The restaurant industry can be cut-throat, but with the right location and menu, it could also be a roaring success. If you have what it takes to run the business, don’t be put off by the leasing and legals. Below, we have put together a checklist of what you should consider before entering into a restaurant lease.
1. Location, Location, Location
Your restaurant’s success will depend heavily on location. Two common options include:
- Leasing a new premises to start your restaurant business; or
- Buy an existing business and have the restaurant lease transferred to you for the remaining duration of the lease term.
If you are leasing a new premises, you will have a little more legwork such as securing local authority approval to make sure that the use of a restaurant is permitted. Where there is an existing restaurant, you would be looking to transfer the restaurant lease with or without buying the business. You should not assume that this restaurant owner has a valid lease on foot. After engaging a lawyer, you may discover that the lease is near the end of the term with no option for renewal. In this situation, it may be worthwhile to ask the landlord to grant you a direct new lease and have the existing tenant exit the business by surrendering his or her lease.
2. Term of the Lease
The duration of your lease has financial consequences so you need to consider your lease term carefully. There is no early termination right if you decide you want out after the first year. If you have committed yourself to a six-year lease, the only time you can legally exit your lease is to assign it to someone else where they step into your shoes to pay rent and meet the lease obligations for the remainder of the term. If you cannot find someone to transfer your lease to, the only option out would be to request for a surrender of your lease which the landlord is not obliged to accept. In the worst case scenario, you would be required to pay rent for the rest of the lease term regardless of how your business is doing.
On the other hand, negotiating a short-term lease has the advantage of limiting the scope of your financial obligations under the restaurant lease. The maximum you would be liable for is two years’ worth of rent. However, this could also mean that it may not be enough time to build up your business’ goodwill. Alternatively, it could leave you with uncertainty as to the future of your tenure if you are doing well and looking to stay, but do not have a long enough lease in place.
Ideally, you would seek to negotiate a lease with an initial term and then an option for a further term, which is your right as a tenant to take up if you decide to continue trading from that location.
The rent amount is reflective of the location and the market (demand and supply). However, you and the landlord can agree on the rent by negotiating to include outgoings (making the rent gross) or negotiating for a rent incentive where the landlord pays for a portion of your fit-out costs.
The best way to determine the current rent is to shop around in nearby areas and get an idea of how much it costs to lease similar premises. Be aware that the contract could express the rent to be on a square metre basis or an annual basis so make sure you agree to how the landlord will calculate the rent. If the rent is calculated based on the area of the premises, then a survey plan needs to be carried out as evidence of the final net lettable area.
It is common to find in restaurant premises fixtures such as grease traps, stoves and air conditioning and even an alfresco dining area which you would ultimately be responsible for as a tenant. You are responsible for these fixtures in addition to the actual premises itself, which may require maintenance works based on the age of the building. Before entering into a restaurant lease, you should ensure that any machinery is in good working order before agreeing to take on the maintenance obligation required under the lease.
A standard lease often contains the obligation to refurbish the premises at certain intervals (such as once every three or five years). The extent of a refurbishment obligation can range between painting the internal walls to an extensive refurbishment requirement which includes repainting the walls, replacing the floor coverings, updating the décor and fittings and updating the external signs. A full refurbishment obligation may be costly, and it is in your best interest to ensure that you agree to limit the scope of such an obligation.
Before entering into a lease agreement for a restaurant, you should make sure that you negotiate all of the important terms. A lease is a long-term commitment, and it pays to do your homework, research the market and understand your leasing rights. If you would like to know more about the leasing process or need assistance reviewing your lease, get in touch with our commercial leasing lawyers on 1300 544 755.