We talk to Robbie Doyle from Buy Grow Sell about the pitfalls and opportunities in negotiating a Restaurant lease.
This is particularly topical in Australia, with Sumo Salad putting two leasing companies into administration because of the difficulties that they have had in negotiating the leases with Westfield. Westfield, like a lot of shopping centre owners have tried to respond to decreasing retail trade by increasing the experiential opportunities for customers. And this has seen an increase in the number of restaurants in shopping centres with no increase in customers. In fact, some shopping centres are seeing decreasing foot traffic.
Where can restaurant owners find properties that have affordable rents?
We discuss some of traps that can be included in a lease offer.
We look at how many restaurant owners buy their property versus leasing. Buying gives you a friendly landlord, but it is expensive and if the restaurant goes badly, you have a struggling lease and a struggling tenant to deal with at the same time.
What are the different types of lease that are available and how can you structure that with your exit plan, especially when you factor in the fitout costs that will be sunk into the property.
Should you get a lawyer to review your Restaurant Lease? Robbie discusses some of the caveats that can be put onto a lease, and how they can affect your over the time of the lease.
What are the parts of the lease that are negotiable and how can you get the best terms for your Restaurant lease? Robbie provides some great insights into what Landlords can be thinking and the factors that drive the way that they negotiate.
Robbie shares a lot of great insights into the Restaurant Leasing process that can make the process a lot less painful for you the next time that you need to negotiate a lease.
We finish off with the great story of Robbie’s first Restaurant. A talented chef, he was undercapitalised, but with a little out of the box thinking, he was able to get his first start in a Restaurant. His story has some great ideas in it for those struggle to get the money together to begin their own Restaurant story.
If you’ve got questions on Restaurant Leases, Robbie has very generously offered to help you out, so contact him at www.buygrowsell.com.au
Transcript of the podcast on Restaurant Lease with Robbie Doyle
Secret Sauce Episode 49: The Secret of Restaurant Lease with Robbie Doyle
JAMES ELING: Welcome back, everyone. Today’s topic is going to be a little bit more interesting than it normally would be for restaurants in Australia. Which is why I thought we would have a talk about it today. What I’ve done is we’re going to talk to Robbie Doyle who is our resident restaurant real estate expert. Robbie’s been a chef, he’s now a real estate agent who helps people buy restaurants, grow them and sell them. We’re going to get him in, to help understand some of the issues with leases. It’s an area that I think a lot of restaurant owners find pretty boring. They just get in and they sign the contract, and then they hope it’s all good. Well, a lot of the time it’s not all good. That’s been highlighted by something that’s recently happened in Australia.
A restaurant chain called Sumo Salad, they have a number of companies that manage the leases on behalf of their franchisees. Now, Luke Baylis, the CEO of Sumo Salad, has put two of these companies that handle these leases on behalf of their franchisees into administration because of their inability to renegotiate the leases with Westfield. What has happened in Australia is a huge trend, and I think it’s probably a global trend–that as shopping malls have become increasingly profit-challenged from online shopping, they’ve have tried to make it more of an experience. Which means that there’s a lot more restaurants in a shopping centre than there used to be.
Now, that fundamentally fixed the profitability of the restaurant, particularly when you look at some shopping centres and you think, “Wow there’s not that many people in here, these are huge places there’s not that many people in here.” When every second establishment is a restaurant, there’s a lot of restaurants fighting over very few people that fundamentally fixed the profitability of those restaurants. So, Sumo Salad have placed these businesses into administration because they were unable to renegotiate their restaurant . So, it’s a complicated area. It’s an area that can fundamentally affect your business. So, let’s have a chat to Robbie now and see if he can shine some light on some of the ways that you can better understand the lease and negotiate better as well.
James: Hey, Robbie. Welcome to the podcast.
Robbie: Hi, James! It’s good to be back.
James: Excellent! There’s been some very interesting developments in Australia around restaurant leases which I think are sort of emblematic of some big problems that are happening on a global basis, [I’ve been] talking to restaurant owners in the US and the UK as well. Do you want to run as through what has happened with Sumo Salad and what your thoughts are on it?
Sumo Salad – Restaurant lease hero
Robbie: Yeah. Sure, James. Sumo Salad is taking a very brave stance. Actually, they are my heroes. I was waiting for somebody, a champion to step up and naturally draw a line in the sand and say, “You know, our relationship, it’s as a tenant and a landlord. It has to be equal, not slanted totally in the landlord’s favor.” What happens is, when times are good the landlord says, “Oh, I want some percentage rent because you’ve actually achieved greater sales than we expected and that’s more devices for you; but you can pay us another 8%.” James, that’s not a bad thing because you do want to get to that level. You do want to be that busy that you’re actually achieving beyond your sales.
