Food for Thought: 5 Unique Considerations of a Restaurant Lease
Restaurants represent a substantial number of the commercial leases signed in Long Island each year. Actually, between bars, restaurants, cafes, and coffee houses, restaurant leases are one of the growing sectors in commercial leasing throughout Long Island, New York City, and surrounding counties. Yet, these leases are unique in form and substance from those signed for retail or office space – and restaurants are a far cry from industrial or warehouse space.
For example, restaurants are required to follow additional sets of codes and administrative rules for service of food and beverage. There are health codes, food preparation codes, building codes, and licensing requirements that all play a part in getting a restaurant lease signed and the establishment open for business.
Given these special aspects of the restaurant world, a New York commercial real estate lawyer, restaurant tenants, and commercial landlords all need to pay attention to these five unique considerations of a restaurant lease.
#1: When Does Rent Start?
In most office and industrial leases, the first date of rent payment is easy to identify. The landlord and tenant will negotiate for either a set start date for rent or make it dependent on the completion of tenant improvements. In the restaurant world, building codes and other inspections make determining this date much more difficult.
A restaurant tenant always wants to push a rent start date to the day the restaurant opens for business. It is far more likely that opening a restaurant in Long Island, compared to an accounting company, for instance, will encounter issues and setbacks. And these delays aren’t just coming from regulatory bodies and inspections; configuring a restaurant is far more difficult and involves more moving parts.
The issue with this approach is a landlord must accept some uncertainty on the date of an initial rent payment. Even though the tenant is secured and rent is imminent, this causes the landlord some discomfort, and likely requires compromise elsewhere in the lease.
#2: Are All Parties Interested in a Shorter Lease?
A regularly discussed statistic in the world of food and beverage is how many restaurants fail each year. An alarming statistic claimed that nearly 90% of all restaurants fail in their first year (this came from an American Express commercial, no less). In contrast, less advertised data suggests that this number is closer to the 20% mark.
Despite the disparity, these numbers tell both tenants and landlords that their lease may not last for 10 or 15 years. So, forcing a tenant into an extensive, 20-year lease may not serve anyone involved. The tenant would only be signing up as a show of goodwill, and the landlord loses out on other opportunities. In exchange for a shorter lease term, such as five or 10 years, the landlord can ask for other assurances, such as requiring the tenant to take additional maintenance obligations or make specific improvements before, during or after the lease term.
#3: Do Require Renewal Options in a Restaurant Lease
While an extensive initial lease term has definite drawbacks, a bigger concern can be moving a successful restaurant. Patrons associate your café or bar with its locations. They even describe it that way – “it’s the cute place on the corner of Spring and Main Streets.” Losing your location could kill your business. The compromise is requiring renewal terms in your original lease.
Automatic, opt-out renewal terms in increments of five, seven, or 10 years are preferable to a restaurant tenant in a New York commercial real estate lease. The landlord may not want to accept these terms if there is hesitation about the tenant’s longevity, capitalization, and ability to meet payment obligations.
#4: Exclusivity Clauses in the Contract
A huge point of contention in all New York commercial real estate leases is how the landlord fills other commercial space in the same complex, building, or block and whether that impacts the tenant’s business. For example, if a fitness center moves into a huge retail space in a mixed-use building, the tenant doesn’t want the landlord adding an aerobics gym on the second floor. The same is true for restaurants, to an extent.
It can be good for a restaurant to have some competition in the area. If patrons know they have a choice of two or three café options, they are more likely to choose that spot. This also works for bars and led to the creation of entertainment districts and streets lined with bars of different shapes and sizes. So, a restaurant tenant wants to use exclusivity clauses in a specific manner.
Whereas a fitness center may want to prohibit all other gyms, workout facilities, and personal training businesses from being in the area, a Greek restaurant wants to encourage a coffee house to move in down the street and a cocktail bar to take the space next door. These indirect competitors can actually boost business.
The inclusion of an exclusivity clause can lead to significant compromises elsewhere in the leas. For this reason, a tenant may want to consider construction this clause to have narrow application to direct competitors. Another approach is limiting the exclusivity clause to an option. The landlord can allow other restaurants in adjoining spaces, but if a competitor takes nearby space then the tenant has the option to terminate its lease.
#5: Opt-Out for Certificate of Occupancy and HVAC
As discussed, restaurants require some additional licensing and requirements before they can open for business. Obtaining these approvals can distress and stonewall a restaurant’s opening for weeks or even months. In some instances, failure to obtain a particular building code approval could keep the restaurant from opening at all.
How do commercial tenants and New York commercial real estate lawyers approach the risk of denial of occupancy, proper equipment and even access to public bathrooms? By building in opt-out clauses into the contract.
Certain approvals and licensing are outside the restaurant tenant’s direct control, such as receiving the Certificate of Occupancy for a property or ability to install more robust HVAC for restaurant use. Whether these approvals and build-out requirements can be met might be unknown when the lease is signed. If that’s the case, then the tenant and its lawyer should push for the right to terminate or opt-out of the lease if these requirements are impossible to meet or resolve.
Speak with an NY Restaurant Leasing Lawyer
Are you a restaurant tenant or commercial landlord considering a new lease in Long Island? Contact the Law Office of Sami Perez, to discuss your lease, the unique issues of a restaurant lease, and your next steps in negotiation. Our Long Island office can be reached at 516-216-5060.
The information in this blog post (“Post”) is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this Post should be construed as legal advice from The Law Office of Samilde Perez or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter.