Three Often-Forgotten Terms in Restaurant Leases

Minneapolis is currently undergoing a restaurant boom downtown, with over 15 new high-profile restaurants opening their doors in 2015. Residents of Minneapolis are salivating at the chance to try out the newest culinary creations as well as regional long-time favorites (did you know Chicago’s famed Giordano’s deep dish pizza is also coming as well?). Most of these restaurants will sign complex leases, with hundreds of terms and clauses. As the lease page count increases, the chance that every clause will be given the same amount of attention becomes more and more improbable. Here are three clauses that are often forgotten in lease negotiations:

1. Exclusivity

Have you ever heard of the Red Sage restaurant in Washington, D.C.? It’s no longer in business, but it used to sit just two blocks away from the White House and was in a prime location. A fine dining establishment, it hosted famous diplomats and politicians. It was also the only restaurant on its block, and so it attracted most of the elite customers near 1600 Pennsylvania Avenue. Buried in its lease agreement, Red Sage contracted with the landlord to be the exclusive restaurant on the block. This meant that the landlord could not lease out any space on the block to another food establishment. When the landlord leased space to a cake shop, Red Sage became involved in a fairly famous case that went to the D.C. Circuit. Ultimately, Red Sage won the case, and under the terms of the agreement it could abate rent by 50% until the breach was cured.

Exclusivity clauses are extremely important in restaurant leases, but most new restaurateurs forget to consider exclusivity when renting in a large building. For new restaurants, however, exclusivity can be essential to gaining a foothold and attracting customers from the get-go. No more so is this the case than when there are a large number of competitors in the area offering similar cuisine. For example, a new sandwich shop probably should seek an exclusivity clause for sandwich-like restaurants, eliminating the possibility that a Subway or Jimmy John’s could move in next door and destroy the new restaurant’s potential.

2. Assignment

Did you know that about 60% of restaurants fail within the first three years of operation, but that many restaurant leases are for more than three years? Chances are that a new restaurant will be stuck with rent payments even after it closes down. And since many leases for new restaurants contain personal guarantees, this is a significant financial risk. One way to alleviate some of this risk is to ensure the restaurant tenant has the right to assign the rest of the term of the lease to another sub-tenant. Usually, assignment clauses contain the condition that the landlord must approve the assignment, but this can be softened by language requiring that approval “may not be unreasonably withheld.” The importance of the right to assign the lease cannot be understated, specially for new restaurants with unproven business models.

3. Parking

If parking is on site, then there should be a lease term setting forth what portion of the parking spaces will be dedicated, marked, reserved, or otherwise set aside for patrons of the restaurant. In large malls and other centers, parking can be prime real estate. And if other tenants in the same building attract large swathes of customers, this can be detrimental to a new restaurant’s ability to survive. After all, if customers cannot even visit the restaurant, the restaurant cannot serve them. However, new restaurant tenants should be cognizant that sometimes traffic to other tenants in the same building can lead to increased traffic for the restaurant as well. Parking needs are context-specific, and they should not be overlooked or forgotten when negotiating a lease.

If you are looking to lease space for a new restaurant, you should work with an attorney to structure the lease in accordance your specific needs. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Advertisement