Not too long ago, I brought my parents to a well known restaurant and bakery chain and what a surprising experience we had.

A casual night out

It was a Saturday night about 9:00PM and my parents just arrived at the airport. Searching for a quick bite to eat, we soon realized nearly every restaurant along the airport strip was packed due to the Anime convention in town. There was only one restaurant left to check and sure enough the family restaurant down the road had empty seats.

Upon arrival, we were greeted and seated quickly. As usual, my parents requested hot water and lemon as their choice of beverage while my wife and I shared a pot of coffee. Soon after, we placed our orders; a seafood platter, a fish hoagie for my wife and a tilapia and cod dinner for my parents.

9:30PM. No food yet!

Thank goodness my parents were there to fill in the 30 minute waiting time with conversation. I was surprised our food was out yet, so my wife decided to speak to the manager. Two minutes later, our food came out. So I waved across the restaurant signaling for my wife to return. No apology was given for the wait time, but at that point, we really didn’t care and just wanted to eat. Forty-five minutes later, we were done and decided to get the check.

Arrival of the bill

My father insisted he would pay for the dinner. Now just to tell you briefly about my father, he is far sighted and his eyes are getting worst. I saw him squinting at the check and slowly moving his head side to side reviewing each item.

Then suddenly he blurts out, “I can’t believe they charged us for water.”

Oh boy, here we go again; my father must have read the check wrong. I took the check from him and there it was on the very top in clear print; $4.40 for hot water. I couldn’t believe it. Was this some joke? There was not a chance I was going to pay for hot water. I quickly spotted our waiter and pointed out what believed to be an error.

The short slender waiter looked at me with a face that said it all. It was not an error, it was true. The waiter said he could do nothing about it, but admitted it was wrong to charge customers for hot water. He recommended speaking to the manager which I did.

A conversation with the manager

I went to the front of the restaurant and found the manager sitting down watching TV in a separate partitioned room. A bit odd which also was a sign of poor service? Interrupting him, I jokingly questioned about the charge in way to confirm it was an error of some sort. He said,

“No Sir that is correct.”

“Are you kidding me? I asked. You have to be joking to charge $4.40 for two cups of hot water. My parents didn’t even order any tea!”

“I’m sorry sir, this is our corporate policy.”

“I don’t understand, why would you charge for water?”

“You would be surprised sir as to how many restaurants are charging for hot water in the city.”

“Oh really, well I haven’t heard of any. Please name me some!”

Pause……

“Well, we have to charge for hot water because as a restaurant we get charged. You know our water comes from a hot water dispenser. Each time you pull the lever we have to pay. It’s all part of operating a restaurant.”

“Whoa… Look! I come from a restaurant background and there is no way you can tell me that is the reason. I hope that it isn’t because it isn’t my problem that you can’t cover your utility bills. Look, I don’t think we should be paying for the water especially since we were not told about this policy at the beginning. Why don’t you simply tell people upfront about your policy?”

“They would get mad.”

“Well, would you rather them come up to you each time like I am doing right now?” I questioned

“Why should I tell customers we are charging for hot water? Should I tell them that ice water is free? Should I tell them that coffee is not?”

“What! What are you talking about? Obviously not! First, ice water is free and second, coffee is a product I am purchasing. I think you are missing the point. Ok, fine you have a policy, but the least you can do is either place fine print in the menu or to actually inform the customer when hot water is ordered. So in this case, because we were not informed, I think the charge should be removed.”

“Sorry sir, that is our policy and I can’t do anything about it. I understand you are not happy as I would feel the same way. I am just following orders from corporate office. I have no control over the policy.”

“I understand that you may not have any control of the policy, but you can do something about this bill. You obviously have a staff training and management problem. In fact, if you wanted to charge me $10 for hot water and I really wanted it, I would pay for it as long I was informed about it. Well if that’s how you want to deal with it, I guess I will have to leave it at that.”

We quickly paid for the bill and left in a hurry. This was not the end of it. In most situations, I would normally forget about the problem, but this time I just had to take it to the next level.

Image credit: andybutkaj

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Explanations and Clarifications

The first few components of the Letter of Intent (LOI) are self explanatory. Some landlords do not provide a floor plan. Even though the real estate listing will indicate the total SF, you should verify the measurements are correct. If a landlord does not have a copy of the floor plan, you can check with the City Hall’s Record Department. Once you have confirmed a floor plan exists, you can inform the landlord to retrieve it. There is a fee charged for retrieval.

