Commercial Restaurant Leases – Nothing is “Standard”
For about the 50th time in my business career a real estate leasing agent handed me a lease recently and said it was a “standard” commercial lease the landlord used for everyone and there was nothing unusual about it. Real estate agents, leasing agents and used car salesmen make good fodder for attorneys who end up representing unsuspecting people who sign “standard” contracts!
There is no such thing as a standard contract. A contract includes leases, real estate agreements and any other document that spells out a “meeting of the minds” (agreement) between two entities. There is nothing more non-standard than leasing a space for a restaurant.
It was easier to chuckle and walk away with the agreement than try to educate the leasing agent. I assume they use this “standard contract” routine to encourage tenants to sign with confidence without reading and understanding each and every clause. They fear you will end up in your attorney’s office discovering just how one-sided most pre-printed contracts favor the person who drafted the contract; usually the seller or lessor. Always spend the money to hire a good real estate or contract attorney for any agreement for more than a couple of dollars!
Using the contract I was recently handed, here are just a few gems from this “standard” commercial lease agreement:
- Within the first few paragraphs of 95% of the leases out there, this paragraph appears, ” … should the term of the lease begin, commence or end on a day other than the first day of the month, then the rental for such partial month shall be prorated on a daily basis based upon a thirty (30) day calendar month”. Sounds fair enough. So, if your are leasing a warehouse, restaurant or any other space for $10,000 per month and the lease begins on the 7th of the month, your per day rate on the above calculation would be $333.33 per day. You would owe 25 days (for a month that had 31 days in it) for a grand total of $8,333.25. However, you are obligated on an annual basis for $120,000. Now, other than leap year, every year I know has 365 days in it. If you prorate on an annual basis, your per diem would be $328.76, for a total of $8219.00. That is a difference of $114.25. The landlord got you for over $100! Does that sound like a “fair” lease to you?
- One of the most dangerous clauses in a lease today is the responsibility to comply with the Americans with Disabilities Act of 1990. This act specified the requirements for accessibility to public and private businesses. All leases make this the responsibility of the tenant. Prior to signing any lease, you must get the landlord to either provide you with a certification that the premises comply with ADA requirements or get an indemnification from the landlord that states if someone should sue you because your premises do not comply on the day of your occupancy, you are not responsible. For instance, if your front door is ½ inch too narrow, you could be sued under the ADA ACT and forced to replace the front door and defend yourself in federal court. Fines and penalties could result, plus your legal fees. Why would you want to assume this risk for a door that was installed perhaps ten years before you leased the premises?
- In most commercial leases there is a provision that states the tenant shall not “assign this lease, sublet all or part of the leased premises or otherwise transfer its interest in the lease without prior written consent of the landlord, which consent shall not be unreasonably withheld…”. Sounds reasonable, right? Read on! Generally, in a later part of this paragraph or another paragraph, there is this statement, “In the event of any assignment or subletting of this lease, any options to extend the term or to expand the leased premises contained herein shall immediately terminate…”. What does that mean? If you agreed to two five year options on the lease after the first five year term, those options are gone for the new tenant. So if you sold your business after 4 successful years, the new tenant only has one year left. How much do you think your successful business would be worth to a buyer with this clause in your lease?
- Another little gem included in almost every lease is a clause that states, “Tenant hereby grants a security interest under the Uniform Commercial Code in all of Tenant’s goods and property in, on or about the leased premises.” If you agree to this, you will sign what is known as UCC forms that can be filed with the Secretary of State’s office in the state you are located. This puts everyone on notice that you cannot sell any property that is covered by the document. That may be fine for a real estate office or a barbershop, but a restaurant may have $200,000 worth of equipment that will need occasional replacement. You cannot buy or sell your property with the lien filed. The best way around this clause is to delete it, but the alternative is to allow the landlord’s attorney to hold the documents and file them only in the case of a default on the lease.
- One more common paragraph in a lease is the “right to relocate”. The particular lease I am quoting states, ” the landlord shall provide tenant with written notice, 15 days prior, identifying where the landlord plans to move the tenant. If tenant does not agree to the new premises proposed by the landlord within the 15 day period, landlord or tenant may terminate the lease”. It is unbelievable that any tenant would agree to this; but they do. You build a great business in a good location and the landlord could move you to a poor location and you have no remedy other than canceling your lease!
I could go on, but as you can see the lease is not written in favor of the tenant and, in fact, could put you out of business at a landlord’s whim. There are many more troublesome clauses in leases. Shopping center and strip mall leases are notorious for these (and many more) “standard” clauses.
You must read each word. Your attorney must have the experience to pick out problems immediately. The restaurant business is difficult enough without fighting over a one-sided lease agreement with your landlord.
Larry Edger, Author
The Restaurant Ebook
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