Important Lease Concepts Restaurateurs Should Know

As all restaurateurs know, a good location is an essential ingredient in any recipe for long-term success.

But controlling costs is also a key factor. Renting your location—rather than actually purchasing real estate—can help with both by providing access to a much larger pool of possible locations and while reducing the need for a large upfront capital investment. In order to maximize these advantages, however, restaurateurs need to secure the best possible lease agreement—one that has undergone a comprehensive legal review, and then negotiated to obtain the best terms possible for both brand-new and well-seasoned restaurateurs opening a new location or concept.

Therefore, when negotiating a new lease agreement, restaurateurs should understand the various types of leases and key terms that are often present in such agreements.

Types of Leases

There are three main types of lease agreements that can be used for a restaurant: (1) a gross lease; (2) a net lease; and (3) a percentage-based lease. The type of lease for each location will likely be determined by the landlord but should be open for negotiation.

A gross lease is a type of lease that builds all costs, including operating expenses and other charges, directly into the monthly rental amount being paid to the landlord. A gross lease provides a restaurant with a clear picture of what its monthly charges relating to the lease agreement will be.

A net lease is a lease agreement which shifts some (or all) of the costs of operating expenses directly onto the restaurant. These costs will be in addition to the base rent being paid to the landlord (the base rent will usually be a lower amount due to the pass-through of expenses). The most common net lease is a “triple net” lease agreement which shifts all operating expenses onto the restaurant. These expenses include maintenance costs, insurance and real property taxes.

A percentage-based lease is a lease agreement that has a set base rental amount, plus the possibility of additional amounts being paid to landlord based on the restaurants monthly sales. The percentage concept is sometimes included in either a gross or net lease to create a hybrid lease agreement.

Common Terms in Restaurant Leases

• Permitted Use: A lease agreement will include a section that defines the permitted use at the location. While it is likely a landlord will want to narrowly tailor the permitted use (i.e., the specific type of restaurant that will be operated), a restaurateur will want to keep the permitted use somewhat loose (i.e., just listing “operation of a restaurant”) to allow for a change to the style of the restaurant to adapt to new market trends. The permitted use definition should also include the sale of alcohol and right to use delivery services such as Door Dash and Grub Hub, if applicable.  
• Hours of Operation: A commercial landlord will likely want to include pre-determined hours of operation as well as a continuous operations clause in the lease agreement. A restaurateur should be mindful of these requirements during negotiation. At the very least, the restaurateur should be comfortable with the established hours of operation and request certain closure period to allow for renovations, observance of holidays and force majeure events (i.e., an extraordinary, unforeseen event beyond the control of the owner, such as flash flooding or a strike).
• Maintenance and Repair Obligations: It is important for a restaurateur to clearly understand its maintenance and repair obligations prior to entering into a lease agreement. It is common for the restaurateur to be obligated to repair and maintain items such as the HVAC system and grease trap (if exclusively serving the restaurant). If these items are shared with other tenants at the location, such repair and maintenance should be completed by the landlord and the restaurateur should be charged for its proportionate share of these items.
• Assignment and Sublet Rights: Almost all commercial lease agreements include terms pertaining to the assignment of the lease agreement or sublet of the location. Most commercial landlords try to limit these rights as much as possible to prevent free assignment or sublets from occurring during the term of the lease agreement. At the very least, a restaurateur should try and negotiate a permitted assignment clause, which allows assignment of the lease agreement in certain circumstances without the consent of the landlord (i.e., if the restaurant is going to be sold to a new operator).
• Insurance Requirements: When a restaurateur enters into a new lease agreement, we highly recommended that the insurance provisions be reviewed by the restaurateur’s insurance agent to ensure the minimum coverages and terms are market in the location area. A restauranteur should pay close attention to liquor liability insurance requirements and if business interruption insurance is required (this has become more common since the Covid-19 Pandemic).

Bottom Line for Restaurateurs

Securing a well-vetted and effectively negotiated lease agreement can be the difference in whether a restaurant is a financial success. The list above is just a small sample of the variety of different terms and concepts with which restaurateurs must contend when considering whether to lease. Contact Pullman Comley’s Hospitality Practice Group to learn about how we can help you create or review a lease specifically tailored to the restaurant industry.