A Restaurant Owner’s Checklist for Commercial Lease Deals

The value of the business may depend on its location, the ability of customers to find it, its visibility, access, and proximity to other stores.
The value of the business may depend on its location, the ability of customers to find it, its visibility, access, and proximity to other stores.
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Lease negotiations begin when the tenant is presented with the Landlord’s lease form. The tenant will be told it is standard, all the other tenants have signed it and, in any event, it is non-negotiable. It may be what the landlord presents to each tenant, but is highly unlikely that all tenants have signed it without modification upon close review and negotiations with the landlord.

Restaurant owners need to make decisions based off of what is best for their business. This checklist is intended to identify some of the most important issues raised by the landlord’s form of a lease.

1. Tenant Formation

Even if the business is run by one or two individuals or spouses, they should form an entity that shields them from personal liability. For instance, a corporation or limited liability company should be formed, and that entity should sign the lease. 

2. Measure the Premises

The tenant should reserve the right to measure the premises after the landlord’s work is completed and adjust its proportionate share of common expenses accordingly.  The basis for measurement should be specified. “Rentable” and “useable” square footage are entirely different concepts, and different types of space use very different methods of measuring the square footage.

3. Relocation of Premises

Restaurants, in particular, should resist any right of the landlord to relocate the premises. The value of the business may depend on its location, the ability of customers to find it, its visibility, access, and proximity to other stores. If the landlord insists on the right, the tenant should get notice, premises of the same size and configuration, and completion of the tenant improvements by a given date, with the right to abate rent and new directory signage.

4. Landlord’s Work 

The improvements to the premises the landlord constructs must be specified in detail. Terms such as “Grey Shell” or “White Shell” are not sufficient. If the landlord’s work is not completed by a specified date, the tenant should be entitled to terminate the lease.

5. Permitted Use

The permitted use should be defined as broadly as possible: “general office” or “general retail” uses are best. The landlord should represent that the permitted use is allowed by zoning, applicable laws and property restrictions.

6. Continuous Operation

If the landlord requires continuous operation, there should be exceptions for employee training, renovation, restoration, repair, maintenance and holidays.

7. Operating Expenses

As a general matter, the tenant should pay a proportionate share of only maintenance and operating expenses of the common area and not any capital repairs or improvements. 

8. Increases in Operating Expenses

There should be a percentage limit in the increase in annual operating expenses for controllable expenses, typically, everything but taxes, insurance and utilities. 

9. Audit

The tenant should receive an annual statement of the operating expenses with a right to conduct an audit.  If the tenant discovers errors, the landlord should reimburse the tenant, and if the errors are above a certain percentage, the tenant should also be reimbursed for the cost of the audit. 

10. Base Year

If the increase in the operating costs is relative to a base year, the tenant should insure that the base year actually reflects the costs the landlord would incur in a typical year.  For instance, the landlord may successfully challenge real property taxes and obtain a refund or receive payment on a guaranty, insurance or third-party claims during one or more years following the base year.

11. Exclusive Use

The tenant should obtain an exclusive right to conduct its business.  The right should be as broad as necessary to insure that it does not lose necessary business to competitors.

12. Tenant Alterations

In no event should the tenant be under any obligation to alter the premises to conform to any change to law, rule, regulation or ordinance, unless specific to tenant’s use or as a result of any modification to the premises by the tenant.  The tenant should be entitled to make alterations as long as they are not to the structural elements, building systems or exceed a certain cumulative amount. 

13. Tenant Maintenance

In no event should the tenant be responsible for structural elements, public stairs, elevators or mechanical systems (including HVAC), plumbing, electricity, UPS, security and other similar installations.

14. Landlord Obligations

The landlord should be obligated to operate, repair and maintain the building in a first-class manner and in conformance with all applicable laws, rules, regulations and ordinances. In all events, the landlord should not impair the visibility, access or use of premises. 

15. Assignment

Assignments to affiliates, franchisees or franchisors should be permitted without landlord’s consent.  The tenant should be released from liability after an assignment.

16. SNDA

The tenant should require a Subordination, Non-Disturbance and Attornment Agreement (SNDA) from the existing lender as a condition of executing the lease. They should not agree to subordinate its interest to any future lender unless the lender agrees not to disturb the tenant’s use of the premises and agrees to cure any continuing defaults by the previous owner.

Commercial leases are lengthy and complicated, and each provision requires careful review. There is no “standard” form and the lease the landlord hands to the tenant, long or short, will be anything but balanced and fair. The preceding provisions are just a sampling of those that are of importance to the tenant and the commentary only touches upon some of the issues the tenant will want to address. This is one document that is wise to have an attorney review.

Bruce May is an attorney at Jennings, Strouss & Salmon, P.L.C., and Chair of the firm’s Real Estate Department. He has devoted his entire career to all aspects of the law and practice of real estate and commercial transactions throughout Arizona.