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Real Property & Development Review

Biggest Restaurant Leasing Mistakes: How to Avoid Them

Posted in Real Estate

The restaurant leasing panel at Food Times at Restaurant High (a national restaurant industry legal and business conference hosted by Davis Wright Tremaine in Seattle, WA) covered ten of the biggest issues facing operators in negotiating restaurant leases.  Attorneys John Benazzi (DWT), Steve Rich, Glenn Inanaga (Panda Restaurant Group), CPA Justine Hunter (Moss Adams) and operator Colin McCabe (Chop’t Creative Salad Company) led a lively discussion—answering questions from the audience about issues such as rent commencement dates, permitting risk, triple net expenses, gross sale exclusions and lease accounting treatment.

Members of the audience were particularly interested in the panel’s success in negotiating certain hot-button provisions with landlords.  According to the panel, almost all lease provision are negotiable depending on the parties’ bargaining positions.  That said, tenants should be mindful of landlord’s concerns and risk assessments when asking for concessions from landlord’s standard form of lease.  In most cases, there are compromise provisions which can address tenant’s concerns while not creating additional risk—or at least not unreasonable risk—to landlord.  According to Mr. Inanaga, this is where leasing experience (and good tenant checklists) can come in handy to get tenants the protection they might need.

For example, the panel discussed the concept of “permitting risk” in discussing when rent should commence under a lease. Given most landlord’s lease forms, rent would commence upon expiration of a certain number of days (the fixturing period) after execution of the lease.  Thus, a tenant usually bears the risk that it will not obtain permits and be able to complete construction prior to the date rent commences under the Lease.  If, on the other hand, a lease specified that rent commences a certain number of days after tenant receives all of the permits necessary for it to construct its improvements and open for business, the “permitting risk” is shifted to landlord—because rent will not commence unless and until tenant is unable to obtain the necessary permits.  This is a favorable result to the tenant (especially where tenant is operating in an unfamiliar jurisdiction and unsure of the local permitting timelines), but may not be acceptable to the landlord given the new risk.  The panel discussed various ways in which to minimize this risk to landlord—requiring tenant to submit for permits within a certain number of days after execution, requiring tenant to engage landlord’s permit expediter and giving landlord a termination right if tenant is unable to obtain permits within a certain number of days after lease execution.

The discussion was so lively that the panel was unable to cover all of the issues originally intended.  If any attendees (or any readers) would like a copy of the panel’s handout, please contact John Benazzi, at johnbenazzi@dwt.com.