We are in a strip mall operating a fast-casual American cuisine restaurant (by lease definition)in the same strip as a full service restaurant that is defined as American cuisine. The only real defining difference in our leases are the counter service vs. table service. We are definitely more of a burger shop with steaks but over the past few years have changed our menu to keep up with competition and satisfy the public. Our full service restaurant now is seeking legal revenues, as we have cut into his business. There is also a Mexican fast casual at the end of the mall who signed first. The full service was there before us as we took over a failed sub shop.
With that as background, he is now asking us to define our menu. My concern is we may slit our business throats if we do not allow for change. The restaurants lawyers feel they have a case. We have family that owns the strip and need to protect all involved. Where would we seek advice regarding Menu Definition and how would we protect ourselves, as business is dynamic and those who do not change, die.

Hi,
I read your email and I can see that you have your hands full. If I am correct, you are either directly or indirectly an owner in this property as well as a tenant, right? And now it appears that you have angered one of your tenants that was in operation before you. That tenant is apparently asking you to define your menu and your question to me is basically how to define that menu without limiting yourself in your business.

As far as defining your own restaurant’s menu, you should definitely consult a lawyer who is familiar with restaurants and leases. The bigger question that jumps out at me with your comment is, “Did any of the previous tenants have an exclusion in their lease protecting them from a future tenant offering basically the same fare as them?” You’re in a tricky situation here since you operate the business that essentially is competing with your own tenants. It might be better to strike some kind of understanding and make sure everyone is comfortable with what each other is serving.

I recommend getting professional legal help before this gets too far out of hand. I don’t know how things are in your area as far as the availability of qualified tenants, but it’s generally a good idea to keep good tenants happy and in place, as this contributes towards your bottom line.

Thanks for writing,
Cathy

We’ve operating our business for 12 years now and have always been a tenant. Now, my new  business partner is suggesting buying rather than leasing. He found an office building with a space that I admit would work well for us, but I get an uneasy feeling about some of the other tenants. Also, I lease because it’s easier, I deduct my lease expense and I don’t have to deal with vacancies or obnoxious tenants. Which is better?

Nick K.

Memphis, TN

Nick,

Your partner isn’t totally nuts. There are certain advantages to buyer rather than leasing. For example, having control over your space, building equity in your property and certain tax advantages will all benefit a property owner. However, this isn’t a simple A or B answer. I would suggest that you meet with an experienced Commercial Realtor who will do a comparative analysis of Leasing vs. Owning. If done correctly, you’ll be able to see just what owning will cost when compared with leasing.

Based on what you said in your question, my guess is that you would be happier buying a single tenant property so that you don’t have to deal with tenants or vacancies…what do you think?

For any of your commercial real estate questions, send an email to:

cathy.anderson@crye-leike.com

Jackson

Hi Jackson,
I understand what you’re saying, but unfortunately the simple answer is no, there is no such thing as rent control or a fixed increase for existing tenants. The landlord can charge whatever he feels he can get in the market. Your best defense is to point out that you have been a good tenant for these 4 years and leased his space when he had no tenant for 2 years. If there isn’t any loyalty on his side then you just might be better off somewhere else. Sorry…

Cathy

For any of your commercial real estate questions, send an email to:

cathy.anderson@crye-leike.com

Bill G, Memphis

Hi Bill,
I can understand your frustration but before you run up a large legal bill you need to check your lease. The quick answer to your question as to whether your landlord can do this or not is yes, he can if he has allowed that other tenant an exclusive on selling those products. That means he has agreed not to let any other tenant into his center that will compete against him by selling the same products he does. So, once you decided to put those products in your store, you became a competitor to him. You more than likely have a section in your lease that states what kind of business you will be operating. If your lease limits you to beauty related services, then you really have to stick with that or speak to your landlord about making any changes. By the way, you could have put an exclusive in your lease preventing another beauty related service provider from entering the center and competing against you. Food for thought.

Good luck,
Cathy

For any of your commercial real estate questions, send an email to:

cathy.anderson@crye-leike.com

Barry
Houston, TX

Barry,
Thanks for writing. Sad to say, I have heard from others in your same situation. The good news is, you are  paying below market rents and you are located in an area that is desirable.  The first thing to do is check your lease. Are you allowed to sublet? Many leases do NOT allow for subletting so that option may not be viable. If subletting is an option, you may have an opportunity to make some money by offering the space you don’t need at market rent and then pocking the difference.

First things first, though. Make sure you current on all of your rent first. If not, that makes it very difficult to negotiate with your landlord when you are technically in default. If you are current with your rent and have proven to be a good tenant then you are in a good position to approach your landlord. Explain your current situation and offer a solution. Remember, your landlord has no obligation to meet your demands/suggestions other than what the lease provides, but given the economy he/she will most likely rather accommodate you if he can. Be prepared to give something in return. For example, if he is willing to take back some of the space, he may want you to extend your original lease term as part of the deal. Be prepared to negotiate with the understanding that both parties will want to come out gaining ground and, at the end of the day, you are still obligated to the terms of your lease. And, if subletting is an option, you may acutally come out ahead!

