The 5 Key Commercial Lease Terms for Restaurants:
Get “On the Same Page” As Your Landlord, Figuratively and Literally
Introduction & The Importance of a Mutual Understanding, Clearly Recorded in the Lease Agreement
Finding and leasing commercial space has a different set of rules than finding and leasing residential rental properties. One golden rule, however, remains true in both cases: thou shall ensure the lease agreement is specific, clear, and representative of thou’s understanding of key terms and issues. In this six-part series, we will analyze the key terms of a commercial lease relationship, the importance that the parties reach a mutual understanding of the meaning of those terms, and that such understanding is clearly written in the lease agreement.
Here’s an example of where things go wrong.
Imagine if a commercial landlord leases a property for the exclusive use of “a coffee shop.” Suppose months into the lease agreement, the tenants desire to enhance their value to their customers by featuring alcoholic liqueur in some of their specialty, artisan coffee drinks and proceed to obtain the necessary licensing. The lease is silent on the sale of alcohol. After learning of the tenants’ intent to obtain a license to sell liqueur, the landlord approaches the tenants and informs them that the sale of alcohol is a “change of use” under the lease agreement, which only permits the use of premises for “a coffee shop.” The landlord defiantly declares that a coffee shop selling liqueur constitutes “a bar,” and he doesn’t want a bar in his premises. He promises to evict the tenants for violating the lease agreement if they sell their artisan coffee drinks with liqueur.
Believe it or not, I’m currently representing a client in a similar fact pattern.
Who’s right? Well, it depends on a few factors, which are beyond the scope of this article. One thing’s for sure – the tenants, in this example, would either have to preclude from selling liqueur or face a possible eviction. And, if they continued with the sale of alcohol and were ultimately evicted, then the tenant would likely sue for wrongful eviction, and the definition of “a coffee shop” would be resolved by a judge.
As you can see, a misunderstanding of an important lease term, coupled with a vague, nonspecific recording of that term in the lease agreement, can lead to various problems. A tenant could be force to unexpectedly pay thousands of dollars for repairs or renovations for common area maintenance fees. Or, a tenant may see her rent payment unexpectedly increase as her restaurant’s sales in increase. Or, a tenant may be forced to purchase expensive insurance coverage, for which she did not anticipate, significantly increasing her overhead. Or, worse yet, the landlord, as in the above example, may seek to evict the tenant, because the tenant is using the premises for something different than what the landlord and the lease agreement, in his opinion, permits.
In these situations, the landlord typically has all the leverage against the tenant, forcing the tenant to debate between breaking the lease (and accepting the penalties therewith) or accepting the common area maintenance fees, the landlord’s opinion on the permitted use, or whatever the case may be.
Remember, the specific language of the written lease agreement will, itself, determine the outcome of any legal dispute between the parties, regardless of any verbal statements or assurances made at the time of negotiation or signing of the contract. If one party were to sue the other, a judge would focus on the language of the lease agreement. The judge may accept witness testimony of any verbal discussions between the parties on the disputed term, but, inevitably, the parties will each submit testimony that supports its own position, precluding the judge from believing one party over the other – the proverbial “he said/ she said” scenario. And, disputes over lease terms often arise in unforeseen matters, such as the definition of “a coffee shop.”
In the above example, wouldn’t it have been nice if, instead of identifying the use as “a coffee shop,” the lease said “for a restaurant?” I think anyone would agree that restaurants sell beer, wine, and alcohol and do not constitute a bar. Likewise, if the lease only spoke to “a coffee shop,” wouldn’t it have been nice if the lease spoke to the sale of alcohol?
If you can see the mess that vague terminology can cause for tangential issues like a coffee shop selling specialty, liqueur coffee drinks, imagine the anxiety, stress, grief, and, let’s face it, attorneys fees that can flow from poor drafting of key terms of a contract, such as monthly rent payments, common access maintenance, square footage, required insurance coverage, and other considerations – all of which we’ll take in turn over the next five articles of this six-part series.
And, if you are an existing or start-up restaurateur or other culinary entrepreneur, I would love to be a part of your team and handle your legal affairs, so you can do what you do best: drive culture across America. Visit my website or contact me via email.