Five rules for smart expansion
In order to grow as a business, most restaurant groups need to expand the number of sites from which they operate. But doing so is a risk, as has been shown by the recent spate of high profile failures in the sector which expanded too fast. Fladgate real estate partner Gavin Whitney shares his five tips for taking on new leasehold premises.
1 Pay the right rent
One of the most important considerations in deciding on new premises is the amount of rent to be paid. Make sure you get a surveyor who can advise you on the market rent for the area. Consider whether a rent based on your turnover might be better for your business model. Don’t forget to consider the other costs such as business rates and service charge. The council can advise you on the rates and the landlord can give you an indication as to the likely service charges; but don’t take the latter at face value. Ask for accounts and budgets and ensure you do a survey of the building to see whether it is in good condition or might need a lot of work doing in the near future. Try asking for a fixed or capped service charge to give you cost certainty.
2 Agree the right length of term
In the past, leases used to last 25 years with no breaks. Now, five-year terms are far more common. Balancing the need for certainty of occupation with the ability to vacate if the site doesn’t work for you is vital. Consider a five-year term with an option to renew rather than 10 years with a break (which can be more costly from a stamp duty land tax perspective if you only ever intend to stay for five years).
3 Spread the cost
Opening the site is going to take a lot of cash since there will be the costs of fitting-out, marketing, hiring staff etc., so you need to reduce your overheads as much as possible in the first few months. You should ask your landlord for a rent free period to allow you time to fit out and start trading. Some landlords will contribute towards the cost of your works, so you may want to ask for this if the landlord is very keen for you to take the space. You may also want to consider a stepped rent at the beginning of the term so that you have time to build customer numbers and to help you reduce your initial outgoings.
4 Allow for reinvention
Restaurants need to constantly reinvent themselves and to do that they often need to refit, change their ‘look and feel’ and possibly even rebrand. You need to ensure your lease gives you the ability to make non-structural alterations and also changes to internal and external signage, preferably without the need to obtain landlord’s consent.
5 Be flexible
As the market changes, you may want to vacate the premises or may not need as much of it. Therefore, you need to be able to assign the lease easily or underlet the whole or part of your space. You should ensure that your lease allows you to do this and that any landlord requirements in relation to the same are not too stringent. If franchising is part of your model then ensure that this is allowed, preferably without consent. If you have different companies and different brands then you may also want permission to share with those group companies without consent.
Gavin Whitney is a partner in the real estate department at law firm Fladgate LLP.
