Questions to Ask Landlords Before Leasing Restaurant Space

For most restaurant owners their success or failure is determined the moment they sign their lease.

Why?

Because most get in a rush to find retail space for lease and overlook important clauses and/or make mistakes during the negotiations. Part of that is just knowing what to ask landlords. Having information about the space, previous tenants, neighboring tenants, etc is key to ensure that you negotiate effectively and mitigate your risks.

To help get you started below is a list of questions to ask landlords before signing a restaurant lease.

When do I start paying rent?

You need to negotiate enough time to build out the space and/or enough time to ramp up sales before you start paying rent.

Depending on the existing condition of the space restaurant build outs can take up to 6 months, and you ideally don’t want to have to pay rent during that time.

Can I sign the lease as an entity rather than personally?

Creating an entity for your restaurant creates a layer of protection for the business owners. In the event you are not able to pay your rent or meet other lease obligations the landlord can only go after the entity assets (other than a guarantee if exists). 

This is especially important when you operate more than one location. Ideally you want each location under a separate entity. That way if one location defaults it will not effect the other locations.

If you sign the lease personally the landlord has the ability to go after your personal assets to recoup any lost rent.

Do I have to sign a personal guarantee?

If you are a brand new business then you most likely will have to sign some sort of personal guarantee in which you will be liable for debts/damages in the event the entity is not able to take care of.

However you can negotiate to have limits or caps on personal guarantees. For example you can negotiate to have the personal guarantee limited to the landlords unamortized cost of doing the deal (tenant improvements, lease commissions, etc.), limited to a certain dollar amount, or limited to X number of months of rent (base and/or nnn). You can also negotiate to have the personal guarantee amount burn off after x months, years, etc.

At the end of the day you still may have to sign a personal guarantee however try to negotiate to limit your personal exposure as much as possible.

Why did the last tenant leave?

If the last tenant was a restaurant then it’s important to find out why they left. Did they go about of business, relocate, etc? Where they bought out? Why did they go out of business? Make sure you try to get the whole story.

Are their any liens on the space?

If the space was formerly occupied by another restaurant and they went out of business there could potentially be existing liens. What means is that tenant owes creditor(s) money and until those liens are paid no one can operate another restaurant.

Would be a good idea to get this in writing by the landlord.

Can I get an exclusive clause?

Ask to be the only restaurant in the shopping center that is allowed to serve the type of food that you do. You are already going to have competing businesses around your shopping center. You don’t also want competing restaurants in the same retail center that you lease space in. 

Make sure the landlord is not able to lease space to competing restaurants and no other tenant is allowed to sublease space to competing uses.

If they do make sure their is some sort of financial penalty.

Am I able to get a liquor license?

Find out if the location is capable of getting a liquor license, and if so find out how much it will cost. The last thing you want to do is sign a lease only to find out that there is a church nearby or that the city is not issuing anymore liquor licenses, or that the cost is grossly too high.

There maybe certain areas in the city that do not allow licenses or there could be a cap on the number of licenses that are issued. Do your homework.

Can I change the type of restaurant later on?

What if your original concept does not work out or you decide to retire and sublease the space? If so you want the ability to change the concept or type of food that you serve. Landlords like to control their tenant mix and don’t like deviating from the use they originally approved. However, do your best to insert some sort of clause that allows you to change the food concept with landlord approval.

Can I assign my lease to another restaurant user?

What if you want to retire and sell your restaurant? During lease negotiations it’s important to limit the limitations on the sublease and assignment clause. 

Who pays for repairs of the HVAC units?

In most restaurant or retail leases the tenants are responsible for maintaining and repairing the HVAC units. That is why during the initial lease negotiations it’s important to find out how old they are and require that the landlord have them inspected and repaired (if needed) by a licensed hvac technician. Also if the existing units are old you want to get the landlord to provide some sort of warranty for repairs and replacement.

Obviously this is not an exhaustive of list of questions to ask and discuss with landlords with renting restaurant space, however it should get you started.

If you have any questions feel free to give us a call at 512-694-7803