Opening a restaurant: 5 common issues to avoid.
You’ve perfected your brand, the menu and found the perfect location, you are now ready to instruct solicitors; all going well you should have the key within 8-12 weeks to start your fit out. However, something “unexpected” will invariably crop up during the conveyancing process, so in order to assist below are five issues which regularly come up during the process below.
Budgets are always under pressure once a build gets underway, with unbudgeted expenditure wherever you turn. However, even before starting the fit out it’s important to plan for other opening expenses. Operators will also need to budget for the following as part of the conveyancing process:
- Rent due from the date you get the keys or the expiry of any negotiated rent free period;
- Service charge contributions towards the costs incurred by the landlord in maintaining the building/wider estate in which the premises are situated;
- Insurance rent (often payable in addition to the service charge) by way of reimbursing the cost of the buildings insurance maintained by the landlord;
- VAT on the rent, service charge and insurance rent;
- Stamp Duty Land Tax (SDLT) (see below); and
- Landlord’s fees; heads of terms will usually provide for both parties to bear their own costs on the grant of a new lease. However, if you are purchasing an existing lease (which will most likely require the landlord’s consent), you need to obtain landlord’s consent to your fit out, or require a variation to the lease then you may be asked to contribute towards the landlord’s legal fees.
SDLT is frequently seen in connection with residential purchases yet also applies to commercial transactions, and is payable on the “chargeable consideration” for the transaction. This will include BOTH the premium payable (if any) to an outgoing operator on the purchase of an existing lease, or to the landlord on the grant of a new lease AND the rent payable under the terms of a new lease.
If the landlord has elected the premises for VAT (i.e. VAT is charged on the rent) then SDLT is calculated on the VAT inclusive amount, thereby increasing the tax payable.
A surprise SDLT bill usually comes out of either the fit-out or marketing budgets.
It is in everyone’s interest for a transaction to progress as quickly as possible, but it’s important to set realistic timeframes from the outset. A typical transaction for the grant of a new lease (assuming no conditionality) will take between 8-12 weeks from receipt of papers. This period will need to be extended if a planning permission and/or a premises licence application is required.
If you are taking an assignment of an existing lease this may take longer than the 8-12 week timeframe, as landlord’s consent will usually need to be obtained, leading to more parties being involved in the process.
There’s often a misconception that a tenant is able to “do what they like” once they have the keys. However, a lease is likely to contain detailed provisions as to the extent and type of alterations which can be made, and these will often require landlord’s consent to be obtained (usually at the tenant’s cost). Breaching these obligations can have cost implications, and could ultimately lead to the landlord taking back the premises if you fail to rectify the breach when asked.
The landlord will usually cover their own costs in connection with the approval of the tenant’s initial fit out; so it’s a good idea to use the time during the conveyancing process to submit a comprehensive drawings pack, and obtain landlord’s consent to the works at the same time as signing the lease. This approach will enable you to start works promptly thereby minimising your fit-out period and enabling you to capitalise on any rent-free period.
An external seating area can provide valuable additional covers, and prove a real draw in the summer months; yet, it’s not simply a case of putting tables and chairs outside the shop front. The following points need to be considered:
- If the premises form part of a larger estate you will need to obtain a seating licence from the landlord/owner of the estate;
- If the seating area is on public highway, or is on private land but accessible by the public, without payment, then a street trading licence (renewable annually) may be required from the local authority; and
- Your premises (alcohol) licence will need to cover the full extent of the external seating area to enable customers to buy a drink with their meal;
Opening a new restaurant is an exciting time for any operator; It’s our job to ensure the process runs as smoothly as possible, and that the lease gives you the flexibility you need to run your business and adapt to ever changing consumer demands.
Alex Hutchings is a commercial property lawyer specialising in hospitality and leisure premises. If you are looking to take a new lease of commercial premises with a view to opening a restaurant then contact Alex on 020 7462 6961 or email@example.com to see how CBG Law can assist with your plans.