Good lease period for a start up Cafe?

[Joga]

Hi there!

My partner and I are in the process of looking for a suitable space to start up our first cafe.

We think we have found the perfect little shop but we're trying to come to grips with what lease period is right for us.

In a perfect world we would build the business up from scratch to probably sell after around 4 years. I am aware that things usually don't go to plan in small business and that the majority of cafes do fail : (. We do however have loads of industry experience and support and feel like we can pull it off.

So from my understanding when starting a little cafe you would probably want a small lease term to begin with just in case your cafe fails.

However if we succeed and have a profitable cafe to sell in four years obviously to sell you would need to have a reasonable amount of lease left for potential buyers to consider it? Having a landlord tell you to get out would be the worst for a cafe doing well you cant just move shops like perhaps something more retail or service minded could.

The shop we are looking at it is offering a 3 + 3 lease. Just say the cafe fails after one year exactly how long am I still responsible for the lease? 2 years or 5? We suggested a 2 + 2 + 2 + 2 thinking it seemed to cover all bases for us - If the business failed we would only have a 2 year lease to be responsible for (is that correct?) or we could sell the business after four years with 4 years remaining for a potential buyer which wouldn't be too bad?

They stuck firm with 3 + 3. Why is that better for them? Because it gives them one more year of security? Or because it doesn't lock them in for 8 years only 6?

How does selling the business effect the lease? Do the new owners need to renegotiate straight away or do they just take over from you until the lease period is over and then renegotiate?

I believe we have to think about the big picture and try to get something that will work in our favour in the best case scenario (having a great business to sell in 4 years) but also in the worst case scenario (business failing and still being responsible for the lease) I'm just not sure exactly what that is!

I have come to grips with practically every other aspect of starting this business from scratch on a very low budget (it's been in the planning for a long time now) but I'm not 100% sure on any of this lease stuff so any advice would be greatly appreciated!

Thanks so much in advance!

Jacqui

[FS Concierge]

Hi Jacqui,

Thanks for joining us and apologies that your first post got stuck in our moderation queue for a while.

I'm sure there'll be some people around here who can give you some advice on this, but in the meantime, congratulations on progressing your plans as far as you have.

Hope it all goes brilliantly for you,
Jayne

[Kennethti]

Hello Joga,

What a good lease period is for you is a matter for your assessment and for your consideration and will probably be specific to your situation.

In NSW the default position for retail leases are that the lease, including options, must be for a minimum period of 5 years. This can mean 2+3, 3+2, or whatever other combination. Retail leases must also contain a number of additional documentation and further information can be found at http://www.fairtrading.nsw.gov.au/Bu...l_tenants.html

It is not unusual for a landlord or lessor to seek a 3+3 term, but I will note that a 2+2+2+2 term is unusual. If you enter into a 3+3 term and you end the term early, you may be liable for up to the 3 year term.

The lease may also specify what can happen if the business is sold during the term of the lease. Some leases do not allow you to assign the lease, which means that if you sell the business the new owner must renegotiate. Provided that the new owner takes over immediately and continues to pay rent it will be unusual for the landlord or lessor to hold you to the balance of the contract.

When you sell the business as well, your contract may specify what the new owner must do. It is not unusual to have the sale of business contract be on the condition that the new owner must enter into a new lease or the lease must be assigned to the new owner within a certain time period.

It sounds like you have a lot of questions and in these circumstances I strongly recommend that you see a local solicitor.

[Indo]

Hi Jacqui

I did exactly what you are proposing to do; I set up a cafe from scratch and sold it 3 months before the end of my first 3 year lease period.

Firstly I would advise you to go for the 3 years, it takes a while to get established and you will be surprised how quickly that first 3 years goes!
Kennethti (above) has said that there is a min 5 years in NSW however I sold the business through a broker/ agent, the buyer used a solicitor and neither mentioned it so I can only assume it doesn't apply here in QLD.

