Restaurant Leases: What to Look for to Save Money

Congratulations! You’re a growing restaurant multi-unit operator! You’re signing new leases on a regular basis, your company is expanding, and so is your top-line revenue! Life is great.

It’s all about “Location, location, location”, and thankfully you’ve chosen some excellent ones for your portfolio. As these locations pile on, you are taking on more and more leases, each with their own set of renewal dates, clauses, rent escalations, contact information, terms and conditions. At some point, managing all of this data in a spreadsheet or with calendar reminders becomes overwhelming. So how do you stay on top of all those important details?

If you work with a lease management platform like Leasecake, you’re covered. (Another congrats!) Our team of real estate experts can help you understand all that legal language so that you stay ahead of the curve and aren’t paying more than you should.

If you don’t have a solution like Leasecake, you can still dive in and understand. We’ve compiled this article with some of the most important aspects of your leases to stay aware of so that you don’t get taken advantage of.

Why Understanding Your Lease Details Matter

Understanding the details of leases is crucial for a restaurant multi-unit operator for several reasons:

1. Cost Management: Leases typically represent a significant portion of a restaurant’s expenses. By thoroughly understanding lease terms, you can effectively manage costs and avoid overpaying in rent. It allows you to negotiate favorable terms, such as lower base rents, percentage rent agreements, or rent abatements, which can directly impact your profitability.
   
2. Financial Planning: Detailed knowledge of lease terms enables multi-unit operators to accurately forecast and plan your finances. They can assess the impact of lease payments on cash flow, determine the feasibility of expansion or new locations, and make informed decisions regarding lease renewals or terminations.
   
3. Lease Renewals and Negotiations: As leases near expiration, understanding the lease terms allows operators to proactively negotiate favorable renewal terms. They can leverage market conditions, their track record, and any necessary modifications to secure more favorable rents, extended lease terms, or other concessions.
   
4. Legal Compliance: Leases include legal obligations and responsibilities for both the tenant and the landlord. By understanding lease details, multi-unit operators can ensure compliance with terms such as maintenance responsibilities, insurance requirements, operating hours, and permitted uses. This helps prevent potential disputes or breaches that could result in penalties or legal action.
   
5. Expansion and Portfolio Management: Multi-unit operators often have plans for expanding their restaurant portfolio. Understanding lease terms helps them evaluate potential locations, assess the financial viability of new leases, and compare different leasing options to choose the most advantageous ones. It also enables them to strategically manage their portfolio by identifying leases that may need renegotiation or termination.
   
6. Risk Management: Detailed knowledge of lease terms allows operators to identify and mitigate potential risks associated with their leases. They can assess factors like rent escalations, early termination clauses, default provisions, or obligations related to common area maintenance. This knowledge helps them anticipate risks, plan contingencies, and protect their business interests.
   
7. Operational Efficiency: Lease terms may include provisions related to maintenance, repairs, utilities, and access to common areas. Understanding these details helps operators manage their operations efficiently and plan for any potential disruptions or responsibilities associated with the leased premises.

Overall, having a comprehensive understanding of lease details empowers restaurant multi-unit operators to make informed decisions, optimize their financial performance, minimize risks, and strategically manage their lease portfolio. It enhances their ability to negotiate favorable terms, plan for the future, and ensure compliance with legal obligations.

What to Consider When Reviewing Your Leases

When a restaurant franchise is considering leasing a property, there are several important factors to consider to ensure they are not overpaying in rent. Here are some key points to look for in leases:

1. Market Rent Analysis: Conduct a thorough analysis of the local market to understand the prevailing rental rates for similar properties in the area. This will help you gauge if the proposed rent is reasonable and competitive.
   
2. Percentage Rent: Negotiate a percentage rent clause, especially if the landlord is offering a higher base rent. Percentage rent allows you to pay a percentage of your monthly sales in addition to the base rent, which can help ensure that the rent is proportional to your business’s performance.
   
3. Lease Term: Consider the length of the lease term. Longer lease terms often provide more stability and potentially allow for negotiation of lower rents. However, be cautious about committing to a lengthy lease if you’re unsure about the location’s long-term viability.
   
4. Rent Escalations: Examine the lease for any rent escalation clauses. These clauses specify how and when the rent will increase over time. Negotiate reasonable rent escalation terms to avoid sudden and significant rent increases that may strain your business’s profitability.
   
5. Rent Abatement and Tenant Improvement Allowance: Seek rent abatement or a tenant improvement allowance to offset the initial costs of setting up the restaurant. This can help reduce your upfront expenses and improve your cash flow during the initial stages.
   
6. Common Area Maintenance (CAM) Charges: Understand the CAM charges and what they cover. Carefully review the lease to ensure that you are not responsible for excessive or unfair common area maintenance expenses.
   
7. Exclusive Use Clause: Include an exclusive use clause in the lease to prevent the landlord from leasing nearby spaces to direct competitors. This clause helps protect your market share and reduces the risk of revenue loss due to competition.
   
8. Sublease and Assignment Rights: Negotiate favorable sublease and assignment rights to provide flexibility in case you need to exit the lease prematurely or want to transfer the lease to another party. Ensure that the landlord’s consent is not unreasonably withheld.
   
9. Lease Negotiation: Engage the services of an experienced attorney or real estate professional to help negotiate the lease terms on your behalf. Their expertise can ensure you are protected and assist in securing favorable terms.
   
10. Exit Strategies: Consider lease termination or buyout options in case the location doesn’t perform as expected or if your business circumstances change. Having clear exit strategies in the lease can mitigate potential losses in the future.

Remember, it’s crucial to carefully review and understand all lease terms and consult with professionals to ensure you make informed decisions and secure a lease that aligns with your business goals and financial capabilities.

Looking for More Expert Help?

Lease management software like Leasecake can help take all those important dates, dollars and documents, translate them into an easy to digest format, and send you automatic reminders so that you never have to worry about forgetting those details again.

Want to learn more? Let’s schedule a call or demo to show you how we can make lease management a piece of cake.