Read this before you sign a lease for a bar

Over the coming months, Sven Almenning will be writing a feature series on how to open your own bar. First off the rank is lease negotiations and heads of agreements.

I thought I’d kick this series off by covering what I feel is one of the most important things when it comes to opening your own bar, namely the negotiation of your lease and lease terms. For many of us this is a completely new experience. You may have opened a dozen bars for other owners, but chances are you never sat at the negotiating table trying to secure a good lease. So despite all your experience running and managing great venues, many of us kick off our foray into business ownership sitting at a table negotiating with landlords and agents who are experts at this; something which can leave us severely disadvantaged…

Over the years I have learned a few things about this (although I am confident there are people out there with both more and better advice than I) and here’s my take on it.

HOA – heads of agreement

This really is where everything is at. Once you have found a site you want to lease/rent from a landlord, the agent will normally ask you to sign a Heads of Agreement. And if they don’t – then you should request one. In my opinion this is where you have the chance to negotiate the commercial terms for your lease. Some of the key items you should agree on include:

• The rent & outgoings
• Turnover rent
• Rent free period
• The length of your lease and your options
• Bond, bank guarantees and personal or director’s guarantees
• Fit out contribution & Lessor’s (landlord’s) works
• Leases without an approved license

Rent & outgoings

This is the big one. In the end the landlord will want as much rent as they can get. Their rent has a direct impact on the value of their premises if they are to sell it down the track. It may therefore be hard to negotiate down your rent. However, that doesn’t mean you should not try.

Whilst most landlord and agents will try to give you a value based on sqm, I prefer to work out what I think the place is worth based on licensed or DA capacity plus opening hours…

For instance, for a 100 capacity Sydney city fringe venue with a 1am licence, I think $1,000 per person capacity per year is fair. So $100,000 per year or $2k per week. Whether the place is 150sqm, 200sqm or 300sqm means little to me, if I can’t fit more than 100 people in there.

Another way to calculate your maximum rent is as a percentage of forecasted takings. I prefer for my rent to fall between 5 percent and 8 percent of my forecast takings. 10 percent is an absolute max for me, but then again I run with pretty high wage costs (more on this in a later story), so I have to save on rent. In some venues we may even sit below the 5 percent mark. If you have fairly low wage costs you may be able to afford paying more rent.

Regardless, my advice is: stay below 10 percent (and remember to make sure both your rent and income figures either both include or both exclude GST when you make your calculations).

Turnover Rent

The concept of turnover rent has reared its ugly head in more or less every conversation I have had on rent in the past two years. Especially when dealing with developers. The argument they put forward tend to go along the lines of… we’ve given you such a great deal on rent, blah blah blah… If it turns out you’re successful, maybe we can recoup some of our ‘losses’ through turnover rent…

They way they work it is you pay a base rent amount and then they ask for a percentage of your turnover on top… Normally they want 10 percent.

Whatever. I don’t dig. If a landlord wants turnover rent it should only be turnover rent. When times are tough they get little to nothing, when times are smashing, they get more…. However I’ve not heard of a landlord signing up to this deal yet. They want their base rent plus the cream… To me that’s a no-no.

Rent Free Period

Always ask for a rent free period. In fact, try to ask for two. I ask for:

• Rent free fit out period;
• Rent free trading period;
• Ideally I want 3 months of each so 6 months in total…. I don’t always get it, but I do push for it.

Why? Well, during your fit out period you are adding value to the landlord’s assets. You should not be paying rent while adding value to their property.

The second rent free period is for you to find your feet after opening. Your running costs tend to be higher as you open than they will be down the track. Wage costs are higher, cost of goods are higher, and when paying rent on top you may find you are running in the red straight away. A couple of months of rent free period on top doesn’t affect the landlord’s property value at all, but it does help put a long term tenant in their space.

Do note though, that the longer the rental term the more generous is your rent-free period likely to be.

