Key considerations for food and drink operators or retailers in negotiating a fair lease

So, you have found the ideal site for your new restaurant, café or shop, and you are keen to get in, fit-out, make the place your own and start trading. But what needs to be considered by you to be included within the new lease for the property?

Annual rent or turnover rent?

Clearly it is important to ensure that the premises will be commercially viable for you and we would always recommend appointing an experienced agent who knows the local market and the type of business to help advise on valuation issues and what is current in the market.

Will there just be an annual rent payable or potentially a turnover rent i.e. a percentage of profit you make?  Will the turnover payable be in addition to the main rent or only payable if the percentage of turnover agreed exceeds the main rent?  Will there be a cap on the total turnover paid?  What is included within the turnover calculation and, importantly, what is excluded?  For example, tips that customers pay direct to staff.  What information will the landlord require from you and when to calculate the turnover?

Will you receive an initial rent free period to compensate you for setting up the business and fitting out the space?

Will you need a security deposit?

Particularly if you are a new start-up business, the landlord may be concerned about your ability to pay the rent and other payments under the lease for the length of the term.  With a company they may well ask for personal guarantees of the directors/owners or alternatively a rent deposit.  In those circumstances, the landlord will request a sum of money, commonly either 6 months or 3 months of rent (plus VAT if applicable), which will be held by the landlord who can utilise those monies in the event of default by you as tenant.  There will be an obligation on you to top up those monies if used.  You need to consider what happens if the rent goes up during the term, will the landlord require those deposit monies to be topped up forever?

How long will the lease be in place?

Normally, due to the initial higher costs for the fit-out of a restaurant, those leases tend to be for a longer period than retail or even cafés, being generally at least 15 years with 20 terms still being common, as opposed to a 5 or 10 years.

Obviously, as a tenant, obtaining flexibility together with security should be considered.  Will the lease contain break options enabling either party to bring the lease to an end?  Will you negotiate a tenant only break to retain that maximum flexibility?  In law, break clauses are notoriously strictly interpreted and innocuous provisions can be difficult to comply with, so careful consideration needs to be given to the exact wording.  By default, business leases have rights to security of tenure, but will the landlord wish to exclude those rights under the Landlord & Tenant Act 1954?

What additional costs do you need to consider?

What else will you be liable to pay for under the lease?  Generally, your own utilities and business rates, but is there a service charge which in large multi-let buildings such as a shopping centre could be an enormous additional cost? What is included within that service charge by way of refuse collection, maintenance, what common parts do you and your customers have rights to use?

Use of premises

You should check that the unit has the correct planning consent for your proposed food and drink offering or retail space.  What does the lease say regarding your use of the premises?  You may not want it too prohibitive to enable you to offer what the customers want but this needs to be balanced against the landlord’s requirements for a well-managed estate with a balance of operators and tenants.  It is not unusual for leases to make reference to a tenant’s initial menu offering for at least the first few years of the term.  Will the landlord agree some kind of exclusivity clause so that other units on their estate do not have the same offering in direct competition to you?

Fit-out, fixtures and refurbishment

No doubt you will have a predetermined view of just how you want your café or restaurant to look, but even if there is a pre-existing fit-out, it is likely you will want to make changes.  If you are taking a shorter term of lease you will want to spend less on the fit-out.  What does the lease allow by way of alterations to the premises?

You can expect the lease to contain a covenant requiring you to return the premises to how they were when you took the lease and this may be open to negotiation and there may be certain works that you specifically need to carve out of those obligations.

Plant and equipment

What additional rights will the lease need to contain to enable you to operate successfully and without causing a nuisance or disturbance to neighbours?  Restaurants will generally need extraction equipment, potentially rights to put plant and equipment on the roof of the building or elsewhere, together with access to ducts connecting the unit to that plant and equipment.  Are there grease interceptors already installed in the kitchen area or will you need to install the same?  Will the unit be serviced and when can you receive your deliveries?

Do you need a premises licence?

Is it your intention to sell alcohol?  Does the landlord have requirements regarding any necessary premises licence?  Do you need to ensure that the premises licence is in place before you take the lease enabling you to have the amount of covers required to make a profit and operate successfully?

Who will be responsible for repairs?

Normally a tenant will be responsible for keeping the premises in good repair and condition.  The definition of exactly what is and is not included in the premises is therefore imperative.  What if the space already has some element of disrepair, should you as tenant be responsible for handing the unit back with those issues resolved or can you agree a schedule of condition to be agreed limiting your obligations by reference to that?

Are there provisions for dealings/alienation?

What happens if the premises do not prove suitable for the use of your business or maybe trade is so good you need to upscale to a larger unit?  The lease should contain provisions for alienation i.e. can you assign the lease (a new tenant take on that lease), or underlet the whole or part and, in which case, what conditions need to be met?  If your premises are in a large shopping centre or estate it may well be the landlord requires the option to first refusal on the terms that you have agreed and for you to surrender the unit back to the landlord.  This could be advantageous to you as usually such a transaction will proceed smoothly and quickly.

Do you need an agreement for lease?

With so much to think about and needing to know the right permissions, consents, premises licence to trade successfully etc, it may well be that an agreement for lease will be necessary setting out the conditions that need to be met before you are obliged to enter into the lease.  Once exchanged, this does give a contractual obligation on both landlord and tenant to enter into the lease assuming the conditions can be met, giving both parties certainty and comfort before entering into obligations or work that can be expensive and meaning that money should not be wasted.

We have significant experience and expertise in helping to negotiate fair leases for clients in the food and drink sector. Get in touch info@ts-p.co.uk if you have any questions.