What a restaurant owner should ask when entering a commercial lease

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Table of Contents

• Can the landlord increase my rent?
• When are the handover and commencement dates of the lease?
• What happens when my lease ends?
• Conclusion

Are you considering purchasing or opening a restaurant? It is important to note that the Sale of Business contract is not the only agreement you will be required to sign. You may also be required to enter into a lease. A lease is an agreement that gives a restaurant owner exclusive possession over the premises for a certain period of time to operate their restaurant. Entering a commercial lease with terms that do not match your business’ goals or expectations can have a significant negative impact for a restaurant, so it is important to speak to leasing lawyer before signing any documentation.

As a new restaurant owner, you should be asking the following questions when entering a commercial lease:

Can the landlord increase my rent?

Generally, yes. A landlord may increase your rent if your lease permits it. Rent rarely stays the same during the entire length of a lease. Commercial leases will usually have 1 of 3 rent review clauses.

• A fixed rate increase is where rent will increase at a fixed rate or percentage usually on an annual basis. For example a 25% increase will mean that if the rent for your restaurant is $20,000 for your first year then it will be $25,000 in your second year and so on.
• A market review is where the rent will be increased based on the current market rent for your premises. It is common that this mechanism is applied for the first year of an option term of the lease (if any).  If the parties cannot agree on the market rent, then the lease will usually specify a person, such as a property valuer or real estate agent, who will review the current market rent and value of similar properties to determine what your rent should be.
• A Consumer Price Index (‘CPI’) rent review is based on an evaluation of CPI. A CPI review evaluates the inflation in the price of goods and services and usually takes place on a yearly basis.

When are the handover and commencement dates of the lease?

If you are opening a new restaurant (rather than purchasing an established business), there are two important dates a new restaurant owner should pay particular attention to in a commercial lease.

• The handover date refers to when the premises will be provided to your practice.  This is usually the date on which you can start your Fitout of the premises.  Depending on your negotiations you may not need to pay rent during this period until the commencement date.
• The lease commencement date is the date when a lease will actually commence. On this date, your restaurant will be required to be ready to open and pay rent.

It is important to ensure that there is a sufficient period between the handover and commencement dates to allow you to make the correct fit outs and renovations for your restaurant. A restaurant will not be able to run without the correct installation of kitchen and dining equipment, but this will not stop your landlord from making you pay rent. In other words, make sure your equipment and fit out is ready for your installation on the handover date.

What happens when my lease ends?

All leases will have an expiry date. As a restaurant, your business will build up goodwill and customers within the area of your business. The fit outs and renovations you make to the premises at the commencement of your lease and over time can be very costly but they can also be costly to remove.  In order to retain your goodwill and obtain the maximum benefit from your fit out investment it is important to put in place a clause that gives you a right to renew your lease at the expiry of the term.

You should speak to a leasing lawyer to make sure you are aware of the last date for exercising any options to renew.

Conclusion

Are you considering purchasing or starting up a restaurant? Our team of leasing lawyers have extensive experience in negotiating leases for new restaurant owners. Call LegalVision on 1300 544 755 and get a fixed-fee quote today.