Length of lease and options

The longer the lease, the more valuable is your investment into the venue. And, if you haven’t signed a personal guarantee I don’t see any reason why you shouldn’t sign as long a lease as the landlord will give you. On the other hand, if you have signed a personal guarantee you may want to break the lease into shorter lease options… So a 5+5+5+5 rather than a 10+10 for instance.

A 5+5 means you have a five year lease with an option to renew your lease for another five years. It is your call whether you want to get out after 5 years.

Anything less than a 5+5year lease is not of interest to me. For me to take anything less I’d have to be able to walk right in and begin trading without covering any cosmetic fit out costs.

Bond, bank guarantees and personal or director’s guarantees

In my experience every lease these days come with a personal or a director’s guarantee. And as such your solicitor is likely to tell you that it is both a common and fair practice.

Common it may be. Fair it is not. At least not in my opinion.

By signing a personal or a director’s guarantee you are becoming personally liable not just for anything that happens to the building during your tenancy, but also for the rent for the length of your lease term… So if you have signed a 10 + 10 year lease at $ 100,000 per year that is a million dollar liability for you.

Imagine operating a nightclub in Kings Cross and then having to close after the lock out laws devastated the nightlife there. Imagine being three years into a 10 year lease at $ 200,000 per year in rent. With 7 years to go on your lease you have to keep paying $ 200,000 per year , or potentially a whopping $1.4million to the landlord. There’s really only two ways out. You either find another tenant who is willing to pay the same rent (and in our example of Kings Cross that’s highly unlikely) or you declare yourself personally bankrupt.

Hence my big fat “NO” to personal guarantees.

I have managed to get out of signing these every time and I do it by offering a couple of months extra worth on bond or bank guarantees up front. Yes, this cuts into my cash flow, but it massively reduced my exposure.

A quick note on leases without a license

Sometimes your dream venue won’t come with a liquor licence and you’ll have to go through the process of acquiring one. (I’ll cover that process in more detail later). The fact that your premises doesn’t come with a licence has a big impact on how you negotiate your HOA and your lease.

In short your lease should be 100% dependent on you getting your desired licence. If your application is delayed (regardless of the reason) your start date should get pushed back until the licence is granted. If your licence application gets declined, then you should immediately be freed from your lease obligations.

I know of people who failed to negotiate the above and were basically left paying rent for months whilst their application kept running into issues and becoming delayed.

The landlord may request that you start your fit out works during the application period. This has happened to me. However without a guarantee that you will receive your licence (and there is never a guarantee), this is not something I in good conscience can recommend you do.

I have negotiated agreements where the landlord has promised to reimburse me for all fit out costs should the license be declined, simply because they want the place open and trading asap; and that is the only circumstance I would ever agree to commence work on a site before the license has been approved.

Fit out contribution or Landlord’s/lessor’s works

You might find a site you like, but that is either missing essential services or is in such disrepair that you’d want the landlord to contribute towards the fit out.

I normally want to see the landlord cover all essential services such as grease traps, exhaust, plumbing, water and air conditioning whilst we’re happy to look after the cosmetic fit out. The details of this is negotiated pending the individual sites, but it is important to negotiate it and to put your wish list forward and also to ensure you get it included in your HOA and lease.

It’s important to remember that when you vacate the premises you may be able to take with you furniture and other details of the fit-out; but cool-rooms, plumbing, exhaust fans and air-conditioning etc will stay with the building. The minute it’s built it belongs to the landlord anyway so it is only fair that the lessor contributes in some way towards your build and fit out.

In closing

Ok. So that was a lot to cover, however the HOA and your lease are an essential part of the opening process and decisions made here stay with you for the length of your lease. Seeing that this is where most of us have little to no experience when we first start out I thought it was worth going into detail.

• Sven Almenning is the founder of Eau De Vie and the Speakeasy Group as well as online hospitality training platform Ananas. He was Bartender Magazine’s recipient for the Outstanding Contribution Award in 2009 and has been in the top 5 of Bartender Magazine’s biennial Most Influential List every year.

• Please note the advice given in this article is general in nature and not to be considered specific legal or financial advice and isn’t a substitute for professional advice.