What aspects of your lease are most important? How can you save money on those details? Read more to find out!
Congratulations! Your business is growing! You’re signing new leases on a regular basis, your company is expanding, and so is your top-line revenue! Life is great.
It’s all about “Location, location, location”, and thankfully you’ve chosen some excellent ones for your portfolio. As these locations pile on, you are taking on more and more leases, each with their own set of renewal dates, clauses, rent escalations, contact information, terms and conditions.
At some point, managing all of this data in a spreadsheet or with calendar reminders becomes overwhelming. If you’re already using a lease management platform, you will be better prepared. But when it comes to saving money, how do you stay on top of all those important details?
This article will help you understand which aspects of your lease are most important, and why it is to your advantage to thoroughly understand the details of each of your leases. Taking the time to read and understand the fine print now can translate into many dollars saved in the long run.
Why understanding your lease details matters
Understanding the details of leases is crucial for a restaurant multi-unit operator for several reasons. It’s not just about knowing when your renewal date is coming up or how much you pay every month.
Leases typically represent a significant portion of a restaurant’s expenses. By thoroughly understanding lease terms, you can effectively manage costs and avoid overpaying in rent. It allows you to negotiate favorable terms, such as lower base rents, percentage rent agreements or rent abatements, which can directly impact your profitability.
Detailed knowledge of lease terms enables you to accurately forecast and plan your finances. They can assess the impact of lease payments on cash flow, determine the feasibility of expansion or new locations, and make informed decisions regarding lease renewals or terminations.
Lease renewals and negotiations
As leases near expiration, understanding the lease terms allows you to proactively negotiate favorable renewal terms. Lease negotiations and renewals can sometimes start up to 24 months before the expiration date. So, you’ll want to start early in order to secure more favorable rents, extended lease terms or other concessions.
Leases include legal obligations and responsibilities for both the tenant and the landlord. By understanding lease details, you ensure compliance with terms such as maintenance responsibilities, insurance requirements, operating hours and permitted uses, which can help prevent potential disputes or breaches that could result in penalties or legal action.
Expansion and portfolio management
If you’re considering an acquisition, understanding lease terms will help you evaluate potential locations, assess the financial viability of new leases, and compare different leasing options to choose the most advantageous ones. It also enables them to strategically manage their portfolio by identifying leases that may need renegotiation or termination.
Detailed knowledge of lease terms allows you to identify and mitigate potential risks associated with their leases. You can assess factors like rent escalations, early termination clauses, default provisions, or obligations related to common area maintenance. This knowledge helps to anticipate risks, plan contingencies and protect their business interests.
Lease terms may include provisions related to maintenance, repairs, utilities, and access to common areas. Understanding these details helps manage your operations efficiently and plan for any potential disruptions or responsibilities associated with the leased premises.
Overall, having a comprehensive understanding of lease details will empower you to make informed decisions, optimize their financial performance, minimize risks, and strategically manage their lease portfolio. It enhances their ability to negotiate favorable terms, plan for the future and ensure compliance with legal obligations.
Reviewing your leases
When a restaurant franchise is considering leasing a property, there are several important factors to consider to ensure they are not overpaying in rent. Here are some key points to look for in leases:
Market rent analysis
Conduct a thorough analysis of the local market to understand the prevailing rental rates for similar properties in the area. This will help you gauge if the proposed rent is reasonable and competitive.
Consider the length of the lease term. Longer lease terms often provide more stability and potentially allow for negotiation of lower rents. However, be cautious about committing to a lengthy lease if you’re unsure about the location’s long-term viability.
Rent adjustment clause
Check to see if your rent is tied to your sales or third-party indexes. Inclusion of these types of clauses isn’t necessarily a deal breaker, but you’ll want to be aware of them. Avoid consumer price index (CPI) increases as they are unpredictable and can result in significant rent increases over time.
If well written, a renewal option allows you a bit more leverage to control the leased premises at expiration of original term and to (again, if well written) renew at a set price vs. fair market value, giving you a clear picture for budgeting purposes and protecting your investments.
Can you sublease the space to another tenant if your business closes or relocates? What if you sell your business — will you be allowed to assign your lease? Consider fully negotiating this clause for additional security.
Rent abatement and tenant improvement allowance
Seek rent abatement or a tenant improvement allowance to offset the initial costs of setting up the restaurant. This can help reduce your upfront expenses and improve your cash flow during the initial stages.
Maintenance and repairs
Pay special attention to clauses related to maintenance and repairs to the leased premises; HVAC maintenance, repair and replacement; and common area maintenance (“CAM”) expenses. Look for and request vague language be clarified in order to avoid overpaying in the future. Carefully review the lease to ensure that you are not responsible for excessive or unfair common area maintenance expenses.
Exclusive use clause
Include an exclusive use clause in the lease to prevent the landlord from leasing nearby spaces to direct competitors. This clause helps protect your market share and reduces the risk of revenue loss due to competition.
Sublease and assignment rights
Negotiate favorable sublease and assignment rights to provide flexibility in case you need to exit the lease prematurely or want to transfer the lease to another party. Ensure that the landlord’s consent is not unreasonably withheld.
Consider lease termination or buyout options in case the location doesn’t perform as expected or if your business circumstances change. Having clear exit strategies in the lease can mitigate potential losses in the future. An early termination clause outlines conditions that will allow you to terminate early prior to the agreed upon original expiration. Make sure you understand any possible early termination penalties.
Remember, it’s crucial to carefully review and understand all lease terms and consult with professionals to ensure you make informed decisions and secure a lease that aligns with your business goals and financial capabilities.
If you’re looking to save money, here are some ways you may want to see if you can reduce the overall cost of leasing a particular property.
- Term length: Discuss the potential for lower rent in exchange for a longer lease term. Present market research to support your proposed rent. Avoid CPI increases as they are unpredictable and can result in significant rent increases over time.
- Concessions: Request landlord-provided tenant improvements or rent abatements.
- CAM charges: Negotiate for more favorable terms on any common area maintenance (“CAM”) charges.
- Exclusive use clauses: Consider requesting exclusivity in offering specific products or services. Ensure the lease protects against direct competition within the property.
- Assignment and subletting: Discuss terms for assigning the lease to another party or subletting the space. Understand landlord approval requirements for assignments or subleases.
- Admin fees: Does the lease obligate you to pay for admin fees for the property manager? Consider asking them to be removed, especially if the rent is on the high end of fair market value.
No matter what, it’s important to engage the services of an experienced attorney or real estate professional to help negotiate the lease terms on your behalf. Their expertise can ensure you are protected and assist in securing favorable terms.
A better way to manage lease data
Lease management software like Leasecake can help take all those important dates, dollars and details and translate them into an easy to digest format, and send you automatic reminders so that you never have to worry about forgetting those details again.
Want to learn more? Visit us at www.leasecake.com to learn more or schedule a demo.