Brewery Lease Basics: Terms, Definitions, Watch Outs
There’s a lot to think about when negotiating (or re-negotiating) your brewery lease.
In this post, we’ll dig into lease basics, review terms you need to know, and share important lease watch outs.
- Lease duration and renewal options (how long is the initial term and what are options for renewals?)
- Rent structure and escalation clauses (how are increases calculated?)
- Triple net lease (what does this really mean?)
- Maintenance and repairs (who pays for what?)
- Assignment and subletting (are you allowed to sub-let the space?)
- Termination and exit strategies (what are your options if you need to get out of the lease?)
What follows is a basic run down of terms, definitions, and a few tips from my personal experience working with leases. I’m not a lawyer, so it’s always best to have one review your contracts prior to signing.
#1 Lease duration and renewal options
One of the goals in your lease negotiation is flexibility and optionality.
Ideally you’re looking for stability, the ability to plan, but also building in options to get out of the lease if it’s not working. (See Assignment and Subletting below)
For example, you may have a 5 year lease with two 5 year renewal options. This gives you stability, and peace of mind to know the time duration and rates that you’ll pay to retain your space.
There are many priorities when negotiating a lease. Lease stability is right up near the top.
#2 Rent structure and escalation clauses
Rent is often a fixed amount, paid monthly, with built-in increases at set time intervals. For example, $2500/month for the first year, then 3% annual increases thereafter.
The computation of rent is based on a dollar amount per square foot. Say, $30/foot x 1,000 sq feet = $30,000/year. Paid at $2500/month.
Other rent structures may include a variable component, such as additional rent when sales exceed a certain threshold. For example, tenant will pay 3% of annual sales over $1million.
#3 Triple Net Lease
NNN stands for “triple net lease”, a type of commercial lease where the tenant pays rent, utilities, and other expenses such as property taxes, property insurance, and common area maintenance charges (CAM).
Be careful with these NNN charges. Make sure you get proper documentation to support any expenses passed through to you.
Understand that the landlord doesn’t have an incentive to keep these costs down. Who they hire and what is charged for landscaping, snow plowing or common area maintenance is not their concern. It’s yours.
If you’re in a building with multiple tenants, make sure the allocation of the NNN costs are computed correctly. Often, these fees are charged pro rata based on the square footage leased by each tenant. Ensure the costs allocated to you are accurate.
#4 Maintenance and Repairs
The lease should specify who is responsible for maintenance costs. Typically, major systems and mechanicals are on the landlord (think heating, cooling systems, roof and structural items).
If this is not clearly specified in the lease you may run into expensive disputes.
Think about things that can go wrong, assume they will, and ensure the lease is clear on who pays for what.
#5 Assignment or Subletting
In a lease assignment, another tenant takes over the lease as is. They ‘step into your’ shoes and you transfer the lease to them.
Under a subletting agreement the tenant (you) enter into a separate lease with a new tenant (or sublessor).
All the terms and conditions of your original lease with the landlord stay in place.
These options can be very useful if you need to get out of a lease entirely, or reduce your rented space and related costs by sub-leasing.
#6 Termination or Exit strategies
Ideally, the contract will outline how the lease can be ended early and provide details on the provisions and costs of doing this.
In my experience, there usually isn’t a provision for early exit or termination. You’re just obligated to the full payment over the full term of the lease.
In these situations, if you need to exit early it becomes a negotiation. The landlord wants the full rent due over the remaining term, you offer a smaller buyout, you work towards an agreement.
Better to have a plan in writing if you need to exit early.
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