Eleven Lease Provisions Critical For Your Startup Restaurant's Success

Leases are often the most significant contract signed by a restaurant company. Landlords typially hold most of the proverbial cards in their s with prospective tenants; thus, the prudent restaurant operator will negotiate as hard as possible from the first draft of the Letter of Intent through execution of a final lease.

This article will review some critical lease provisions commonly drafted by landlords in commercial leases, and provide insight into how a restaurant tenant in the startup and growth phase of its life cycle might respond. If we do not already have your attention, consider this hard reality. Most restaurant leases disproportionately favor the landlord. This is particularly true in the case of independent restaurant leases.

If independent operators are to level the playing field and avoid business failure due to onerous lease provisions, then they need to educate themselves on lease provisions and band together with independent restaurant-friendly advocates to shift the balance more favorably toward their interests.

In this article, we will review 11 "critical provisions" of which you should be aware when entering into a restaurant lease or renewing one. There is no substitute for partnering with an experienced, restaurant-savvy attorney; however, you need to review your lease agreement with critical eyes, as well.

#1: The Personal Guaranty

In most situations, the tenant will be a new single purpose entity, and very often a limited liability company (LLC). As the contract is between the landlord and the LLC, landlords will often demand a "personal guaranty" to provide additional security that the lease obligations will be met, in the form of putting one or more owners of the tenant entity personally on the hook for all damages incurred in the event of a tenant default, which can include rent, expenses, broker commissions, remodeling costs, rent concessions to a new tenant, etc.

Your landlord is not your partner, regardless of what your real estate broker tells you. Think 'David vs. Goliath'. You need to balance your restaurant lease in your interest before signing on the dotted line.

A full guaranty should be avoided at all costs, with any guaranty instead limited in both time and amount. Your restaurant should be able to "stand on its own" after a few years of successful operation, and to require an owner/principal to personally back a decade of risk simply ignores the economic realities of risk.

Occasionally a restaurateur will say, "Why do I care? I don't have any assets for the landlord to get, anyway." But isn't the point of starting a restaurant (or expanding into a new location) for the owner to build personal wealth? She may not have assets on lease signing day, but after eight years of successful operation that guarantor will probably have assets for the landlord to get.