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DON'T GUARANTEE THAT LEASE!

Jan 28, 2009
Article #28
Author: Mel Jones

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Leases can be huge liabilities for restaurant owners.  Most leases are personally guaranteed by the tenant.  This means, the tenant guarantees the rent will be paid through the whole term of the lease, even when the business is closed and not making money.  But SellingRestaurants is on the cutting-edge of creating new mechanisms to reduce and eliminate risks for tenants.

All too often tenants are shocked to find out the landlord is pounding on their door asking for the rent and foreclosing on their home in order to collect past due rents.  Or worse yet, they sold the restaurant and the new owner has failed to pay the rent so the landlord is asking the old owner to cough-up the monthly rent or else.

Yes, the reality of the situation is when a tenant defaults on a lease, most leases give the landlord the right to literally take every thing they own to pay the rent as long as the landlord follows the legal process.

But there is a growing trend SellingRestaurants has developed and initiated with several landlords that eliminates the need for a personal guarantee.  And in this economy it could takes years to fill a restaurant space with a new tenant costing the tenant possibly hundreds of thousand of dollars.

To a landlord there is nothing worse than having a restaurant space go dark and having the tenant strip it.   Restaurants have vast and expensive infrastructures in place that often cost 10’s and in some cases 100’s of thousands of dollars to build.  From plumbing to electrical to sewer and all the special permits required in-between, a restaurant has some great value even when it is closed and longs as it is turn-key, ready to open the next day.  In addition, it is far easier for the landlord to lease a turn-key restaurant than it is to lease a stripped facility.

To a restaurant tenant there is no less value in a restaurant sale than the liquidated value one gets from striping a restaurant and selling it piecemeal.  A turn-key restaurant could sell for $50,000+ but piecemeal the restaurant and one may fetch $5,000 to $10,000 for the equipment.  And don’t even think about stripping it and storing it.  The cost to store it will quickly exceed the price one can receive for the equipment.

SellingRestaurants works with hundreds of landlords each year.  In recent months SellingRestaurants has spearheaded negotiations with landlords to eliminate the personal guarantees and replaced it with a reversion default clause whereby the tenant hands the landlord the restaurant keys and title to the property and walks away from the lease with no further obligation to the landlord.  No more rent, period!  This doesn’t eliminate a tenant’s right to sell the property per se, the tenant can always do that.  But it significantly reduces the tenant’s lease obligations and personal risks. 

So one may say that’s a lot to give a landlord.  The truth is it isn’t.  One can blow through $10,000 in rent in no time.   And all one may get for the equipment is $10,000.  And the liability for a lease could be huge. 

So would one give-up $10,000 to be relieved of all liabilities relating to the lease.  Well, this author certainly hopes so!

Give your SellingRestaurants agent a call and ask him what he can do for you.

 

                                                                                                                                                                                                                                                      

Mel Jones is one of the premier restaurant brokers in the nation having published hundreds of articles on buying and selling a restaurant and bar business, selling thousands of restaurants in CA., WA and AZ and building one of the most copied business models in the brokerage industry.  Mel started SellingRestaurants in 2004 with the one simple concept, give the buyers the information they need to make intelligent buying decisions without being pestered by a broker or hiding information, prepare the business for market by researching key details that make or break deals and educate the buyer on the buying process to create an intelligent buyer.  Prior to SellingRestaurants, Mel was a Chief Financial Officer for Universal Music Group, the largest music company in the world.  There he participated in more than $11.5 billion of merger and acquisition transactions.  He also work for top companies such as Nestle Foods, USA. He hold a Bachelors in Business Administration Finance as well as attended Law School at Gonzaga University.  Give Mel a call at 480.274.7000.


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