• Occupancy

As you will notice in this sample, occupancy states “Shall occur on the later of May 15, 2008 or completion of the Lessor’s work as defined in Base Building Conditions.” I have highlighted the words “later” and “or” as of importance as it effects the meaning. In simple terms, it states, occupancy of the space will begin anytime after May 15, 2008 or until the landlord has met all Base Building Conditions. We will not occupy the space prior to May 15, 2008 nor will we occupy it on May 15, 2008. This allows you to have sufficient time to prepare any necessary funding or modifications to the plan, drawings and suppliers. We will also only occupy the space after the landlord has met all Base Building Conditions.

In this particular offer, I have included three additional conditions that must be met prior to occupying the space. Once you have verified there is a copy of a floor plan held at City Hall, the Landlord should be given a specific number days to deliver the drawing to the tenant. In this sample, I have given four days. The second condition requests an official approval by City Zoning.

Although the real estate listing may classify the space as a commercial space, you should check whether a food business with extraction is allowed meaning full range of cooking is permitted. There is nothing worst to have signed a lease and finding out afterwards that cooking isn’t allowed. In this condition, you should allow three to four weeks for City Zoning to review the site. The third condition pertains to building taxes. You should request an official copy of the tax year quoted on the real estate listing. You just never know what kind of landlord you are dealing with.

• Rent Commencement

In this sample I have requested three months after occupancy. This provides a rent free period to the tenant for build out. Most landlords are willing to give two months while others may be more generous and offer up to four months. The wording is important as you will see it states rent will not commence after occupancy. You want to avoid paying unnecessary rent on an empty space.

• Usage

Keep this section simple and straight to the point. Fancy words in the description won’t score you any points. Here I have stated, “Modern Fast Casual Dining Restaurant.”

• Base Rent

This is the rent that you are willing to offer on a per month basis.

• Term

This is the number of years you would want to lock in. Most landlords will expect either a five (5) year lease or ten (10) years. Most landlords prefer long-term leases. As a tenant, there are pros and cons of offering a longer term than a shorter one. For example, a ten (10) year lease offers you security that you will be paying the same rent for a ten year period. On the other hand, if you fail to succeed, you could deeply put yourself into bankruptcy. You must weigh the options and see which you believe is best for you.

• Options

Once you have decided the first lease term, you want to have options to extend your lease. Commonly, you will see many offers stating a one (1) 5-year option to extend. Here I have asked for three (3) 5-year options. Although it is possible for a landlord to agree to accept the same base rent during a tenant’s option period, few will accept what I have requested. In this particular scenario, the landlord is unwilling to contribute towards any of the much needed upgrades. Therefore, I have lowered the base rent compared to the asking price but have offered a longer term lease with an incentive.

I have stated, “new options are subject to a base rent increase, but no more than ten (10) percent of prior five year period.” This provides an incentive for the landlord. Depending on what base rent you are willing to offer and how much money you are willing contribute for upgrades, this will definitely effect a landlord’s final decision. Overall, you want to try and lock in at the same base rent for the longest period of time.

• Base Building Conditions

Anything that needs to be upgraded or improved that you want the landlord to cover should be included in this section. You will note that I use the term “Vanilla Box” which refers to a space with four walls. Before occupying the space, a landlord should agree to provide the tenant a clean fully stripped down space. Second, if the space is not up to building code, a landlord should be fully responsible for this upgrade including delivering the space with all necessary fire protection.

These two conditions are absolutely the minimum that should be provided by any landlord. Other conditions will vary depending on the space.

• Tenant Improvements

The important point to note in this section is the statement, “Such landlord approval shall not be unreasonably withheld or delayed.” The section refers to the tenant’s right to change the façade (the exterior store front). Basically the statement refers to the landlord’s willingness to give permission and the time it will take to get an answer. A landlord should be reasonable in giving you permission within a reasonable period of time.

• Real Estate Taxes

This section is crucial and should not be taken lightly. Crooked landlords can falsely state the real estate taxes. To protect yourself, you should ensure you are only paying for your fair share of the taxes. If the space you are leasing is part of a much larger building, you obviously do not want to pay more than what you are leasing. You should also request for the real estate taxes for the prior two years of the building and/or if available the specific space being rented.

• Utilities

You should be allowed to pay directly to the utility company for all separated utility meters associated with the space. Never pay directly to the landlord unless you receive a copy of the bill.

• Security / Building Access

You should have no difficulties in accessing the space 24 hours a day, seven days a week.

• Signage

Similar to the statements used in “Tenant Improvement,” the tenant shall be given the right to install signage at its own expense once it has met building code and approval of the city. The landlord should be reasonable in giving you permission to do so and should approve it within a reasonable time.

• Brokerage

In this section, you should state the commission agreement between you and your broker and if applicable any co-brokers who were involved.

