Commercial leases are usually the largest single expense that restaurant owners incur. So it is worth taking the time to think carefully about a lease before signing. In this article by Anthony Coppola of Coppola Jabaly, we tackle some responses to common questions that restaurant owners encounter.
What are some common misconceptions about what can and cannot go into a lease to protect the restaurant owner?
Leases are, at their core, what lawyers like to call “creatures of contract.” No, it’s not some storybook monster made out of paper and intent on paper-cutting you. It simply means that the parties, the lessor and lessee in case of a lease, decide what goes into the agreement. The single biggest misconception that business owners have about leases is that they tend to believe it’s a “take it or leave it” deal. In good and bad markets, terms are always up for debate.
Commercial leases are regulated differently than residential leases. Many first-time business owners are used to leases on apartments or houses where the other side may say take it or leave it, and often, the only term that can be negotiated is the price.
When it comes to commercial real estate, negotiating detailed terms of a lease is common. Much of the negotiation centers around who takes what risk at what point in time. For instance, if the building is destroyed by an act of God, until what point in time are you comfortable still being obligated under the lease? Is it at the time of destruction? Sixty days after the event? 120? Being obligated under the lease well after the space is destroyed is an expensive proposition and may make very little sense. Nevertheless, we see it often in leases.
The destruction of the property is just one of many scenarios you’ll have to consider. Businesses can often do things to a space that residential tenants would not dream of doing, like installing high temperature ovens and seating, or they may be required to do things like add ventilation. Businesses may also be more responsible for the maintenance of the space and even the common area. How the common area is defined is important to limit a lessee’s responsibilities to the overall upkeep of the building.
So making sure the lease matches exactly the amount of risk a business owner is willing to accept is essential, as is making sure that the lease allows the owner to do what they want to do.
Pitfalls in restaurant leasing that are seen routinely
By no means is this an exhaustive list, but these are some problems that arise constantly and are often overlooked:
- Americans with Disabilities Act compliance: Businesses must comply with the Americans with Disabilities Act. And both the landlord and tenant can be held responsible for compliance. To some degree, the responsibility can be assigned in the lease. It is important to be careful that a tenant does not end up taking on the cost of something like moving a large structural beam that blocks the front door. The tenant can ask the landlord to warrant that the space is compliant to begin with, but it can be a very costly mistake if a tenant accidentally accepts the costs of making those changes.
- Escape clauses: Commercial leases often last for five years. Some last for decades. But what happens if something goes wrong? It is important to have a way for a business owner to get out of a lease on a property that is damaged or destroyed. People often do not want to eat in a half-burned down shopping center, but if the section a restaurant is in remains unharmed, the owner may still have to pay for years whether the rest is rebuilt or not. Another common escape clause centers around anchor tenants leaving. If big stores are sitting empty, it may scare away business, so restaurant owners may want a clause allowing them to get out. With the prevalence of individual guarantees, language that limits the guarantee period or damages amount is central to limiting exposure; in this case, limiting personal liability.
- Improvements and renewal options: Most restaurants have to improve the commercial space that they rent. They build kitchens, they decorate, they add booths and tables. These improvements increase the value of the space, so when the lease comes up for renewal, a landlord now has a more valuable space and can charge more. Two ways of dealing with this problem are rent abatements for improvements and renewal options up front that take the improvements into consideration.
Read the extended version of this article in our summer 2017 digital magazine issue by clicking here.
About the author: Anthony Coppola
Anthony Coppola is a Member at the Alexandria, Va.-based law firm Coppola & Jabaly, which serves small businesses. He has practiced law as an appellate litigator at Greenberg Traurig. He also developed his professional skills working at the Legal Writing Pro, the D.C. Public Defender, and the U.S. Department of Labor Office of the Solicitor.