While you may expect everything to run smoothly at your restaurant, unexpected occurrences will pop up and you’ll most likely be making some changes at some point. Things like concept changes, new signage or updating the kitchen will require you to revisit your lease agreement to determine what is allowed.
Doing your due diligence when negotiating your lease will give you a deeper understanding of what changes you can make. By preparing for potential pitfalls in advance, you can take away some of the headaches that come along with change.
Although every restaurant lease is unique, there are certain provisions that tenants should be aware of during negotiations. The following are a few of the most problematic lease provisions from a restaurant tenant’s perspective, as well as guidance on how to navigate these potential pitfalls during the negotiation process.
Exclusivity provisions
Exclusivity provisions give tenants exclusive rights to operate certain businesses in shopping centers. For example, you may ask to be the only fast-casual restaurant allowed to lease within a shopping center. Careful drafting of these provisions is very important because they are strictly construed by courts due to their restrictions on the free use of land.
So how should a tenant protect his or her business? Be specific. Use examples in the lease to define or illustrate any terms (like “family style restaurant,” “fast food restaurant,” etc.), even if there seems to be an agreement with the landlord as to what the terms mean. Do not be afraid to name specific restaurants that illustrate what the term is not meant to encompass.
Ask your landlord about the presence or absence of exclusives in other tenants’ leases in the shopping center. You should try to negotiate an exclusivity provision that gives you the option to terminate the lease or get a rental reduction in the event the landlord violates the provision.
Use clauses
Use clauses deal with what will be operated in the space, or essentially how the space will be used. The key with use clauses is to ensure you have maximum flexibility in your use clause in case your planned restaurant concept does not work out and needs to change. You want to negotiate for as broad a use as possible.
You should also make sure you have the right to change any signage, outdoor displays, etc., in the event the restaurant’s concept changes during the lease term.
Assignment and subletting
Assignment and subletting provisions are intended to give you flexibility in assigning the lease or subletting the space. These provisions give you viable “exit strategies” in the event that the business is not successful. Landlords typically have the right to approve potential assignees or subtenants, and will often insist on a number of conditions for the potential assignee or subtenant, including creditworthiness, net worth, experience level, etc.
Ideally, a tenant wants the right to be able to assign or sublease the lease without the landlord’s consent because you want as broad a universe of potential assignees and subtenants as possible.
Tenants should also request a full release from the landlord after assignment. This can be challenging as many landlords do not want to give such a release because it means that the original tenant is no longer liable on the lease, which means that the landlord’s sole recourse for any future default is against the new assignee or subtenant. As the tenant, however, you should try to limit future liability associated with the performance of an assignee or subtenant to the extent possible.
Nuisance
Nuisance provisions are very important in restaurant leases because of the nature of the business. Most standard nuisance provisions provide that a tenant will not cause “any nuisance,” which is very broad. Odor, garbage, noise and other restaurant-unique issues could all be considered a “nuisance” under this type of provision. Be careful to elaborate a bit more about what is or is not encompassed by the term “nuisance” to avoid disputes down the road.
Conclusion
Although the negotiation process can seem tedious, it is important to remember that what may seem like contractual overkill on the front end can become critically important if a problem ever arises. Being aware of issues unique to restaurant leases will give tenants the ability to negotiate the most favorable terms possible.
Jill Johnson is a commercial litigator with Chamberlain Hrdlicka (Atlanta), who counsels clients with landlord/tenant and real estate disputes. She may be reached at (404) 588-3574 or by email at [email protected].