Once you have received confirmation of a mutual agreement of the terms listed in the LOI, then you may proceed. Any necessary legal documents should be prepared prior to proceeding.

Summary of Negotiating

Negotiating a lease involves some skill and practice. How to negotiate a lease is not taught in school, it’s something you have to learn. Hopefully, this has provided a quick insight of the various components of what is involved. Understanding each component is the very first step in protecting yourself. You should never rely on a broker to do all the work for you. No matter how experience they are, you need to know how to negotiate the terms and conditions you want.

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One of the most important parts of opening a restaurant is how to negotiate a lease. The ability to effectively negotiate a lease can either save you money or destroy you. Rushing into a lease can lead to an unexpected and lopsided deal that is only beneficial to the landlord. Before signing any lease agreement, you first need to understand the terminology and language used among realtors. Second, you need to know what you want and how much you’re willing to do to get what you want. Third, you need to sure everything that was negotiated has been included in the conditional offer.

Select a strong real estate broker

As you may have read my previous article, “Choosing a Real Estate Broker,” it outlines what to look for when choosing a broker. At the end of the day, you want to ensure the broker you choose is really working for you. A good broker will be able quickly assess a space and evaluate whether a landlord’s terms are fair. A good broker should also believe in your concept to the extent they have given their best efforts to negotiate with various landlords.

Making a conditional offer

You have scouted a potential space for your concept and you truly believe it is the right space for you. You want to proceed. So, the next step is making a conditional offer or what is known as a Letter of Intent (LOI). At this stage you and your broker will draft a letter outlining your proposed lease offer and additional terms you seek. There are several variations of a LOI so there is no actual standard format. It is important to ensure you have included all the terms and conditions you want the landlord to meet.

LOI sample

Here I will introduce a LOI format. Remember, depending on where you live, you may have different laws pertaining to a certain component. In addition, the terminology used may vary from country to country.

The formatting of a LOI is very much like writing a business letter such that you should prepare it on your business letterhead. The following is an example of the various components in a LOI. Terms and conditions will vary on each offer. I will also explain each component presented.

Dear Tom,

The TRB Group Ltd., would like to propose a conditional offer to lease space at 120 King Street West, Toronto, Ontario.

Property: 120 King Street West

Toronto, Ontario L5B 3S8

Tenant: The TRB Group Ltd.

Landlord: Of Record

Premises: Approximately 1200 SF on the 1st floor including the basement space. The exact SF calculations will be determined upon receiving floor plan.

Occupancy: Shall occur on the later of May 15, 2008 or completion of the Lessor’s work as defined in Base Building Conditions. In addition, occupancy shall not occur before approval of the following three conditions:

a) Landlord must provide a certified survey / site plan and floor plans as part of the mandatory requirements for Preliminary Zoning Review. (Must be delivered to tenant within 4 business days).

b) Official approval by City Zoning. (Allow 4 weeks).

c) Official copy of 2007 building taxes and allocation of taxes.

Rent Commencement: Three months after occupancy

Usage: Modern Fast Casual Dining Restaurant

Base Rent: $5700 per month

Term: Seven (7) Years

Options: Three (3) 5-year options to extend; new options shall be subject to a base rent increase, but no more than ten (10) percent of prior five year period.

Base Building Conditions: The space will be delivered as a clean “Vanilla Box” ready for Tenant finishes.

- Landlord will ensure all inventory from the prior / existing Tenant is disposed.

- Landlord will be responsible for delivering all fire protection (fire alarm, sprinklers) if they are required.

- Landlord will pay for A/C upgrade to 5 ton capacity.

- Landlord will pay for (painting, repair, updating) the front façade of the space.

Tenant Improvements: All additional improvements will be at tenant’s expense. Tenant improvements will meet building code and regulatory requirements and shall be reviewed and approved by the landlord.

Tenant shall be given the right to change façade upon the approval of the City and the landlord. Such landlord approval shall not be unreasonably withheld or delayed.

Real Estate Taxes: Tenant shall pay proportionate share of the real estate taxes based on the rented square footage divided by the total rentable SF of the building. Tenant shall be given documentation of real estate taxes for prior two years of the building and / or if available the specific being rented. The real estate taxes are currently estimated at $12.00/SF.

Utilities: Tenant shall pay directly to the utility company for all separated metered utilities associated with the leased space.

Security / Building Access: The space shall be accessible 24 hours a day, seven days a week.

Signage: Tenant shall install signage at its own expense. Signage shall meet building code and approval from the city. Lessor’s consent will not be unreasonably withheld or delayed.

Brokerage: Landlord will be responsible for all leasing commissions to TRB Realty Ltd. in connection to the lease. TRB Realty was the sole real estate brokerage.

Part 2 to come..

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