Leasing Terms Guide for Restaurant and Retail Owners

Contrary to what landlords might tell tenants, most leases can be negotiated. However, commercial leases can be complicated. There is no standard form. Each provision must be carefully reviewed.

This checklist is designed to highlight the most important issues that tenants of retail or restaurant spaces need to be aware of. It should also be addressed in a landlord's lease agreement. Business owners must consult an attorney before signing this lease.

1. Tenant Formation

Form an entity that protects individuals from personal liability, such as a corporation or limited liability company. This can be used even if just one person or a spouse manages the business. The entity should sign the lease.

2. Landlord's Work

It is essential to detail the improvements that the landlord makes to the premises. It is not enough to use terms like "grey shell" and "white shell." It is important to clearly outline the details of any additions or improvements that will be made to the space. The tenant has the right to terminate the lease if the landlord fails to complete the work by the specified date.

3. Take Measurements Of The Premises

After the landlord has finished, the tenant can measure the property and adjust the common expenses accordingly. It is important to specify the basis of measurement. The concepts of "rentable" and "useable square footage are completely different. Different types of space use different methods to measure the square footage.

4. Relocation of Premises

Particularly restaurants should resist the landlord's right to move the premises. Its location, visibility, accessibility, customer access, and proximity to other businesses may all impact the value of the business. The landlord may insist on the right for the tenant to move. This means that the tenant must be notified and provided with premises of similar size and configuration.

5. Permitted Use

It is important to define the permitted Use as broadly as possible. "General office" and "general retail" are preferred. The landlord must declare that the permitted Use is permitted by zoning, applicable laws, and property restrictions.

6. Continuous Operation

Suppose the landlord demands continuous operation (meaning that the tenant must operate its business in the leased premises throughout their lease term). In that case, there should be exceptions for employee education, renovation, restoration, and maintenance.

7. Operating Expenses

The tenant should contribute a proportionate amount to the maintenance and operating costs of the common area. Capital repairs and improvements are not allowed.

8. Increases In Operating Costs

A percentage limit should be set on the annual increase in operating expenses to control uncontrollable expenses. This would typically include taxes, insurance, and utilities.

9. Audit

A tenant should be entitled to an annual statement detailing operating expenses. The landlord should reimburse the tenant if he discovers errors. If there are more than a certain percentage of errors, the tenant should be reimbursed for the costs of the audit.

10. Base Year

The tenant should verify that the base year is representative of the actual costs the landlord would have in a typical year if the increase in operating costs is relative. The landlord might be able to successfully challenge real property taxes and receive a refund, or payment on a guarantee, insurance, or third-party claims, during any number of years after the base year.

11. Exclusive Use

The exclusive right of the tenant to run a business should be granted. To ensure that the tenant does not lose business, the right should be as wide as possible.

12. Tenant Alterations

The tenant should not be required to modify the premises in any way to comply with any law, rule, or regulation, except for tenant use and any modifications to the premises. The tenant should have the right to make modifications as long as they do not affect structural elements or building systems and not exceed a specified cumulative amount.

13. Tenant Maintenance

The tenant should not be held responsible for any structural elements, public staircases, elevators, or other mechanical systems (including HVAC, plumbing, electricity, and security) in any way.

14. Landlord Obligations

The landlord must be required to maintain, repair, and operate the building in a first-class way and in compliance with all laws, rules, and ordinances. The landlord must not interfere with the visibility, access, or use of the premises.

15. Assignment

Without landlord consent, assignments of leases are allowed. This means that all rights a tenant or lessee has over a property can be transferred to franchisees, affiliates, or franchisors. After an assignment, the tenant should be free from all liability.

16. "SNDA"

As a condition to executing the lease, the tenant must obtain a Subordination, Non-Disruptive, and Attornment (SNDA) from the lender. They must agree not to subordinate their interest to any other lender unless they agree not to disturb the tenant's Use of the premises or to remedy any ongoing defaults by the former owner.