolutely Essential Issues In A Restaurant Lease

Posted in Acquisitions, Contracts, Corporate Entity, Franchises, Franchising, Liability, Litigation, Negotiation, Real Estate

Leasing is a big issue for restaurants. Almost all restaurants at least start out leasing their space. Often, restaurants are required to lease their space to capture the prime locations of a given area. For these reasons and many more, it is vital for restaurant owners to pay close attention to leasing terms. The following categories show what we believe are the absolute “must-haves” when a restaurant negotiates a lease.

Price

We assume that you know the price you can afford, so this is a given.

Ensure The Landlord Owns The Premises

Have a title commitment or abstract of title performed to ensure that the Landlord has the right to lease the premises and owns it. We also recommend the inclusion of a representation and warranty that the Landlord owns the building and has the authority to lease the Premises.

Also, ensure that both the legal description of the building and a floor plan is provided. Both need to be included and verified by a title company and/or contractor familiar with the B.O.M.A. standards of measurement.

Net Versus Gross Lease

Every lease is either a net, gross, or base year lease. A net lease is one where the tenant pays both rent and its share of all utilities, common area maintenance fees, taxes and insurance that the landlord provides to the complex. A gross lease is where the tenant pays only monthly rent and the landlord covers the cost of everything else. A base year lease is one where the tenant is only required to pay the excess cost of these fees over the actual costs of a particular year. Be aware of which type of lease is the one in question. The best lease for any tenant is a gross lease, because the tenant will not have to worry about escalating taxes, costs of insurance, etc., but those are very rare. The second best lease for a tenant is a base year lease. If you have no choice but to accept a net lease, a provision permitting the tenant to review the landlord’s actual costs each year is recommended, just to be sure that the landlord isn’t fudging on some of the operating costs.

Personal Guarantees

We recommend that all restaurant owners create or have a legally recognized entity to be the primary lessee on any lease. In most cases, this preserves the restaurant owner’s rights in the case of a lawsuit. However, most landlords understand this as well, so they require personal guarantees of any lease by the restaurant owner to ensure that the actual owner remains liable in the case of a lease default. Still, this personal guaranty is not always a sure thing for the landlord. Depending on the leverage of the parties, the credit worthiness of the restaurant owner, and a variety of other factors, one of the prime key negotiation issues is to negotiate away the restaurant owner’s personal guaranty. In the alternative, a backup position is to at least negotiate a burn-off of the personal guaranty so that its length is not indefinite.

Permitted And Exclusive Use

We recommend that restaurant owners obtain a use provisions that is as general as possible as opposed to specific.

Also, many landlords will agree to grant the restaurant owner an exclusive use provision to permit them to avoid direct competition in the center in which the lease exists. The exclusive use provision may have to be drafted more narrowly than the permitted use provision in order to permit the restaurant to be the only permitted restaurant in the center. Also, we recommend that the exclusive use provision should be broadly crafted to give the restaurant maximum protection in the center. After all, a provision that says that no “sandwich shops shall be allowed in the Center” still allows a variety of other types of restaurants. In contrast, an exclusive use provision that prohibits all other “restaurants and bars” would serve the restaurant much better.

Default Notice And Cure Rights

Automatic defaults under leases are disturbing things. If a lease says that the tenant is in default if rent is not paid on the first of each month, it could cause a serious issue if the mail gets delayed or if the tenant simply forgets to pay the rent for a day or two. On the other hand, landlords do not want to have to send tenants notices of monetary default every single month so that the tenant “rides” the extra days every month. A reasonable compromise is to suggest that default does not occur on monetary payments until five days after receipt of written notice by landlord, but that the landlord is not required to send more than two notices in any one calendar year. On non-monetary defaults, it is essential the tenant receives notice of the default and an opportunity to cure–15 to 30 days–because the tenant may not even be aware of the non-monetary default before the notice arrives.

Conclusion

Obviously, there are a variety of other recommended issues to be negotiated in a lease, but we believe that these issues are the key drivers for restaurants.

Do you have any leasing war stories? What are your thoughts on these issues? Please let us know!

About the author: Matthew Sanderson is a restaurant lawyer in Texas. “Good service with a smile” is his motto. Click here to find out more about Matthew Sanderson’s legal practice and how he can help you today. Follow him on Twitter @dealattorney.