Robin Gagnon

Leasing a restaurant is the most common form of restaurant ownership. It provides several advantages for the buyer but is not without risks as well. Most restaurants for sale on primary sources like We Sell Restaurants include leasing, rather than buying the property. Here are the advantages for the most common approach in the industry to occupancy.

Lower Initial Investment:

Leasing a restaurant typically requires a smaller upfront investment compared to purchasing real estate for the business. This is because you are simply providing a deposit rather than a substantial down payment. You are also not required to secure a large mortgage, allowing you to retain capital for your launch that can go to other items like renovations, equipment purchases, or marketing.

Flexibility:

Leasing a restaurant typically has a term of five years with additional “options” to renew of roughly five years. This provides greater flexibility, especially for new or expanding businesses than buying a location since the mortgage is forever (or until it is paid off or sold). Leasing a restaurant with shorter terms than mortgages (typically 20 years), allow you to adapt to changing market conditions or relocate if the area shifts. This flexibility is particularly valuable in the restaurant industry, where location and demographics play a significant role in success.

Reduced Risk:

Leasing a restaurant shifts some of the risks associated with property ownership, such as market fluctuations, property maintenance, and depreciation, to the landlord. This can be particularly advantageous in uncertain economic times or when entering a new market where demand is uncertain. For example, those renting downtown restaurants in office building prior to the pandemic enjoyed several advantages. These office building locations traditionally have low rent, a captive office building audience and limited hours. Post pandemic, those locations are the focus of articles like this one, titled, “Downtowns are dead, dying, or on life support…” In a lease situation, the shifting tide simply means you exit the lease and move your operations to a better spot.

Easier Exit Strategy:

Leasing a restaurant may also offer a simpler exit strategy compared to selling real estate. Most leases include an assignment and assumption clause meaning that when you sell your business, the new tenant, if qualified, can assume your lease term and additional options to renew. If you decide to pursue other opportunities, assigning a lease as part of the sale is often less complex and costly than selling the real estate. You can work with a Certified Restaurant Broker to exit the business with minimal financial repercussions and move on to a venture more smoothly.

Access to Prime Locations:

Leasing a restaurant provides access to prime locations that may be financially out of reach for purchasing. This is especially true when you are looking to establish a presence in high-traffic areas. The cost of entry is just too high for purchasing the real estate. Leasing a restaurant allows you to capitalize on desirable locations without the substantial financial investment of ownership.

Maintenance and Repairs:

Lease agreements for restaurants typically place the responsibility for property maintenance and repairs on the landlord rather than the tenant. This includes big ticket items like HVAC which can be very costly for restaurants which require larger tonnage and many times, multiple units with one servicing the back of the house and a hot kitchen with the other servicing the front of house. Having someone else responsible for repairs can save you time, money, and hassle, as you won't be responsible for unexpected maintenance costs or major repairs, allowing you to focus on running your restaurant effectively.

With all these advantages, it seems to make sense for an operator to lease a restaurant. However, there are some pitfalls you must consider before executing any rental agreement. You must first, be well versed in the language of personal guarantees. A personally guaranty is your personal commitment to the landlord, usually required for leasing a restaurant, that you remain liable for the lease even after you exit the business. The second consideration is the assignment and subletting language. Both can have long-term implications on your credit and flexibility to exit.

There are also some downsides to leasing a restaurant. Luckily, these are the things you can minimize or overcome before signing that rental agreement.

Begin with an Exit Strategy:

Unexpected challenges can arise in the restaurant business, from personal issues to unforeseen market changes. Work with a Certified Restaurant Broker at the time you sign your lease, not after the fact, to ensure your lease includes protections as well as options for a clear exit strategy. You should be able to assign the agreement without facing excessive financial obligations in the form of a personal guaranty for the entire lease term. Prioritize clauses that outline reasonable termination terms to protect your credit in case of unforeseen circumstances.

When leasing a restaurant, confirm that the landlord permits business transfers within a reasonable timeframe. Avoid vague language like "shall not be unreasonably withheld" and instead insist on specific, measurable transfer timelines like, “Any transfer is subject to the landlord’s approval and such approval shall be provided with 30 days of receipt of a fully executed application package.” This holds the landlord’s feet to the fire if you have a willing, ready, and able buyer but can’t get an assignment.

Understand Your Personal Guaranty

Personal Guarantees are an entire article unto themselves but at a minimum, safeguard your credit by ensuring that once the lease is transferred, you are relieved of any further financial obligations under the personal guarantee. If the landlord will not agree to this, limit your liability to a specific number or maximum amount. Include language that the lease is automatically assignable to an approved franchisee of the brand if you are a franchise location. Request that a new tenant with a net worth and cash on hand equal to a set amount is also automatically approved. The bottom line is to negotiate the personal guaranty at the outset of the lease, not when you are trying to exit.

Determine Your Transfer Costs

Before signing a lease, make sure you know the cost to transfer and set this up front. The landlord should disclose the fee and it should not be open ended. Request that is state the transfer fee shall not exceed $1500 and do not settle for loose language that makes it whatever the landlord and his attorney want to charge you. We Sell Restaurants has seen situations where landlords have attempted to charge as much as $60,000 just to keep the lease from transferring. By clarifying these expenses upfront, you can avoid financial surprises that will derail the deal.

Avoid One-Sided Clauses

Do not allow the landlord to include a clause that states that if you ask for a transfer, they may void your lease. It seems counterintuitive for the landlord to want the space back, but you may have long term rates at lower amounts than he can get from someone else and they will take advantage of this language to terminate you and lease the space.

Negotiate Protections

Negotiate for Tenant Protections including terms that protect your business in case of anchor tenant abandonment or high vacancy rates. Include provisions in the lease that trigger rent reductions if the center's occupancy falls below a specified threshold. This proactive approach can shield your restaurant and credit from the adverse effects of surrounding economic shifts. If the anchor tenant is gone, what happens to traffic at the shopping center before someone else takes the space? You must be prepared for anything to happen in the future.

Review Administrative Costs

Go beyond the base rent and review administrative clauses. Study all fees including common area maintenance costs, tax increases, and other charges associated with the lease. Work to cap or negotiate these additional expenses to avoid financial strain on the business in the future. You need to understand all the financial obligations outlined in the rental agreement before leasing a restaurant.

Don’t Tackle This Solo

Do not go it alone on lease negotiations. You need more than one partner. You need a good attorney to explain the legal language of the document. You also need a knowledgeable restaurant broker to help you understand business terms. All too often, we work to transfer leases where the attorney signed off on clause that do not protect your financial interests.

Overall, leasing a restaurant property offers financial flexibility, reduced risk, and access to prime locations, making it an attractive option for many restaurateurs, particularly those in the early stages of business development or seeking to expand into new markets. On the other hand, you want to minimize your future financial exposure and risks to the business by making sure the lease you sign benefits you in the short and long term. Are you interested in leasing a restaurant? Check out the opportunities online at WeSellRestaurants.com