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Acquiring Restaurant Premises – The ‘Tenant’
24 March 2016

The restaurant sector has always been fast moving and competitive and is seeing continual growth in the UK market. It is not showing any signs of slowing down. Food is big business and this is not just confined to within the bounds of the M25, many other parts of the UK are also recording growth.

It may well be that if you are currently within the industry you are looking to protect your market share by moving into bigger premises or open a second, third, fourth… restaurant. Or, you may be fresh faced and ready to move into this market to capture some of that growth for yourself and expand your mini empire.

You will have your carefully crafted business plan at the ready. You will have a location in mind. But how do you go about securing that new premises and what are some of the potential pitfalls to look out for?

Preliminaries

Where to start? A commercial agent with restaurant expertise is highly recommended for finding the right premises for your business. This is especially true if you are locating to a new geographical location or you are unfamiliar with the market.

A landlord may ask for references, a rent deposit and/or personal director guarantees and the commercial agent is best placed to negotiate these conditions for you.

Your acquisition may be of a new lease or the transfer of an existing one.

If your acquisition consists of a new lease, once premises are identified the agent will put together ‘Heads of Terms’. This document will set out the key terms of the proposed lease between you and your prospective landlord. The Head of Terms will always remain ‘subject to contract’ meaning they are not set in stone and can potentially be negotiated until the lease/agreement for lease is entered into.

What’s the risk?

You have found the ideal place and the Heads of Terms look fine, why should you not just rush to get your signature on the dotted line?

It is very likely that your rent is going to be your biggest overhead. Such a large business expense should not be entered into lightly especially when margins in the food and drink industry can be tight.

By entering into a lease tenants can sometimes unwittingly make themselves responsible for historic liability, putting the premises into a better condition than they found it and/or be tied into a long lease without the ability to dispose of their interest or terminate early.

Am I not just going to be responsible for my actions?

Possibly not!

When you take over an existing lease (an “assignment”) that lease may be an “old lease” which is a lease granted before 1 January 1996. An “old lease” is a contract between the landlord and the original tenant for the entire term of the lease. Of course, the tenant may have changed many times. In the event of a tenant breach the landlord can call on the original tenant or any intervening tenants who have given direct covenants to meet the liability of the current tenant. Therefore, be warned, an “old lease” could potentially see you on the hook for many years even once you have vacated the premises.

A lease granted after 1 January 1996 is considered a “new lease”. When a tenant transfers a “new lease” they are automatically released from any future liability under the lease unless they have entered into an Authorised Guarantee Agreement (“AGA”) with the landlord. It is therefore likely that any future disposal would be subject to this mandatory condition.

Term of the lease

How long do you want the lease for? In any new business venture retaining flexibility is key so that liability can be offset should the venture not succeed.

It may seem tempting to enter into a longer lease term to secure the long term future of your business ,especially if the location is lucrative or if you are investing in expensive fit out works. However, you should consider that you will be liable for the rent and other outgoings for the entirety of the lease, or at least until you have disposed of your interest. This is regardless of whether or not your income stream dries up.

It is essential to retain flexibility by either  negotiating a shorter term lease of say one to five years or ensuring that if the project doesn’t take off you have adequate rights to dispose of the lease.

If you do want a longer term then it is always advisable to negotiate a right to terminate early, say at the half way point. Break clauses are notoriously fraught with traps and you should always seek legal advice both in negotiating the clause itself and again well in advance of the break date to ensure that you can effectively break the lease if desired.

Security of Tenure

Business continuity is vital in the restaurant sector and if you want to ensure that you have an automatic right to renew the lease at the end of your term,  you must make sure that the lease is granted within the security of tenure provisions of the Landlord and Tenant Act 1954 (“1954 Act”). Even if this is the case, the Landlord can rely on limited statutory grounds of opposition.

Landlords will often seek to contract out the 1954 Act so that tenants are not afforded that privilege, especially on shorter leases,  and you should carefully consider whether this a key negotiation point for you.

Fit-out and alterations

It is very unlikely that you are going to stumble upon the perfectly decorated and fitted out premises. You will want your restaurant to look great and to do that you need to ensure that the Landlord has agreed in advance to your proposed fit out works. Does the lease allow you to carry out the necessary scope of works? Most leases prohibit a tenant carrying out structural works so does this need changing? Be aware that bolting bespoke seating or racking to the floor and/or ceiling is classed as structural! Should the Landlord contribute to any improvements being made and should you be obliged to reinstate all such works at the end of the term?

Use and Licencing

It may seem obvious but you need to be confident that the lease allows you to run the premises as a restaurant and that the lease allows you to operate within the relevant use class (A3 (restaurants and cafes).Also, you should check that the premises benefits from the necessary planning permission.

You will also need to consider if the premises is licensed. If you will be selling alcohol, providing regulated entertainment and/or providing late night refreshment (between 11.00pm and 5.00am) then you will require two licences – a premises licence and a personal individual licence.

If you are acquiring an existing restaurant then you may be able to simply secure a transfer of the licence but you must check that the licence is sufficient for your purposes.

The above are just some of the key considerations and the entirety of the lease and its provisions should be carefully considered before committing yourself to the term. It is very important to seek legal advice and to ensure that the lease is right for you and your restaurant business.

If you require further information, please contact Amie Kelsall at [email protected] or on 01189 527 189.

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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