As a continuation to our last article I will discuss further some additional important points regarding lease negotiations which I believe will be helpful to you.
1. ASSIGNMENT AND SUBLEASE RIGHTS – Having the proper language in this section of the lease is extremely important in helping you sell your business. This language should include the words “the Landlord will not unreasonably withhold consent” in consenting to an assignment. Additionally you want to have the right to sublease and keep any of the excess monies from a prospective sublease ( this is called a spread- the difference between the rent you are paying the Landlord and the rent you are receiving from the Sub lessee or at the minimum being able to share this spread 50/50 with the Landlord).
2. OPTIONS – These are helpful to you in giving you the added years necessary to operate your business as well as making it easier to sell your business. Try to get the first years rent of each term of the option nailed down up front so you aren’t the victim of runaway rent increases which make it economically unfeasible to operate. Try to stay away from the market rent formula and try to have the rent tied to a rollover of the Cost of Living (CPI) in the proceeding year. For example if you have a five year base term with a five year option and the rent in the fifth year of the base term is $4000, set up the rent in the first year of the option period to it is tied to CPI (assuming CPI is 3% for the proceeding year the rent for the first year of the option would be $4,120 or $4000 x 103% = $4,120). Make sure that the options are assignable too.
3. RIGHT OF FIRST REFUSAL – This is a very helpful tool for you and gives you the right to purchase the building should the Landlord put the building on the market during your tenancy. The way this works is that if the Landlord gets an acceptable offer from a third party buyer he has to come to you to give you the opportunity to match or exceed that offer usually between 15 to 30 days from the date this offer is received.
4. LANDLORD CONTRIBUTIONS – Having the landlord contribute capital improvement money to you based on so many dollars a square foot (i.e. $25 per square foot) is helpful in reducing your initial investment. If the Landlord is willing to do this have it structured so are not obligated to pay back this contribution through increased rent.
5. CAPPING NNN EXPENSE PASS THROUGH – Make sure you have language in your lease to protect you should the building be sold or transferred and the building is reassessed and you are responsible for paying a pro-rata share of the real estate taxes. This language (capping your real estate tax liability) will result in your real estate tax liability being limited only to the assessed value of the building to your lease inception date and will limit your future tax liability. Have caps also built into your lease for insurance and Common Area Maintenance (CAM) expenses to minimize future expense increases in these categories as well.
If you are negotiating a new lease or renewing your lease please feel free to get in touch with us at Restaurant Realty at 415-945-9701 to help advise you through this important process.