Coffee is the leased of your worries ...
While extraction theory, EK alignment, and particle size distribution are all worthy topics of discussion here at Barista Hustle, these all mean nothing if you’ve not got a shop to experiment in. Jared Lawler gives us a fascinating view on the business side of coffee, with a solid list of points to consider.
Leases – they aren’t a sexy topic – but hear me out. I decided to write this article after I checked in with a former employee to see how his coffee bar was going. “Nar ... we ran into trouble with the landlord and had to close it down,” he told me. Another talented individual who built a beautiful business had now lost a bunch of savings, a massive amount of time, and suffered what can be at times be emotionally crippling experience when a business fails.
Working in the hospitality industry, this was just one of many similar scenarios I've heard over the years. From people who sub-let; are forced out of their business; then the lease holder takes control of their business. From people on month-to-month leases who swear the landlord is so nice that when they sell the business they will continue with a new lease at the same rate, then turning around and quadrupling the rent, rendering their business worthless and killing the sale.
I asked one of my first mentors, who was a great cafe operator in Melbourne, what was the most important thing for a successful café. I expected him to say something about good staff, customer service, nice fit-outs, or serving the best coffee … it was none of them – it was simply, “Your lease. Without a good lease, all of the above adds up to nothing,” he said. “It's like building a house on sand – you need a good foundation and that foundation is your lease.”
So I reached out to Suzy Wood of Studio Legal who generously shared some of the critical points her firm look for in a lease. Of course, it’s only general information and should not be relied upon or represented as legal advice.
- Does rent include or exclude GST? If your rent is expressed as a certain dollar amount “excluding GST” or “plus GST”, your rent will have 10% GST added on top, and you will need to budget for this.
- Does the Retail Leases Act apply to the Lease? If the Act applies (and where possible, you should maintain it does), you have the benefit of a range of protections including the right to a disclosure statement and the right to be reminded by the landlord before your option periods expire. The Act also precludes the landlord from being able to charge certain expenses back to you as a tenant, including land tax and their legal costs.
- Does the landlord have the legal title to the premises? If not, this should raise an alarm: it may mean that there is a mortgagee in possession, or that the landlord is in fact a tenant who is sub-leasing to you. While rare, it is possible that the landlord is not entitled at law to actually lease out the property because they do not have the appropriate legal interest. There would be nothing more disastrous than finding out that you had paid rent to a party who did not have the legal right to grant you a right of possession. To confirm this, do a title search to confirm the landlord owns the premises before you sign.!
Rare as this is, I was caught up with a dodgy landlord once who misled us on a location. A site in Melbourne came up for lease and I rushed the process to get the lease signed.
I started to find complications with the council, went back to my lease, had my lawyer review it and as it turned out I was completely duped. The site owner was the council, not the "landlord" who had illegally sub-leased the site to me. Things got messy and we had to walk away. Fortunately, the risk was low so we didn't get out of it too badly. But it was a lesson learnt – always get an expert to review a lease. Let’s just say when I went to my lawyer to help me clean up the mess, he wasn’t impressed I didn't talk to him at the start.
- Is there a mortgage over the premises? If so, you should make sure that the landlord has obtained mortgagee’s consent to the lease. Your Landlord will need to ask their bank or lending institution for this.
- Is the initial term of the lease too long or too short? Initial terms longer than 5 years can be too much commitment for tenants, particularly if they are new to business. On the other hand if you have spent money on fit out costs, you need to ensure you have sufficient tenure (i.e. a decent rent term). We also recommend you seek as many options as possible so that you can keep extending the lease term. For our retail clients, we generally suggest initial terms of 5 years plus a minimum of two-three option periods of a further 5 years (although some clients like even shorter terms, such as 3 x 3 x 3). Remember that you do not have to exercise your options.
Length of lease is important, especially if you are trying to extract greater value out of your business. The longer you have a lease, the longer you can generate income from the location. Pretty simple. Also, when you sell your business, buyers will be looking to maximise their investment. So a long lease will increase the value of your business and make it more attractive to buy. We can look into how we can extract greater value and things to consider when negotiating a lease another time.
- How will rent increase? Is there a fixed increase each year or are increases calculated by reference to CPI or market reviews? Fixed increases of 3 – 5% are common. Consider whether your rent will be subject a market review and when that will take place. If there is a sudden jump in the market value of the property, you should be able to get out of the lease if you want to, but that’s unlikely during the lease term. You may find your rent even decreases at a market review, if you are being overcharged by your landlord based on the market value of the area.
Do your projections and work out worst-case scenarios. For example, I opened a shop where there was no good coffee and no competition. Within two years, five cafes had opened around me serving “specialty” coffee. The pie wasn’t getting bigger, just getting sliced up differently, so be mindful and budget for a worst-case scenario.
- Is the lease appropriately tailored to the circumstances? Look for “Additional provisions” in item 22 of the standard form lease. For example, if you have been promised exclusive rights to a car park, or if the landlord has promised to fix certain areas of the premises before the lease starts, make sure these are written in as additional provisions.
- Will you be able to carry out any fit out works you require? Most leases will require the landlord to consent to the tenant’s fit out works. If you are planning on carrying out works before you start trading, it is best practice to get the landlord’s consent formalised in the lease to avoid any dispute about what was agreed to.
I would also suggest taking your builder for a site walk through and reviewing the plans before signing a lease. This way, fit out blow-outs can be caught early and hopefully worked through, either before signing or negotiated into the landlord’s works. I had one site where the engineer’s plans didn’t match the plans provided – there wasn’t any wastewater or power on the plans. We raised it with the landlord before signing the lease and he rectified it – costing him $30k. Had it not been caught, that cost could have fallen on us, or ended in a nasty legal dispute.
- Is the permitted use broad enough to cover your intended current and future use for the premises? Consider how your business might expand in the future. The goal is to get this as broad as possible.
Once you have all your permitted use down, try to get exclusivity too. I recently saw a small little shopping mall that had about eight shops. A greedy landlord had leased out six as cafes, all selling the same or similar things, and needless to say, they were all struggling.
- Check the additional provisions for any insidious deletions or amendments. If the additional provisions state that “clause X is deleted”, go to the terms of the lease and find out exactly what has been deleted. This can be time-consuming and a bit dull, but it can save a lot of time and hassle down the track.
Ultimately ALWAYS seek legal advice. It may cost you a little bit but it’s the best money you can spend. Spend the money.
I hope this article helps some people steer through the murky waters of leases, saving some money and heartache along the way.
A big thank you to Suzy Wood of Studio Legal.
If you have any thoughts or feedback, feel free to send them to firstname.lastname@example.org, and let us know of any additional tips or horror stories in the comments below!