Negotiating Your Restaurant Lease: How To Avoid Costly Mistakes

One of the most common and costly mistakes restaurateurs make when negotiating a real estate lease is a myopic fixation on the financial figures and numbers to the exclusion of the actual terms of the lease.  This happens because real estate leases are written in legalese, and restaurateurs generally focus on financial figures and dates to ascertain the lease’s bottom-line. The terms of the lease that govern the relationship between the landlord and restaurateur are equally important and deserve as much consideration as the lease’s financial terms.

In New York, real estate leases are generally comprised of three documents: (i) a guaranty, (ii) a standard form of lease, and (iii) an addendum to the standard form of lease.  The purpose of this article is to highlight certain substantive provisions contained in the standard form of real estate lease and the addendum to the standard form of real estate lease that are generally given short-shrift until construction delays and disputes arise.

• Utilities.  Consult with an engineer and/or architect to investigate the adequacy of the utilities, such as electric, sewer, water, gas, sprinklers, grease traps and ventilation.   In New York City, for example, the issue of restaurant ventilation is increasingly a concern for restaurants situated close to residential buildings.
• Insurance. Consult with an insurance broker to investigate the estimated cost of insurance.  For example, the costs of insurance are generally higher for the popular “live kitchen” or open kitchen schemes.
• Certificate of Occupancy. Consult with a professional to determine whether the building is certified for the legal use and occupancy as a restaurant.
• Licensing. Consult with a professional to determine the cost and the amount of time to obtain a desired license. For example, in New York City, the time and expense involved in obtaining a sidewalk café permit should figure into the start-up costs of a restaurant.
• Premises Description. Consult with a professional to determine the legal description of the premises.  For example, the lease should stipulate whether basement space, patio space, and outdoor area space is included in the lease.
• Construction Alterations. Consult with a professional to determine a reasonable time period for the period of rent abatement or a time-frame for construction purposes.  The failure to adequately plan a construction program for a restaurant premises may seriously affect the financial viability of the restaurant project.

Having the above-items in mind during lease negotiations, the aspiring restaurateur can adequately budget the amount of resources necessary for opening a successful hospitality venture. Remember, “An ounce of prevention is worth a pound of cure.”