TUCKEY’S TIPS Negotiating Restaurant Leases

Restaurant leases must reflect current market conditions like inflation, the tight labor market and post-pandemic changes to the industry. The goal of any restaurant attorney is to shift the risk of market conditions to the landlord where possible:

1. Inflation: Before the pandemic we were comfortable seeing 3% rent renewal increases as a matter of course. However, the 12-month All Items CPI Index is up 6% as of the end of February. The Food Index rose 9.5% as of the end of February. For this reason it is important to exercise renewals on a timely basis so that a landlord cannot claim that a more advantageous renewal rate is no longer on the table. Try to tie renewals to the traditional percentage increase rather to CPI where possible.

2. Percentage rents: The rising cost of food and labor should make us question whether percentage rent is advantageous. Increased prices equal increased sales, and therefore increased percentage rent, but not necessarily increased profits. Analyze internal numbers to evaluate whether a slightly higher base rent may be the better choice.

3. Opening covenants: If it is difficult to hire employees, or if permitting or construction is prolonged due to supply chain issues, the restaurant may not open on time. Tenants should negotiate away penalties or create advantageous covenants allowing for contingencies that prevent a restaurant from opening. At minimum, rent should not begin until a liquor license is approved.

4. CAM: Post-Covid, landlords began incorporating capital expenses into operating expenses that are chargeable to tenants as CAM. As a tenant you want to exclude these charges, and to negotiate CAM as non-cumulative and non-compounding year after year. Imposing a cap is preferred, but this would involve negotiation due to inflation concerns.

5. Exclusivity clauses: Landlords often ask tenants to attach a specific menu or theme for a restaurant to protect neighboring tenants from competition. Negotiate flexibility to allow you to adapt to changing market conditions, e.g., the post-pandemic shift away from in-person dining to take-out which may have been prohibited under exclusivity clauses. Negotiating prohibitions of neighboring tenants that diners are sensitive to, like Covid testing sites or medical clinics.

6. Close and abate rent provisions: Some tenants with leverage are able to negotiate the right to close and abate rent during future pandemic shut-downs, or on an emergency basis if staff become ill, or if they cannot hire enough employees due to the labor market.

Tuckey Law, LLC covers all of your legal needs for opening and operating your food, beverage and hospitality business. Contact Lauren at lauren@tuckeylaw.com or 312-701-2200. This column is not legal advice. Consult with an attorney to decide on the right course of action for your business.

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