Covid-19 Silver Lining: Renegotiating Restaurant Lease Terms
During all the turmoil and the unknown future state of the restaurant industry, there is also a fascinating and extremely unique opportunity for restaurant operators to renegotiate current lease terms to best support their post-COVID success. And why is this such a big deal? Once a lease is in place, it’s very rare for lease terms to be renegotiated. As you may very well already know, lease terms can be locked in for 5 or 10 years, or even up to 15 or 20.
Many of my clients are currently operating under reduced rent rates that have been informally granted by their landlords. As a result, nothing is in writing, and there isn’t necessarily a plan for future rents. Or, in some cases, landlords are requesting rent repayment for the reduced rent that has been granted. In this second case, I would venture to say that very few restaurant operators would be able to sustain the rent increases that would entail.
I encourage each operator to formalize their agreement with their landlord, and make sure they negotiate terms that are sustainable—in other words, don’t postpone the problem. Instead, try to agree upon a long-term solution with the landlord. To begin, I recommend that restaurant operators review their pre-COVID sales. For instance, they should look at their profit and loss statement from 2019, and make educated estimates as to when future sales might return once COVID restrictions are lifted.
In turn, set the rent to stage up gradually based on those projections. I would base this as a percentage of gross sales. The percentage would depend on where the restaurant is located. For most, 7% should work. But if you’re leasing in a historically prime location, the percentage might be 8-10% of gross sales.
If you need more explanation of what I’m referring to here, reach out to me through the website, and I’ll email a sample spreadsheet to you.
Again, make an informed and detailed proposal complete with the numbers. Couple that with your unique narrative which might include the years of success you’ve had in your location, which is no small accomplishment in the restaurant industry! You’ll also want to include the capital improvements (if any) you’ve made during that time. This could include anything from a new HVAC system or upgrades for the hood to replaced floor tile. You may also want to add something about your rent payment history if it’s been consistent and on time.
Once you have detailed your projections and crafted your narrative, consider reaching out to your attorney for some strategic guidance. As every lease is unique, and you want to understand your current lease terms. You don’t want to approach your landlord with guns’ blazing. After all you are already bound to the terms of your lease! So, I’d recommend getting advice from your attorney, but also approaching your landlord directly and personally with your proposal.
No matter where you land with rent rates and timing, the most important thing is to get everything in writing. Better yet, amend the lease to include the terms. Otherwise, you will be in a very vulnerable position because if you aren’t adhering to the terms of the lease, even if you were given a verbal confirmation on rent reduction, you are in breach of that contract.
I’ll continue this discussion in my next blog post, and I’ll be joined remotely with a guest speaker, Howard Kline. Howard is a real estate attorney and founder and host of “CRE Radio & TV”, a cutting-edge online, news, talk, and interview show on a variety of commercial real estate matters.
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Ryn Longmaid is a restaurant broker and consultant at Santa Rosa Business & Commercial in the San Francisco NorthBay and the host and founder of the Facebook Live Series, Deep Dish: discussions on the business of restaurants for restaurateurs, restaurant buyers and sellers and the restaurant curious.
As well as being a licensed real estate broker, Ryn is a CBB with the California Association of Business Brokers (CABB), a CBI with the IBBA and she holds an MBA in Sustainable Business Management. In addition to being a proficient business broker, Ryn has over 20 years’ experience in the restaurant, hospitality, and food industries. She has served as the executive chef for Amy’s Kitchen, personal chef to actor Don Johnson, she founded and operated a successful and longstanding restaurant. She has also held teaching posts in restaurant management at the Art Institute-San Francisco and The Culinary Institute of America-Greystone.