You have your restaurant concept. You picked the perfect location, and there is space available for rent. You’re on the brink of opening your business, so don’t blow it with a lease that could kill your success. 


Many restaurants succeed or fail based on the ability of the owner, or owner’s counsel, to understand the importance of the lease and its individual terms. What you need to close the deal is a lease that will allow your business to grow and adjust in accordance with the demands of the marketplace.


Tenants repeatedly fail to expend the time, effort and resources to negotiate a favorable, or at least balanced, lease. This is essential, especially in the current leasing environment, where tenants in many markets have the upper hand. In most restaurants, costs associated with the space, or occupancy costs, are the third-largest expense in business operations, behind only food and labor costs.


Here are six lease provisions that restaurant operators should examine closely when entering into a new lease agreement or considering a lease modification or renewal. Three of these relate to occupancy cost (common area maintenance, percentage rent and escalation), while the other three (go-dark, exclusivity and use) address issues that allow your business to grow and adjust to the economic realities of your business plan, as well as the location in which you have chosen to operate the business.


• Common area maintenance, or CAM, clauses are found in leases where landlords have multiple tenants at a single location — specifically, shopping centers, malls and multiuse areas. While landlords seek to define CAM as broadly as possible and attempt to include any expense incurred by the landlord in the management and operation of a center’s common area, tenants should attempt to carve out capital costs from the laundry list of charges the landlord seeks to cover, especially repair costs under warranty, brokerage and legal fees, leasing costs, lease-enforcement costs and any costs reimbursed by insurance.


• Percentage rent clauses typically are found in leases for larger institutional landlords. These clauses require tenants to pay for their success by multiplying a set percentage against the excess sales volume above a threshold sales level. If a landlord is seeking a percentage rent clause, it may be possible to tie the negotiation of percentage rent to other lease provisions, such as tenant improvement funds that the landlord may make available for build-out of the space. 


• Escalation clauses provide for increases in base or percentage rent over time. While at first blush these may appear tenant friendly, this is often not the case. A low initial base rent that has a drastic increase a few years into the lease can ultimately be more harmful to a business than a higher initial base rent coupled with lower or no escalation. 


• Go-dark clauses or co-tenancy clauses apply to multitenant leasing situations and allow tenants to either terminate their leases or receive significant rent concessions if certain conditions arise with regard to the other tenants in the space. Restaurants, moreso than other businesses, may rely on traffic generated by the other businesses in a shopping center as a source of customers, and thus, these provisions are extremely important. Landlords oppose these types of provisions. In fact, if the first draft of the lease is generated by the landlord or counsel for the landlord, it is a virtual certainty the lease will not contain this provision. 


• The exclusivity clause is another provision often opposed by landlords. Dependent on the drafting of the clause, it can be very advantageous to the tenant. The problem is that landlords view these clauses as very limiting to their ability to lease space. Savvy tenants will want to guard against rival businesses opening in outparcel sell-offs. Having a clause that applies not only to the center but also to outparcels is an important consideration. 


• Use clauses address the question of how the tenant is allowed to utilize the property. If a lease is silent as to use, then the tenant can do anything that is legal in the leased space. However, I have yet to come across a lease that does not have a use clause. As you would expect, landlords want to limit use as much as possible, while tenants want expansive use provisions. For a tenant this could be a “make or break” proposition. A properly negotiated use clause can give tenants the flexibility to adjust their business model as the market requires.


While these six clauses are not the only important terms in your lease, knowing the nature of these provisions and how they impact the restaurant tenant can be as critical to your restaurant as a catchy name, good food and a great review. Spending the time and effort upfront to negotiate a lease that is beneficial to you in the long term might be the best move you make in your entire restaurant career.


Robert J. Waddell is an attorney in the Atlanta offices of national law firm Chamberlain Hrdlicka, specializing in the transactional needs of landlords, tenants, restaurateurs, developers, lenders and investors. He can be contacted at (404) 658-5429 or Jeff.Waddell@ChamberlainLaw.com.