Things To Look Out For In Cafe Or Restaurant Leases

Setting up a restaurant or cafe in New Zealand is an exciting venture, but it comes with its own set of legal considerations. While your passion for hospitality may be the driving force, it’s your understanding of the local legal landscape that will ensure your business thrives. If you’re not taking over an existing establishment, securing a favourable lease for your new cafe or restaurant is crucial.

The lease is your legal assurance of the right to occupy the premises. Landlords in New Zealand see it similarly: as a means to safeguard their rights and the condition of their property.

It’s a legally binding contract that can either lead to a profitable venture or become a costly affair. That’s why it’s essential to understand the lease terms thoroughly to prevent future complications.

Being fully aware of your lease’s contents is key to avoiding common pitfalls. Let’s explore some of these issues and how you can negotiate favourable lease terms for your new restaurant or cafe in New Zealand.

Lease Duration

The duration of your lease is negotiated with your landlord. Consider both the potential success and challenges of your business. If your restaurant or cafe is thriving, you’ll want the option to renew without renegotiating. Conversely, if you need to exit the lease early, you may be responsible for the remaining rent or finding a replacement tenant.

For instance, a lease with an initial term and an option for renewal, such as three years with a further three-year option, might be advantageous. Landlords often prefer longer leases and may offer incentives for extended terms. However, the location of your premises is a critical factor. A prime location might warrant a longer lease, while a less certain spot might suggest a shorter term.

Consider the trade-offs carefully when deciding on the lease term.

Rent

Rent is a significant expense, and it’s important to have a clear understanding of the costs involved. In New Zealand, commercial leases often calculate rent on a per-square-metre basis. Ensure you receive accurate dimensions of the space you’re leasing, including any additional areas like storage or outdoor seating.

Compare local rental rates to ensure fairness. Lease terms should provide for reasonable rent increases, typically a fixed percentage or in line with the Consumer Price Index (CPI). Rent reviews are usually annual or biennial, based on the lease agreement.

You’ll likely need to provide a bond or bank guarantee, typically equivalent to three to six months’ rent. Even with a bank guarantee, you may need to set aside funds. Consider the frequency of rent payments and how they align with your cash flow.

Negotiate terms that may include a rent-free period during fit-out or seasonal closures. These negotiations can help manage costs effectively.

Additional Expenses

In New Zealand, the lease must clearly state any outgoings or common costs for which you are responsible. These may include maintenance of shared spaces, security, and building improvements. Separate utilities like electricity will also be your responsibility. Ensure you understand all potential taxes or rates that may be passed on to you.

Some landlords may use a cost segmentation strategy for maintenance, grouping you with similar-sized tenants. Assess whether this approach is fair for your situation.

Annual reconciliations should be part of the lease terms to provide transparency on where your contributions are going.

Insurance Requirements

As a tenant, you’ll need to secure insurance. Public liability insurance is essential, and the landlord may require specific coverage, such as for glass. Building insurance is the landlord’s responsibility, and while not typically required by the lease, contents insurance is advisable for your assets.

Fit-Out, Fixtures, and Refurbishment

The fit-out, which gives your cafe or restaurant its unique ambiance, is usually your responsibility. You may inherit an existing fit-out but plan to make changes. Negotiate terms that may include a fit-out contribution from the landlord, especially for short-term leases.

Leases often include a make-good clause, requiring you to restore the premises to its original condition at lease end. Negotiate these terms, possibly opting for a make-good payout instead of a full restoration.

Maintenance of fixtures and machinery, such as kitchen equipment, falls to you. Inspect these items before signing the lease to avoid unexpected costs.

Refurbishment clauses may require periodic updates to the premises. Ensure the initial condition is well-documented to avoid disputes upon lease completion.

Permitted Use

The lease must explicitly allow for the operation of a restaurant or cafe. Ensure there are no restrictions on operating hours or noise levels. Broad permitted uses can make the lease more attractive to potential assignees, should you need to transfer it.

Exclusivity Clause

If your premises is within a larger complex, consider an exclusivity clause to prevent direct competition within the same location, safeguarding your customer base.

Key Takeaways

A lease for a restaurant or cafe is a critical document that requires careful consideration. Ensure you understand every aspect to avoid costly mistakes. At Sprintlaw, we can assist with reviewing or drafting your lease to secure the best terms for your new venture.

If you’re uncertain about lease terms or need guidance, reach out to [email protected] or contact us on 0800 002 184 for a free, no-obligation chat.

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