It’s no secret that recently, prices for commercial rents plummeted in New York. With so many businesses that went belly up, the excess inventory is quite large, especially regarding restaurant spaces. On the other hand, the economic rebound is now in full progress. To sum up, this will be the best time in several years to launch a new restaurant venture in New York.
Restaurant leases in New York are anything but standard. Several clauses are extremely important and need to be carefully reviewed and negotiated. The devil is in the details and often is hidden in the so-called “Rider.”Below are some considerations for the most important clauses that can sometimes create issues between a landlord and a restaurateur tenant:TermA typical term is ten years with a 3% annual escalation. In case of a significant investment in the business, the tenant should have an option to extend and renew the lease with similar business terms.
Free RentTypically, a restaurant undergoes renovations prior to the opening. During this time, since the business is not producing any revenue, the tenant should seek some rent concession from the landlord.
Real Estate TaxesRE taxes and operating expenses (landlord’s expenses in connection with managing and operating the building) can often be a source of hidden or unexpected fees. It is important that prior to signing the lease, the tenant understands how the real estate taxes and operating expenses are calculated, the tenant’s share in those expenses, the tenant’s rights in contesting real estate tax increases, and other similar issues.
Permitted use‘Permitted Use’ determines what type of business the tenant might run. The tenant should try to negotiate a broad ‘permitted use’ clause, thus having the right to change the concept. This will give flexibility to the tenant if the business does not go as well as expected.ExclusivityThis clause is relevant in the context of tenancy in food halls because it prohibits the landlord from bringing competitors of the tenant.Assignment ClauseBecause running a restaurant is risky, the lease needs to have limited or no restrictions for transferring or subletting the lease. This will give the tenant a better chance of selling its business, if necessary.
Good Guy Guarantee Clause
For extra assurance, landlords require a personal guarantee from an individual or individuals who own the corporate tenant to ensure that they will respect its contractual obligations. The tenant should negotiate and limit the duration of this guarantee to avoid unlimited or overly broad personal liability of the individual owners of the tenant.Demolition ClauseIf a demolition clause is included in the lease, the landlord will have an opportunity to forcibly evict the tenant to demolish and/or redevelop the premises. In such a case, the tenant should try to secure a long advance notice requirement and to have the costs to relocate the business covered by the landlord.Liquor LicenseThe application process with the New York State Liquor Authority is lengthy and difficult. The tenant should try to have the lease contingent on the approval or at least to have a rent reduction until such approval is obtained.