One of the most important provisions in any restaurant lease is when the tenant has to start paying rent. We call this the “rent commencement date” in most leases (or “RCD” for short) and it is rarely the date the lease is signed, or even when possession is turned over to the tenant. Rather, the tenant is almost always provided with some period of time to get the place ready to open, operate, and welcome customers – before it is required to start paying rent. But how that period of time is calculated varies greatly, and is enormously significant.
So, how is the RCD calculated? In our experience, there are three primary events that trigger the clock on when rent is going to have to be paid: (1) the effective date of the lease; (2) the date the space is actually delivered to the tenant; and (3) the date where the tenant receives the permits it needs to start work in the space. Let’s go over each of these.
Effective Date
The RCD being tied to the effective date of the lease is most common where the space is already largely built out for a restaurant (many call this “second generation” space). In these cases, there is not a lot of construction for the new tenant to do – they don’t have to build out kitchens or bathrooms – and after some cosmetic refurbishments they can get open. All that is fine. The problems arise, however, where the space is not in the condition the tenant may have expected, or the work they have planned requires permits, which involves the local permitting agency. Once local government is involved – all bets are off. We can have some reasonable expectation of how long it will take to get permits, but there are no guarantees. Government works on its own timeline.
Delivery Date
Tying the RCD to the date the space is delivered to the Tenant contains many of the same pitfalls, and raises many of the same question that tying it to the effective date does. In what sort of condition will the space be delivered? Will work be needed that requires permits? If permits are required, how soon can we get them? And how long will it take to complete our work after those permits are received?
That having been said, when we review a lease, we try to get a sense of when the space will actually be delivered. And there are a lot of variables that affect that. Maybe the space is occupied, and it will take a couple of months to get the existing tenant out before it can be delivered to the new one. Maybe the space has not even been constructed yet, in which case the lead time will be even longer. In those cases, the new tenant can use that time to get its own plans prepared, its own permit applications submitted, and generally get its feet beneath them before the space is actually delivered, and the RCD clock starts running.
Permit Date
The third way that that the RCD is calculated is tying it to the date that the restaurant’s permits are actually issued such that it can start work. In most ways, this is the safest and most forgiving way to calculate the RCD. It is also most common when the landlord delivers a “shell” (i.e. an unimproved space) to the tenant, or where the tenant has to change the space entirely to make it suitable for a restaurant (e.g. where the prior use was a clothing boutique or something like that).
When the RCD is tied to permits, the tenant can have some assurance that it will not be penalized by delays from the governmental authority in issuing those permits. If the permits are delayed, so is the RCD. There is a bit of a catch, however, and it relates to the tenant “diligently pursuing” their permits. The reason for this, of course, is that the date that the landlord begins receiving rent is dependent on the date that the tenant receives it permits. So any delay in pursuing those permits leads to a delay in the landlord receiving rent. For that reason, leases that tie the RCD to the issuance of permits often also have strict deadlines for the tenant to, among other things, submit its plans to the landlord for approval and to submit the approved plans to the local permitting authority. These deadlines must be closely reviewed to determine (a) whether they are attainable, and (b) what happens if they are missed. We have seen leases all too often where missing one of these deadlines, even by a day, can have serious consequences for calculation of the RCD.
Related to all this is the concept of the “required opening date.” Many leases require a tenant to be open to the public on or before the RCD. Clearly, this is something the tenant wants as well – no one wants to be paying rent before they are open and making money. But, even so, it is not always possible. Delays happen, many of which are outside the tenant’s control. That being the reality, we always try to minimize any penalty the landlord might try to impose for not being open by the required opening date, which in many cases can be severely punitive – think double rent, or multiple hundreds of dollars per day. It is bad enough for a tenant to have to pay any rent at all before being open – to pay double or more can be devastating, and put a restaurant business in jeopardy of survival before it even opens.
For all these reasons, the sequencing of lease execution, delivery of the space, and commencement of rent is among the most important things we make sure our clients have clarity on before they sign a lease. But we also encourage restaurant owners to think about these things even sooner – before they even sign a letter of intent for a particular space. Talk to your broker about this, and determine what is realistic. We have seen too many restaurants agree to an unforgiving and unreasonable RCD, and be in trouble before they even open their doors. We hope this post will help you not be one of them.