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Some things in life are clear as water. But commercial real estate often looks more like a murky swamp.
The problem with swimming in murky waters is not knowing what you might run into.
Or what might eat you!
The good news is there is a way to clear the waters and steer clear of alligators when you are negotiating a commercial lease agreement.
Muddy Waters: Only Good if You Play the Blues
One problem restaurateurs often run into is vague or confusing language describing what it is they are leasing from the landlord.
This is often the case when it comes to describing the condition of the premises and also with regard to landlord’s work responsibilities. The landlord’s delivery conditions and responsibilities are often described in a letter of intent or commercial lease agreement as the “Landlord’s Work Letter.” But more often than not, the restaurateur cannot really be sure about what is and what is not included. This can create additional expenses, delays and disputes between the landlord and tenant.
The lack of clarity is usually caused by the insertion of a description of work provided by the landlord’s contractor or architect. This description often uses industry jargon that may not be understood by the landlord or tenant.
Often a work letter will be described as “grey shell” or “vanilla shell.” In some properties, the landlord delivers the space in “as-is” and “where-is” condition.
What’s the difference between a grey shell or a vanilla shell? A grey shell is delivered in more of a raw condition which requires more work by the tenant to bring the space into a finished condition. A grey shell does not include a ceiling, only a partially completed concrete floor or no floor, no electrical wiring inside the space and no lighting.
A vanilla shell is typically a space that would be in move-in ready condition. The space would include a ceiling, lighting, electrical outlets, three walls and a store front.
It’s all in the details
If you are negotiating to lease a restaurant, it’s important to have a clear understanding of the current condition of the premises and what will be provided by the landlord.
You need to know whether you are getting a grey shell or vanilla shell, and more.
How to Protect Yourself When Negotiating Landlord’s Work
The best course of action is to involve a contractor and architect if you will be building from scratch or undergoing a major remodel project.
If the landlord is delivering an existing space in as-is condition, you need your contractor to verify that the current utilities and condition don’t require extensive upgrades to suit your needs.
A few items to pay special attention to are;
- Is there enough HVAC for restaurant use? Restaurants often need more HVAC than a retail store.
- Is there enough electricity, water and gas available? Upgrading electricity can be very expensive if there is not enough power available to the property.
The contractor and architect should help you understand the condition of the premises the landlord will deliver and provide cost estimates for your portion of the work.
If you are dealing with new construction, request the landlord’s shell letter prior to meeting with your contractor. Walk the space with your contractor and review each description, and ask the contractor to explain what the landlord is providing. If it’s unclear, ask the contractor to explain until you have a clear understanding.
Your contractor and architect should help you draft very specific language that can be included in the letter of intent and commercial lease agreement. Then make sure that your real estate advisor or broker includes this in the offer.
If the landlord makes any changes to your proposed description, discuss these with your contractor and architect prior to agreeing to any changes.
If you follow these suggestions both parties should have a crystal clear understanding of the scope of work. This prevents headaches, delays in opening your new restaurant, unexpected costs, and the risk of ending up in court.
Do you see how this approach reduces risks and increases the likelihood of a successful opening of your new restaurant on time?