Acquiring a new restaurant? - How to avoid the third party costs trap
In the second instalment of a series of articles on how to approach negotiating terms for a restaurant lease, our senior Partner Peter Ruchniewicz discusses why buyers need to be wary of potential additional costs.
Restaurant units are typically first offered to the market as leasehold premises at market rents without requiring payment of a premium “up front”. It is therefore common for the governing lease to contain restrictions on matters such as tenant’s right to dispose, use and alter the premises in which the landlord retains ongoing controls often requiring consents to be obtained before the tenant can take any relevant material steps.
These controls are designed to protect or enhance the investment value of the landlord’s interest and in exercising them the landlord can normally be expected to take legal and other professional advice.
Who should bear the cost of this advice is often an issue in negotiations for new premises.
Sometimes landlords and/or selling tenants require the incoming tenant to pay some or all of their legal costs arising which can be substantial. Structuring a transaction in this way can work significantly against an incoming tenant who should resist where possible. Often this requirement reflects landlord/seller fears of incurring abortive costs but can sometimes be overcome by the early submission of comprehensive tenant covenant, concept and fitting out information. Where it may prove commercially unavoidable, such costs should be offered as a capped or fixed ‘contribution’ at an acceptable pre-agreed level.
In a recent transaction, a client of CBG Law sought our advice early upon the issue of some ‘indicative’ heads of terms for the acquisition of an existing leasehold restaurant which amongst other things required ‘all the seller’s professional costs to be borne by the buyer’. The selling agent had suggested ‘this is usual’ and the client had imagined that the total would not be significant.
However upon a review of the details we soon established that as the interest being sold was an underlease and that 3 sets of solicitors and surveyors costs would arise in dealing with requisite licences to assign and for alterations. We estimated that these together with the seller’s costs on the assignment itself could be several thousand pounds beyond the client’s expectations.
Ultimately with our guidance the client negotiated a fixed contribution equivalent to just 10% of the total of such costs and duly acquired the property. With robust legal advice, clients can make substantial costs savings – money that can be spent on the all-important operational side of the business.
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