A New Lease on Life

Lately (and thankfully), there has been a resurgence of restaurants and bars throughout metro Detroit.  Like with all businesses, certain legal requirements and licenses are necessary prior to serving your first customer (e.g. entity formation, employee contracts, liquor licenses, etc.)

Additionally, there are certain lease clauses that warrant special attention when taking a space for a bar or restaurant. The following are some key clauses that are a crucial part of every restaurant/bar lease and, if negotiated properly, will allow a Detroit restaurateur/bar owner (or any business owner) to increase the value of his/her establishment even prior to its opening and to operate with a greater peace of mind:

1) Lease Duration: Generally, the longer the duration of the lease the better. Especially if given the ability to assign the lease with a minimum of Landlord intervention. Generally, attempt to negotiate for a 15-year initial term with an annual increase of no more than 3%, and an option to renew the lease for another five-year term exercisable at the discretion of the owner. Do your homework to determine the fair market rental value for the premise and don’t simply rely on the advice of your broker.

2) Assignment: Always attempt to retain the ability to assign the lease to a third party (e.g. in the event you want to, or are unfortunately forced to sell your restaurant). The Landlord will insist that he or she must give their prior written consent for any assignment to be valid, but you must in turn, insist that their consent can not be unreasonably withheld, delayed or conditioned. Too many restaurateurs do not realize the importance of having the ability to assign their lease until they are at the point where they have decided to sell their restaurant. At that point, the sale of the restaurant will be hindered because they will not have the ability to offer the lease to the potential purchaser and the Tenant will be forced to just walk away from the premise with nothing. Also be sure that the lease and personal guaranty shall void in the event of a valid lease assignment. Otherwise, you remain liable for any damages, included but not limited to unpaid rent, caused by your Assignee.

3) Liquor License Contingency Clause: If you intend to apply for a liquor license for your premise, I strongly advise that you insert an “escape clause” in your lease in the event that your liquor license application is rejected by the Michigan Liquor Control Commission (“Michigan LCC”). A fair escape clause would be that the tenant gets to void the lease in the event their Michigan LCC application is rejected BUT are required to pay all rent incurred (included any abated months) to the date of rejection. The personal guaranty, if any, must also void as of that date.

4) Free Rent (temporarily): Attempt to get the premise rent-free until the latter of (i) the day Tenant opens the establishment to the public, or (ii) the date Tenant receives its liquor license from the Michigan LCC. Most landlords will agree to this request with some limitation or outside rent commencement date depending on the present demand for the premise and the caliber of the proposed restaurant tenant.

5) The Personal Guaranty: If the lease is going to be signed in the name of the restaurant, usually the landlord will ask for your personal guaranty. Most landlords, however, will waive this personal guaranty if he/she is presented with other options that may reduce his/her risk in the event of your breach. If you request that the landlord remove the personal guarantee clause and he/she initially refuses, two options are:

  1. You can offer him/her a larger security deposit in exchange for eliminating the clause. The larger security deposit will give him/her a greater level of comfort in the event of your default; their goal for including the personal guaranty in the first place.
  2. If you do not have the capital to offer a greater security deposit, then you can offer to compromise and provide the Landlord with a “limited personal guaranty” which provides that you will be personally liable only up to the date that you return the premises back to the Landlord.

A2’s TWO CENTS: Obtain the longest lease term possible with the right to assign the lease.  If applicable, get a Liquor License contingency clause to ensure the lease and guaranty void in the event of an assignment or a failure to obtain the Liquor License.