Things To Look Out For In Cafe Or Restaurant Leases

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Setting up a restaurant or cafe is an exciting yet daunting step. While it may be your cooking or people skills that spawn the idea, it’s your business head that will help ensure it’s a success. If you aren’t purchasing an existing business premises, one of the key considerations is the lease for your cafe.

The lease is your legal protection of your right to use the premises. Your landlord will view it that way too: as a way to ensure their rights and the condition of the property are protected.

It’s a legally binding agreement about a potentially profitable or costly relationship. That’s why you need to get it right from the start to avoid headaches down the line.

You need to be aware of exactly what’s in your lease to avoid some common pitfalls. We’ll look at some of those and how you can negotiate the right terms of your lease for your exciting new restaurant or cafe venture.

Term

The term of your lease is agreed with your landlord upfront. However, you will need to consider both eventualities of success and failure. If your business is going well, you might want to renew your lease without having to renegotiate new terms. On the other hand, if you need to pull out of your lease early, you will need to cover the rent for the remainder of the term or find a replacement lessee.

For example, the best option may be a lease for an initial term with an option for a further term, for example two years with a further two year option. The landlord is likely to want as long a lease as possible and may offer financial incentives to take a long lease but a key consideration is the premises’ location. If you’ve secured a highly prized spot and custom is a given, you may well want to secure a longer term, as opposed to a risky location where success is not guaranteed.

The bottom line is to think carefully about the trade-offs.

Rent

Obviously rent is one of your main expenses and you need to rely on it being a fixed or known amount.

Commercial leases are frequently calculated on a per-square-metre (psm) basis. If so, the real estate agent or landlord should provide you with a plan giving accurate dimensions of all areas you will be paying for, including for example, stairs.

Shop around the local area to check if the rent is fair. The terms of the lease should allow for reasonable rental increases, usually as a fixed increase such as 4% per annum, or increases in line with CPI. Alternatively a periodic market review is negotiated where an agreed valuer calculates the current market rent and the rent is adjusted.

Rent reviews are annually or less frequent, depending on the agreed terms of the lease.

You will usually be required to pay a bond or bank guarantee of about 3-6 months rent. Even if it’s a bank guarantee, the bank will normally require you to put those funds aside into an account. That’s a big outlay you need to be aware of.

You should also consider how often the rent is paid – weekly, fortnightly or monthly, in advance. Does that work with your cash flow expectations?

Is the lease negotiable to allow for a rent-free period while you’re not trading to have the restaurant or cafe fitted out? Are you opening a cafe in an office building in which all the businesses close for a week over Christmas? Is that period of rent negotiable? These are all savvy ways to reduce your costs and are worth considering when negotiating your lease.

Other Outgoings

Outgoings or common costs that you are liable for must be stated in the restaurant/cafe lease. They may include costs of maintenance of common areas, cleaning, security and building improvements, much like a strata fee. Some outgoings may be left to the lessee such as electricity, so you will need to factor those costs in separately. Taxes or rates may be either passed on (depending on the state laws) or allowance made in the rental amount, so make sure your obligations are clear.

Be aware that some landlords might adopt a maintenance cost segmentation strategy that means you’re grouped with like-sized tenants and the maintenance costs attributed to you are based on what those other tenants of a similar sized premises incur. This may suit you or may be unjust, depending on their business and how good the other tenants are at looking after their premises. You’ll have to weigh up the pros and cons depending on your situation.

The terms of the lease should also allow for a reconciliation to be made once a year so that you know where your money’s gone.

Insurance Obligations

You as the tenant will be liable for insurance. Public liability insurance is the main one that the landlord will require you to have and it may specifically require cover of items such as plate glass.

Building insurance is the landlord’s responsibility and other business insurances such as professional indemnity are not part of your lease terms. While it is not usually a requirement by the landlord, you will obviously want to have contents insurance for your own peace of mind.

Fit Out, Fixtures And Refurbishment

Fit out is often the key to a cafe or restaurant having its own signature look and is usually the tenant’s responsibility. There may be a preexisting fit out but it’s likely you’ll want to tinker with it. Occasionally a fit out may be offered as an incentive to take the lease. It’s also worth remembering that the shorter the term of the lease the less you’ll want to splash out on a fit out.

Your lease will very likely contain a make-good covenant that requires you to return the premises ‘back to base’ upon completion of the lease. Bear in mind that it’s up to you to negotiate the terms of the lease and this is an area that often lends itself to some negotiation. You may be able to provide a make-good payout instead and just remove loose equipment and furniture when you vacate.

Any fixtures provided, such as lighting or security systems, will need to be maintained by you and if there’s any machinery, such as kitchen equipment or air conditioning, you’ll be responsible for keeping it in good working order. You should inspect all these before committing to your lease to make sure they’re not about to wear out.

There may also be a refurbishment clause that requires you to make periodic cosmetic maintenance to the premises, such as painting, and this may extend to toilets or alfresco areas.

Again, inspect the state of the premises carefully before signing your lease. The condition of the premises at the outset needs to be accurately recorded by way of a mutually signed inventory and if there’s anything you’d like made good before you sign the lease, don’t hesitate to make those requests.

Permitted Use

Obviously if you’re planning to run a restaurant or cafe, the lease must permit that activity to be carried out in the premises, and to continue to do so with no exclusions into the future. Make sure, for example, that times of activity or noise levels aren’t restricted.

In the event you have to reassign the lease it’s worth making sure the permitted uses are broad so your business options for assignees are not limited. If you plan on having an alfresco area, not only make sure it’s permitted in your lease, but also that there are no council or local area restrictions.

Exclusivity Clause

If the premises is part of a building or shopping centre you may want to request an exclusivity clause which prohibits other cafes or restaurants from popping up next door. This will protect you from competition and maximise your sales.

The Takeaway…

Just remember, a restaurant or cafe lease may seem like a daunting document but it’s there for your protection and the consequences of not getting it right can be very costly. Go through it carefully and if you need help, at Sprintlaw we can help you review or draft your lease to help you secure the best outcome for your exciting new business.

Whether you’re unsure of what terms to include or not sure where to start, you can reach out to team@sprintlaw.com.au or contact us on 1800 730 617 for a free, no obligation chat.

Sarah Voysey

Sarah is a content and copy writer with a background in merchant banking. She has a passion for putting technical language into plain English and is a contributing writer for Sprintlaw.

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