Good luck,
Cathy

For any of your commercial real estate questions, send an email to:

cathy.anderson@crye-leike.com

Janice H., Cordova, TN

Hi Janice,
My first question to you is this: Have you read your lease?
If you have a copy of your lease, please take the time to carefully read all components. Your lease should state your basic lease terms with base rent clearly stated.  You should also carefully check to see if under another category labeled something like “additional expenses” you see where you are to be charged your proportionate share of expenses, usually consisting of taxes, insurance and CAM (common area maintenance). These charges are generally split among all tenants of the building or billed to you alone if you are the only tenant. If in your original lease it states that you pay no additional expenses other than your own utilities then, NO, your landlord can not pass these expenses on to you. If, however, you find that you are obligated to pay your share of these expenses then the landlord does have the right to pass them on to you.

Check your lease carefully and consult an expert if you have questions regarding the meaning of any  portion of the lease.  Don’t feel bad – leases are complicated  and it just points out the need to have representation when you enter into any lease agreement.

Good luck!

Cathy

For any of your commercial real estate questions, send an email to:

cathy.anderson@crye-leike.com

Mae

Hi Mae
Yes, of course, you’re right. But basically, here’s what CAM is: the literal translation is “Common Area Maintenance”, which fall under the general category of “operating expenses.” Those expenses include  property taxes, utilities, assessments, insurance premiums, licenses, permit and inspection fees, management fees, normal building repairs, garbage and waste disposal, janitorial labor, material and supplies and heating and A/C  repairs. All of these costs are generally split proportionately between the tenants but I urge you to read your lease to make sure. There are leases, called either modified gross or gross, that include these expenses.

Good luck,
Cathy

For any of your commercial real estate questions, send an email to:

cathy.anderson@crye-leike.com

I know there’s lots of empty retail space out there. I have been waiting for the market to get to this point so that I could find the perfect space to open my specialty boutique. But, now that I’m out there negotiating, I don’t think they are giving enough free rent or concessions. And I’m not sure my Realtor is even trying that much. What do you think?

Rochelle

Hi Rochelle,

I can understand why you feel let down. However, here’s something else to think about. The landlords have a right to make a profit on their space if the market allows. It’s up to each landlord to decide how long they can afford to keep their space vacant, how much free rent they would like to offer, or whether they’d like to offer it at all. You have to remember that from the landlord’s point of view they want to fill their space with quality tenants. The better financial position you are in as a business, the more leverage you will have negotiating. If you’re a brand new business, you have no history operating that business and a landlord might not want to risk leasing to someone who won’t make it.

As for your Realtor not working on your behalf, that’s something you need to discuss with him or her. They certainly have an incentive to work for your behalf and they are obligated to do so if they are formally representing you as a client. Have a talk with them and express your concerns. Perhaps they can give you some better information.

Don’t give up! Good luck with the boutique.

Cathy

For any of your commercial real estate questions, send an email to:

cathy.anderson@crye-leike.com

We’ve been leasing our office space in Houston and are 3 years into a 5 year lease with a 5 year renewal option. When we began this lease in 2006 we got what we thought was a pretty decent base rent. Now, the rent is this area has skyrocketed and I think we could make some money here but I’m not sure how. Do  you know what I mean?

Phan

Houston, TX

Phan,

I know exactly what you mean – it’s called a Leasehold interest. Basically, it goes like this: you have a lease for 2 more years of your base term at $12/square foot (let’s use this as an example) and rents in the area are $15/square foot. That means you have a value in the difference of $3/square foot. Now, factor in your renewal option.  If that base rent is still below market rent, then you still have a leasehold value.

The only way to make money off of this option is to sublease your space. That means you have to move. If that’s not a problem and you are comfortable that your rent will stay below market then:

1. sublease your space
2. collect from your tenant
3. pay your landlord on your original lease
4. pocket the difference!

Sounds easy, right? One thing you need to know, however, is that most landlords are including clauses in the lease that state that any increases in rents due to a sublease automatically become the landlord’s. Double check to be sure.

If you decide to use this option, check out this Sample Sublease form:

http://tarnet.com/files/pdf/2009forms/F72.pdf

Cathy

For any of your commercial real estate questions, send an email to:

cathy.anderson@crye-leike.com

Devon, Memphis, TN

Hi Devon,
I have a pretty good idea that what’s going on is your additional share of CAM charges, or common area maintenance. You should double check your lease but generally, triple net leases mean that you pay your proportionate share of taxes, insurance and CAM charges. That would explain why some months are lower than others. Perhaps there were additional fees, like landscaping or something like that. Don’t be afraid to ask your landlord for an explanation. It’s better for you to feel comfortable and understand all aspects of your lease.

Good luck!

Cathy

For any of your commercial real estate questions, send an email to:

cathy.anderson@crye-leike.com