What are Your Options? Negotiable or “Market Rate” Lease Renewal Provisions

timetorenewIn a changing real estate market, especially one with rising commercial property values and rental rates, whether you have a renewal option in your commercial lease and the terms of any such option can be critical. It is highly preferable to have an option provision that specifies the rate of any renewal, e.g. some set percentage over the last year of the initial term. It is not uncommon for a lease to say the renewal will be at “market rate” or something similar, then it will be subject to negotiation and agreement between the Tenant and Landlord, leaving the renewal subject to negotiation and agreement between the Tenant and Landlord.  Of course, when this is the case, it largely turns the renewal “option” into simply an exclusive right to negotiate and takes significant control away from the tenant.

If your lease has a market rate or negotiable option provision, here are a couple of things to keep in mind:

  • First, see if there is any provision in your lease that requires the landlord to give you notice of its proposed renewal terms in advance of the date by which you have to give notice of your intention to renew. If there isn’t any such requirement, still go ahead and request that the landlord let you know as much in advance as possible what renewal rate it will be requesting. That will give you a little more time to negotiate with the landlord, or will give you a heads up that the landlord may be looking for much more than you are willing to spend. If you will need to move at the end of your lease, having that bit of extra time may be invaluable.
  • Second, understand that you really have two deadlines: the actual end of the lease, and the date after which it will be impossible for you to find new space and have it ready to move into if you can’t work out a deal with the landlord on your renewal. Is that 6 months before the end of the lease? 9 months? More? You need to have a good sense of this, because if you let that deadline pass, you may be stuck taking whatever deal the landlord is offering because you don’t have anyplace else to go. With restaurant leases this timing factor is critically important because the permitting and buildout requirements of new restaurant space will require much more lead time before any move.
  • Finally, pay close attention to your lease’s holdover provisions. Almost all commercial leases I see in my practice contain drastic rent increase provisions if you stay in the space beyond the end of your lease, with it being common for rent for any holdover period to be 200% the last year of the initial term.  If that is the case in your lease, you must make sure, if you cannot negotiate the renewal term, that you are ready to move when the initial term of the lease is up.

Of course, many of these terms are subject to negotiation at the time you sign your lease and that is the best time to address them. But if you must deal with them later, you should work with your real estate lawyer to ensure you are able to renew your lease on favorable terms or, failing that, have as much time as possible to find a new space.

How a Glitch in Local Liquor License Laws is Hurting Fast Casual Restaurants

beer tapsI’ve written here before about how one of the distinguishing and appealing elements of fast casual restaurants is that, unlike more traditional “fast food” outlets, they often serve alcohol. Most often, however, these restaurants do not have a full bar and only want to serve beer and wine. That more limited offering can make things easier for the restaurant owner because they can simply obtain a beer and wine license, and not have to bear the heightened scrutiny and oftentimes greater regulatory burdens that come with the right to sell hard liquor.

Here in Montgomery County Maryland, where I do a significant amount of work, it doesn’t quite work that way due to a glitch in the local liquor laws. That glitch is this: an individual can hold up to ten full liquor licenses – i.e. those for beer, wine, and liquor – but are restricted to only one beer and wine license. Of course, very often fast casual restaurants have more than one location in a given jurisdiction, and several of my clients have more than one here in Montgomery County. If they want liquor licenses for all of their stores, the law requires them to apply for and obtain full liquor licenses, even if they only want to sell beer and wine. And while that full liquor license gives those restaurants the option to sell drinks containing spirits if they’d like, it also comes with it a much higher licensing fee and more burdensome administrative and regulatory requirements.  While many proceed anyway, and take these burdens on, others decide it is not worth it, and forego alcohol altogether.

Why this inconsistency in the law exists is difficult to say, but it appears it may simply have been an oversight as the laws were amended over the years. Indeed, for years full liquor licenses were by far the most desirable to restaurant owners and very few were interested in selling only beer and wine. Thus, when lobbying efforts were made to expand the number of licenses an individual could hold, the focus was on full beer, wine, and liquor licenses, and no changes were made to the laws regarding the more limited beer and wine licenses. As fast casual continues to boom, however, it would seem that greater attention needs to be given to this inconsistency, and that the right to hold beer and wine licenses be expanded in the next legislative session to meet the demands of this growing trend in the restaurant industry.

Listen: Founder Sean Morris Featured on the Law Entrepreneur Podcast

Our founder and principal attorney, Sean Morris, was recently interviewed by Neil Tyra for his popular new podcast, The Law Entrepreneur.  Take a listen here as Sean speaks to Neil about, among other things, why he decided to build a practice focused on the needs of restaurant owners — or, as Neil puts it, how he became the Restaurant Lawyer.

You can find the iTunes link, as well as the archives to Neil’s excellent podcast here.  Check it out.