Be aware that the rules for commercial leases are quite different to residential, you will be responsible for many outgoings, legal fees to have contracts drawn up, etc. Also be aware that while things may be standard practise, if the landlord wants the place leased then many things may be negotiable and you may not be obliged to accept the answer that “it’s always done this way”. I negotiated myself out of a lot of extras while keeping the owner on side.

When selling my broker advised I get the new owners to begin a completely new lease despite there only being 3 months left on the existing one. This ensured that I wasn’t up for any ‘surprises’ and that I wasn’t going to be chased for signatures or anything else at the conclusion of the lease.
This is actually a very important point that may need some finessing on your behalf at the time of the sale. You are caught between trying to make both sides happy – your new buyer and your landlord, and it can be an extremely difficult time if they don’t see eye to eye. My landlord didn’t increase my rent for the entire period of my lease but wanted the 3 years worth of increases included in the new lease, plus a few extras. In order to make the sale I had to work things out between them or potentially watch it fall over – strictly speaking this was perhaps the job of the broker but in the end you do what you have to.

I agree that you should certainly speak to a solicitor, just make sure they are familiar with commercial leasing.
If I were you I’d also look at a few ‘businesses for sale’ sites and check out other cafes for sale in your general area, they usually include details such as the lease period so that may give you an idea of what to expect. You might also contact local business brokers and ask a few questions.

Please feel free to PM me if you have any other questions.

[Kennethti]

Originally Posted by Kennethti

Hello Joga,

What a good lease period is for you is a matter for your assessment and for your consideration and will probably be specific to your situation.

In NSW the default position for retail leases are that the lease, including options, must be for a minimum period of 5 years. This can mean 2+3, 3+2, or whatever other combination. Retail leases must also contain a number of additional documentation and further information can be found at http://www.fairtrading.nsw.gov.au/Bu...l_tenants.html

It is not unusual for a landlord or lessor to seek a 3+3 term, but I will note that a 2+2+2+2 term is unusual. If you enter into a 3+3 term and you end the term early, you may be liable for up to the 3 year term.

The lease may also specify what can happen if the business is sold during the term of the lease. Some leases do not allow you to assign the lease, which means that if you sell the business the new owner must renegotiate. Provided that the new owner takes over immediately and continues to pay rent it will be unusual for the landlord or lessor to hold you to the balance of the contract.

When you sell the business as well, your contract may specify what the new owner must do. It is not unusual to have the sale of business contract be on the condition that the new owner must enter into a new lease or the lease must be assigned to the new owner within a certain time period.

It sounds like you have a lot of questions and in these circumstances I strongly recommend that you see a local solicitor.

Just wanted to clarify a previous statement - while the default minimum period including all options is 5 years in NSW, this period can be reduced subject to a certificate being issued by your solicitor indicating that you've been advised that the lease period plus options is under 5 years.

I do agree that commercial leases are very different from residential leases and you should get advice in relation to them.

[liesel]

Hi Jacqui,

First of all congratulations, sounds like an exciting time!

I am in a similar situation to yourself and presently negotiating on a commercial lease. Landlords will obviously want to keep you locked in for as long as possible (Be careful if they don't, this could mean they plan to re-develop in the future)... In my experience they usually run for a standard 3x3 or 5x5 term depending on the lease type.

Determining the lease period comes down to you and what you feel comfortable taking on. Time does go very quickly when you're setting up a cafe/restaurant and you don't want to get to the end of your lease and then the landlord turns around and tells you he will not renew it.

My advise would be to get a commercial solicitor to look over the lease, they will be able to advise you if they're are any little surprises in the lease the landlord or estate agent neglected to tell you. Remember the responsibility is with you to do all your checks and make sure all approvals are in place.

With regards to selling a business, it can be challenging and costly as you have 3 parties involved. The prospective buyer can either take over an assignment of your lease (finish up your lease term) or re-negotiate a new lease (direct). This comes down to many factors, such as 'how long is left on your current lease' and the prospective buyers intentions when buying your business.

If you have any questions feel free to DM me, or you can check out my blog at: http://palominoespresso.blogspot.com.au/ I've just writen a post about different things to look for when taking on a commercial lease.

Goodluck!