5 Top Tips for Restaurant Owners entering into a Commercial Property Lease
At Keebles the commercial property solicitors in our specialist Leisure team regularly answer the questions our restaurant owning clients have about their commercial lease so in this article we’re going to share the 5 top tips you need to consider before you sign a restaurant lease.
1. Annual Rent
Before you agree the rent with your landlord and/or their agent, you should take advice from a surveyor to confirm that rent is appropriate for the property.
For example, does the proposed rent reflect the current market conditions? Can you afford the proposed rent based on your financial forecasts? Is any VAT payable in addition to the rent and can you recover it if it is?
Also think about the frequency of payments; the standard position is that rent is payable quarterly or monthly and in advance but either option could impact on your cash flow so you need to identify which option suits your business model best.
You should also ask your landlord if they might be willing to offer you any incentives such as a rent-free period. This is particularly beneficial if you need to make any alterations to the property and/or finish the initial fit-out before you open as you won’t have an income stream so a rent-free period will be a massive help.
2. Repairing Obligation
It is extremely important to clarify the extent of your proposed repairing obligation before you take on a restaurant lease.
This will generally depend on the type of property you are leasing. If it’s a standalone building, you’re likely to need a Full Repairing and Insuring (FRI) repairing obligation. Under an FRI lease you – as the tenant – will have responsibility for all external and internal maintenance, decorations and repairs as well as the liability for insuring the building.
If, however, you are leasing part of a building such as a high street or an internal unit, then an internal repairing and insuring repair (IRI) obligation may be more appropriate.
Under an IRI lease you will have a narrower liability for maintenance, decorations, repairs and insurance as it’ll be confined to the internal parts of the property you’re occupying. The landlord meanwhile should be liable for the repair and maintenance and insurance of any common parts and the exterior of the building.
You should always take professional advice to clarify the extent of the repairing liabilities in your lease. For example will you be liable to keep any basements, cellars or upstairs accommodation in repair? Will you be required to keep any parts in repair which you will not actually be using? If so then can the extent of your demise (and thus your repairing obligation) be limited to reflect this?
It is also important to clarify in the definition of ‘the property’ you will actually be taking a lease on and, therefore, will be liable for maintaining.
At the end of the lease term you will be required to hand the property back to the landlord in a state of repair and decoration required in accordance with the terms of your lease. A surveyor can assist you in reviewing a schedule of dilapidations as served by a landlord’s surveyor. This will detail the repairs you are expected to remedy.
Before taking on the lease, you should consider whether it would be appropriate to document the pre-let state of the property in a Schedule of Condition. This is a record of the property and will usually contain photographs and/or written descriptions. It can help to limit your potential exposure to dilapidations at the end of the lease term.
3. Service Charge
If you are taking on a lease of part of a building, you may be required to pay a service charge to the landlord. A commercial service charge allows a commercial landlord to recover the costs of maintaining and repairing the property from the tenants and could also cover the cost of certain services associated with a commercial property, e.g. insuring the property, providing services to the building and maintaining any communal areas.
It is important you clarify how the service charge is calculated and recharged. You may also want to consider asking if you can agree a cap on your service charge liabilities so you can forecast your potential liabilities under the lease more accurately.
And lastly, make sure you ask your landlord to provide copies of any service charge historic accounts, current budget and forecasts before you enter into your lease.
4. Tenant Option to Break
If you’re a little cautious about taking on a long lease, a tenant break clause will allow you to bring a lease to an end before the contractual expiry date as long as you meet certain conditions.
You are usually either able to exercise a break clause at a specific point, i.e. at the half-way point of the lease term, or they can be rolling in nature and exercisable at any time as long as you give the agreed notice.
Traditionally a 10 year lease would have a break at the end of year 5 but more recently we’ve seen more and more 5 year leases with an option to break at the end of year 3.
You should always push for the break clause that’s most appropriate for your circumstances so you have the option to break should your requirements change, for example if you need to move your restaurant to different premises. Being able to terminate earlier than expected could be an enormous financial help compared to having to see out the full duration of your lease.
It is extremely important to consider the drafting and performance of any pre-conditions contained in a break clause so always take advice from a solicitor so you run into less difficulties should you seek to exercise the option to break.
5. Ability to Assign and Underlet
Most leases place restrictions on the tenant’s ability to assign (or sell) the lease and create underleases.
Such dealings will either be absolutely prohibited by the lease or only be permitted with the landlord’s prior consent and, although it’s generally accepted that consent to such dealings cannot be unreasonably withheld or delayed, it’s common to find assignments and underlettings are absolutely prohibited which again means you need to give due consideration to your pre-conditions with one eye firmly on what you may want/have to do in the future.
While we appreciate we’ve covered a lot here we have seen an increasing number of disputes arising between landlords and restaurant operators because the initial lease provisions were put together without thinking these types of issues through. This is why it’s absolutely essential you speak to a solicitor who not only has commercial property experience but also direct experience of negotiating terms within the hospitality and leisure sector.
If you are thinking about opening a restaurant, bar or café and would like to discuss how to make you’re your lease is absolutely right for you, please email email@example.com or call Jonathan on 0114 252 1496.