New Thoughts on Leases

By Lloyd M. Gordon, President
GEC Consultants, Inc.
Skokie, IL 60076

Over a year ago I wrote an article on restaurant leases. Things have changed and I would like to bring you up to date on some problems in the world of leasing and how they can be effectively handled.

First of all, in many cases the exuberance and overly optimistic earnings projections have failed to materialize. Both first time entrants in to the food service industry as well as those pros who have opened their second, third or fourth places with the idea that location, location, location is everything have found that business conditions are such that the bottom line has been drastically curtailed from the optimistic projections at the time the facilities were concepted.

For many restaurants business conditions caused by changes in the local economy as well as factors such as immediate vicinity industrial production changes, declining tourism and slower rates of demographic changes have weakened sales to the point where the percent of rental paid to sales ratio now exceeds what has historically been considered normal. For years restaurants attempted to pay 5% - 8% on food sales and no more than 8%- 10% on bar sales. Some restaurants are finding that the month to month analysis shows food rentals projected as a percentage of sales are exceeding 10% and those on the bar are as high as 15%. This has caused a definite problem in the ability of the restaurant to produce a liveable bottom line for the operator. What to do?

Storm clouds on the horizon

Many operators are working towards extricating themselves from business by offering their restaurants for sale, often at sacrifice prices or to cut down on the quality of their product and service to the detriment of their reputations and marketability, and others have learned to live with reduced take home income and bitten the bullet so to speak hoping the problem is a short term one.

Take heart! There is another alternative - that is to renegotiate your lease. Literally go to your landlord with your present lease and say " I can't live with this lease and I'd like to sit down with you and rework the lease so that I can survive without causing you undo hardship. In effect compromise with me so that in the long run you have a viable tenant."

Now this may sound logical and make a lot of common sense, but you've got to understand that in order to do this and come out with a successful result, you've got to overcome a lot of ancient prejudices as well as legal technicalities.

Some of the prejudices

Some of these may be summarized as follows:

1. Landlord has no stake in the success or failure of your business.
2. The landlord has his own problems and if your business fails, that's your tough luck.
3. An astute business person doesn't get himself into a position where he can't pay his rent.
4. You have a moral and legal obligation to pay the agreed upon rental.
5. It's an embarrassment to go to the landlord with your hat in your hand and admit that your business is failing.
6. It's a waste of time to talk to the landlord because he is not going to do anything favorable for the tenant no matter what.
7. The landlord would be happy to see you fail because he can take the premises back and
8. re-lease it on more favorable terms for himself.

Legalities to overcome

Here are some thoughts on the legalities that must be overcome to get a more favorable lease:

1. The lease is a legal contract which cannot be broken or altered without the mutual consent of both parties.
2. All of the articles and provisions of the lease existing today are as important today as they were at the time the lease was originally written.
3. As lease documents are aimed at protecting the landlords' rights, they have no motivation to alter them.
4. The perception that a lease is an expensive document to alter which could nullify or offset any financial gains to the tenant should concessions be reached.

Times and thinking are changing

The present business situation is changing so what was thought to be immutable lease protocols are found to be open to renegotiations. The landlords are becoming sensitive to the needs of the tenant and tend to desire that the tenancy remain and that the tenant is enabled to succeed and maintain a successful business. This reflects also in the legalistic view of the lease as an inviolate static instrument which is now being viewed by the landlord and the tenant as a flexible instrument needed to mirror current business conditions and maintain the economic integrity of both parties.

Take the necessary action

The first positive step to take is for the tenant or his/her agent or representative to contact the landlord or the agent and request a meeting. At that meeting the tenant should make proposals listing adjustments and alterations to the existing lease. It should be made clear to the landlord that changes are needed to insure the survival of the business and the continuance of the tenancy.

GEC Consultants, Inc. has been successful in representing restaurant and other business clients in renegotiating existing leases which soften economic problems and have permitted these businesses to continue with both happier tenants and landlords. If you feel the need to discuss this potential for renegotiation with me, phone me at (847) 674-6310 and your phone call will be kept in strictest confidence.

Mr. Lloyd M. Gordon, President of GEC Consultants, Inc. has an MBA from the University of Chicago. He has concepted more than 390 restaurants and has been consulting for over 44 years. He helps people enter the restaurant industry, points the way to profitability, and helps keep them successful. To discuss "New Thoughts on Leases" he can be reached at 847-674-6310.

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