How to maximize your leverage when leasing

Jill Johnson

Times have changed in the world of restaurant leasing. Although each lease is unique, tenants generally have more negotiating power in today’s economic climate. Here are the five areas where restaurant owners typically have more power to negotiate.

1. Buildout and tenant allowance provisions

Many leases suggest that all or much of the initial buildout work will be performed and paid for by the tenant, albeit through the use of some negotiated amount of tenant allowance. This is a bargaining chip for the tenant, who can request that the landlord not only maximize the amount of tenant allowance but also that the landlord pick up the tab for some of the work directly and provide some type of warranty for the work that the landlord performs.

Tenants should also be concerned with the completion date of the work (which often triggers the commencement date of the lease and rent payments) and negotiate for the work to be completed sooner rather than later, because the goal is to begin operating as soon as possible. Landlords often try to avoid making any such warranties because of the uncertain nature of construction. However, many landlords will agree to an expedited timeline if it means getting an operating tenant in the space quickly, which can work to a tenant’s advantage. 

2. Common area maintenance or operating expenses

Most restaurant leases also provide that the costs of operating in the premises (such as common area maintenance charges, to the extent there are shared common areas, taxes and insurance) are passed through to the tenant for payment.

Tenants should negotiate for “operating expenses” to be defined as narrowly as possible. Tenants should be specific, negotiate for certain exclusions, etc. Tenants should also seek to add a provision to the lease that contains audit rights, meaning that the tenant has the right to review and challenge the landlord’s operating expense calculations.

3. Operating hours and parking

Restaurants typically have different operating hours and require more available parking than other retail users. It is therefore important for a tenant to make sure that these provisions are adequate to its needs in the lease. This is tricky because sometimes it impacts the operations of other tenants; however, without sufficient operating hours and convenient parking, any restaurant is likely to suffer.

4. Exclusivity provisions

Exclusivity provisions give tenants the right to operate certain businesses in shopping centers exclusively. For example, a tenant may wish to be the only fast-casual restaurant in a certain shopping center, and negotiating that exclusive commitment from the landlord into the lease is critical. In boom economic times, when tenants are easy to come by, landlords often try to avoid granting exclusivity provisions. However, in today’s economy, tenants should negotiate for as many exclusions as possible to protect their business.

Further, tenants should request during the lease negotiation process that the landlord provide information concerning exclusives in other tenants’ leases. Not only is this information helpful for a tenant to have, courts in some states have said that a tenant is considered to be “on notice” when it enters into a lease as to another tenant’s exclusive right to operate a business. It is much easier for the landlord to share this information than to search real estate records to try to uncover the information.

Tenants should also try to negotiate an exclusivity provision that gives them the option to terminate the lease or get a rental reduction in the event the landlord violates the provision.

5. Self-help

Finally, in the event that the tenant has to close its business, tenants should not agree to include a self-help eviction provision in their leases. Self-help is the process of evicting a commercial tenant without resorting to the judicial dispossessory procedure (usually a state statutory procedure) and is typically accomplished by a landlord locking the doors to the tenant’s space and taking possession of the space.

In a restaurant, which contains extensive equipment and fixtures, the tenant will not want the landlord seizing control of the space and all of the property within it. Some states allow a landlord to exercise a lien on the tenant’s property to satisfy unpaid amounts under the lease, which then puts the burden on the tenant to fight to recover property. This is clearly not an ideal situation and should be avoided from the tenant’s perspective. 

Remember: In today’s economy, a landlord’s ultimate goal is to get a tenant open and operating (and paying rent) as soon as possible. Although the real estate market is continuing to improve, there remain more available spaces for rent than there are tenants to fill them. Tenants can and should use this fundamental concept of “supply and demand” to their advantage to negotiate the most favorable lease provisions 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.