Restaurant leases, covenant strength and security deposits
In the first of a series of articles on the how to approach negotiating terms for a restaurant lease, our Senior Partner Peter Ruchniewicz discusses the thorny question of the rental deposit.
Landlords and, where the restaurant unit is held under an existing lease and being acquired from an outgoing tenant, sellers, will be concerned that the new tenant will have the ability to meet all of its financial and other lease obligations throughout the whole of the term of the lease.
Landlords might generally accept as a tenant an established, sufficiently profitable business operated through a corporate entity without further security. However, requirements for individuals of sufficient personal financial standing to be the direct tenant or guarantor are frequently made, particularly for start ups.
A popular alternative is to negotiate the provision of a rent security deposit typically expressed as equivalent to 6 to 12 months’ rent depending on the respective negotiating strengths of the parties. It is often not appreciated that where a VAT equivalent sum on the deposit is also required (as it frequently is) no VAT point occurs when the deposit is made so VAT cannot be reclaimed then.
Rent deposit deeds drafted by landlords also frequently require a future increase in the deposit to correspond with any rent review increase so the tenant should instead try to negotiate a fixed stated sum; ideally this should not be held for the entire lease term but released on the earlier of any assignment or (on longer leases) when the tenant can show profits of at least 3 times the passing rent for 3 consecutive years.
With the benefit of this advice, a CBG law client recently acquired a restaurant unit having successfully negotiated a significant reduction in the deposit terms initially required. In this case the client’s presentation to the landlord was comprehensive and amongst other things clearly demonstrated substantial proposed investment in the restaurant fit out. This helped make the case that it would not be in the landlord’s best interests to increase the risk of the business failing by insisting on excessive deposit requirements and thereby denying access to valuable additional working capital.
Expert legal advice can ensure that the notoriously difficult first few weeks of trading for any restaurant can be entered into on a more sound financial footing.
Taking good advice at an early stage of your lease negotiation is key. If you are considering opening a new restaurant CBG Law can assist you at all stages of the property acquisition process. To arrange a consultation to discuss your requirements please contact Peter Ruchniewicz on 020 7462 6020 or email pwr@cbglaw.co.uk