However, when the economy contracts, when things slow down, when you have media and you go through a general election and people are saying, “Oh we’re broke, we have no money, there’s a housing problem. There’s no money for discretionary spending and everybody is talking down the economy. At that stage, the landlords are still keen not to end the good times mode and their annual increases. They just don’t shake, they don’t change because they answer to shareholders.
But the likes of Sumo have said, “Hang on, times are now different. There’s more competition. You’re allowing similar style retailers and nearly on top of us within your floor plan and it’s not fair. And asking for applied percent annual increase when on the high street, you could get 3% and it’s not fair. Now, the times are quieter and sales are down you should adjust to rent backwards for the cost that’s leaked, but that would never happen in the mindsets of the landlord.
I think, for Sumo Salad to take up the flag and to run over into the battlefield and try and make a difference and to rally people. I will really be watching that with interest. I think they’ll do a quiet deal. I think they’ll want them to shut up and go away because it’s easier to kick off smaller operators but Sumo [Salad] are big to folks in Australia and they recently altered their offerings, so they have that pressure offering. Their menu has changed, its presentation has changed and they have branched out to other things besides salads.
James: And that’s the thing–they’re not a small operator, 104 sites across Australia. To actually place the company that’s responsible for the leases into administration, that’s pretty much drawing a fairly significant line in the sand really, isn’t it?
Robbie: That thing that the landlords will eventually win, they’re [Sumo Salad] just a behemoth. They’re just too big, they’re global. It’s just like trying to turn an oil tanker quickly.
In theory, you just turn the wheel that way and it will. No, 10 miles later and it’s still moving, they won’t change. There will be blood on the street but what will happen is, the captain will force people to be more creative and looking for alternatives. You don’t have to be in the shopping centre to benefit from the number of people that visit the shopping centre. So, strip areas, strip shops and retail precincts adjacent to shopping centres is where you want to be with good traffic flow.
The future of Restaurants – not in shopping centres
The world has changed. People are getting lazier, they don’t want to even get out of the car to get a coffee or sushi or a salad or a sandwich, so if there’s a drive-thru the amount of inquiries of guests on drive-thru to date it’s just growing in popularity. And it is not going to change and I think you’ll find people drift away from the big box retail centres. And then go back to finding alternatives and that’s where secondary sites become trendy. If you’ve got a working class area or a rundown area, where rents are cheap you get some young entrepreneurs, they go in, somebody sets up a barber shop. Somebody else has some kind of bespoke and coffee roastery and somebody doing a pork shop, t-shirts, vinyl records it gets a new eclectic mix of art gallery pops up. Certainly, those little areas then become trendy and become popular and then the rents are still affordable.
If you look back 10 years ago, you’ll see this old street and park that I remember was a rundown area, now it looks like a renaissance. That’s because, the landlord’s in the shopping centres, they just cannot see beyond the economy that we see. They have an annual report to shareholders. And it’s all about the share promise it’s not about the reality it’s about keeping the value of the business overall.
James: And I know one of the trends that’s the problem is more specific to Australia. Or is it a general trend that retail is really struggling because of companies like Amazon? Now, the thing that makes it really pertinent in Australia, of course, is that Amazon is about to open. Which means that companies like Westfield are going to be a lot more focused on experiential type.
Robbie: Yeah. There’s only precincts to attract families and pensioners, retirees, and young people. That’s also adding stress to the restaurant industry because what’s happening is the operators in those precincts, who might have been five cafes in the shopping centres, suddenly turns 11. Or there are five restaurants, then suddenly there are 15 all around the outside. They’re trying to maximize the dollar returned.
James: It makes it harder if you’re an individual operator sitting in there when people only had 10 places, 10 options for where they could eat while they’re doing their shopping. Now, there’s 30 places and there’s less places to go shopping.
Robbie: Exactly. Yeah, exactly. Yeah, that’s exactly right. And there’s a renaissance as well with cinemas. They’re building cinemas and entertainment complexes and it’s almost like a massive retirement village, offered to those who are not retired. They’re offering everything short of, more like long boats. They’re morphing into basically a destination rather than, “I just need to get some coffee and I need to get some bread and milk and I need to get something for dinner.” It’s nice, I may just duck in and do a weekly shop. It’s almost like they’re becoming attractions and they’re still hooked on this whole 5% annual increase. They start off, what they do James is they lure you in with their generous contribution and there’s no such thing as free money. Nobody gives you money for free, if you do, take it; but be very careful. They’ll want to hook you in this, there’s a hook.
