How to Negotiate a Lease – Part 1
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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June 12th, 2008 at 2:37 am
I cannot even begin to explore the dangers to a potential owner or operator who listens to your extremely inexperienced advice. The lease is the most important document an owner will create to build success for his business and your process is fraught with enough potential problems as to render any chance at success unachievable.
Simply treating this topic like a high school research project and scouring the Internet for articles as research and then trying to collate the information and pass it off as a serious negotiating strategy is inexcusable, dangerous and offensive to those of us who work diligently to create success for those same operators every single day.
June 12th, 2008 at 11:57 am
Dear Jeffrey, I respect the line of work you do as I have been to your website. However to falsely judge my experience is unfair. You may have been in the industry longer, but like yourself I take my work seriously. Therefore I would never pass on information that could danger somebody else. What I share on this site is things that have worked for me throughout my experience. I was taken back when you believe my negotiating strategy was “dangerous and offensive.” The sample presented has worked for me and in fact has been designed with various brokerage firms. This doesn’t mean it will work for others as each lease different. As I mentioned conditions and terms may be vary. In addition, you may have not noticed this is only Part I of II.
I respect criticism, but to falsely judge a person is inexcusable.
June 14th, 2008 at 3:58 am
There are enough holes in this strategy to drive a truck through. You should fire the “various brokerage firms” you say you used to write this outline. It contains absolutely nothing that speaks to the key industry issues for operators looking to lease any restaurant site.
And nobody is falsely judging you or your experience I don’t claim to know enough about either. But what I will judge is your product. I do this for a living and my 27 years of doing it successfully is more than enough to judge this outline as dangerous. And while it may have worked for you in the past, just getting by without having the roof fall in on your head is no reason to rejoice.
A little knowledge can be a dangerous thing. This is a perfect example.
June 14th, 2008 at 12:07 pm
Dear Jeffrey, I have no doubt what you do as a living is successful as you do have an impressive client portfolio. You would be shocked to see some of the kind of lease approaches some other brokers use that I have witnessed and who have failed to protect the tenant or secure the space. Believe it or not, this sample in addition to other conditions applied has worked on several occasions and continue to work. However, I don’t expect anyone to agree with me that this is the perfect lease strategy. We could debate which one is better as I have seen so many approaches presented to me. At the end, I truly believe its what you believe will get you the better deal in the years ahead based on the current scenario the landlord has presented. I understand someone like yourself who has been in the business for 27 years may have a strong opinion about subjects such as this. Likewise, if I were in your shoes that long and someone presented a topic I have specialized in for years, I would probably offer a comment or two. I welcome all comments, therefore thank you for your input.