[That’s] what they do to you, particularly to non-experienced or young entrepreneurs. I’ve seen people been offered 100,000 slots or over 100,000 for a 20-square-meter kiosk. “If only you’ll open a kiosk in my shopping centre here in WA, I will give you a 100,000, up to 120,000”. The cost of building a kiosk, James, or a cafe or a food outlet is actually higher per square meter because it’s more complicated. There’s no extraction, there’s no grease traps usually. You can spend like a 150 – 200 slots, depending on the finish. They’re giving you nearly half the cash up-front as an incentive. I’ve seen people rushing in to take up that opportunity. It’s just a time bomb waiting to go off because they start you off on a high restaurant lease then they ratchet it. They have compound interest focused at per annum and the economy is running 3 to 3 1/2 percent. And then after a year or two, people are ringing me saying, “Our good landlord is greedy, so and so, I should have never signed this lease. Get me out of here.” So, what do I do? Do I pass that poisoned charlatan to some unsuspecting victim? Or do you sit down and say let’s find a way to negotiate for these. You’ll find that the lure it entered in toxically in the beginning is free money.
James: Yup, yup. And I think that’s a good segue in because I think it’s one of the areas that a lot of restaurant operators aren’t savvy in. I think a lot of it comes down to, you just don’t know what’s on the table and what’s off the table when it comes to the restaurant lease.
Robbie: Absolutely, yeah, people don’t know.
James: Exactly, exactly. Yeah, and that’s why I thought it will be perfect to get an expert like you in to run through some of the intricacies of leasing. I think the other thing that’s concerning is, it’s one of those things you may only negotiate once every five years, maybe.
Robbie: Exactly, yeah.
James: So, how many Restaurants would lease their premises as opposed to buy?
Robbie: James, there’s always a demand for people who want buy, to switch down the operator wants to buy the property. Then there’s always a demand for people who want a restaurant lease, too.
Robbie: Getting access to properties for sale is very rare and very difficult. Unless it’s a new development and you’re buying out the plan and you can buy the title. That’s where you have an eye on a long-term plan so you’d know your neighborhood. You’d know where you’d like to have your restaurant. You see a development going in, there might be a block of apartments. It could be a development with retail and food. You say there’s 200 square meters, perfect. You can either lease it or buy it. And if you’re smart, you’ll buy it because land, it will always go up. There’s such a scarcity, they’re such a rarity at NWA. We have a lot of Asian buyers and they will not restaurant lease, they just want to buy and they’ll wait. And sometimes they will buy then lease as a landlord to become a mini landlord.
James: Yes, yes.
Robbie: But, ideally, if you could buy you would. But unfortunately, some people do not have the money or the vision or the plan. They’re just in love with the whole idea of opening their own restaurant–they don’t have an exit strategy.
Two types of property leases
James: What types of leases are there?
Robbie: Generally, you have two types in Australia. You have a retail lease which is well governed by each state and each government and the retail lease offers a lot of protection. Then you have a commercial lease which is a regular and non-retail lease. The government defines a lease, a retail lease predominantly where retail service is conducted where there is at least five units in the complex, they don’t have to be owned by the same landlord.
The attractiveness of a retail lease is to serve as a mechanism for low-cost dispute resolution. For example, if you dispute something with your landlord and a retail lease in each state you have something called the State Administrative Tribunal or Small Business Commissioner and you can go for mediation if you’re in dispute. And you can get to go through the set format and it’s cheap, in fact its free in most of the cases. The difference between the lease like that from a non-retail lease sometimes would be, bank guarantee or the personal guarantee survives after the lease is over.
I’m dealing with one person at the moment who leased a cafe in a government and semi-government-owned building complex for 10 years. He wanted to sell and had a buyer, and the buyer wanted a new lease. Initially, they just said, “Look, we have a signed a contract remaining which is only 10 months with TAU perform. And if you’re good, we might give you another restaurant lease if in the 10 months remaining they want to sell the business to current owner. And if in the 10 months remaining, once he sells the business, the current owner is still on the hook as a personal guarantor.
Whereas, that would not happen on a retail lease, once you sell it you’re off the hook. People have no idea about what they’re signing and they don’t understand what a personal guarantee is. They’re just so anxious to get in and get the deal outright, they feel lucky or the agent persuades them that, “You better hurry up sign the restaurant lease here. Give me a deposit.” The thought of people waiting for those to get on or other people will, they put thumbscrews on people. Realistically, it’s like marrying in haste and then repenting at your leisure. It’s so crushing.
James: Yup, yup.
Robbie: Fix your time and get a lawyer to help you.