Retail lease ①

Q: I want to lease out a store in order to open a cafe. What should I keep in mind when entering into a lease contract? (Male in his 30s working at a restaurant)

A: The most important thing when running a café is leasing a store. You must be aware of basic clauses such as lease period, rent, rent review conditions, bank guarantee, burden of utilities expenses, business days and business hours and the obligation to repair equipment and fixtures in stores. However, there are other considerations and lease agreements which may be favourable to the Landlord.

The best time to negotiate various contractual terms with the Landlord is before the draft lease is issued. Following this, it is best to consult with a lawyer or a specialist and receive advice and then negotiate with the Landlord on the basic conditions.

Checklist before finalising the lease

• Confirm that there are no registration problems with the owner and property
• Check if the permission to run a café has been issued by a government body
• Have items such as toilets, air conditioners, refrigerators, stoves, grease traps etc. inspected for any problems     
• When receiving equipment from the previous owner, confirm the ownership (whether it was leased or mortgaged)
• When renovating a store, ensure prior agreement is made with the Landlord
• If purchasing an existing business, it is best to complete the above research, together with your sales in order to determine whether the purchase price is reasonable.

Bank Guarantee

When renting a commercial property, the landlord will require a few months’ worth of bank guarantees, with a few exceptions. A bank guarantee is an agreement to pay the Landlord a mutually agreed rent on behalf of the Tenant, should the Tenant become insolvent. Banks usually require a fixed amount of deposit from the Tenant as collateral when issuing a guarantee. Therefore, during the lease period the deposit is frozen. 

Lease Period

After the lease expires, it is up to the Landlord to decide whether to renew the lease and decide what the rent price will be. In the case of a thriving business, there is a chance that the Landlord may set a higher rent when signing a new lease agreement. Additionally, a third party may offer a larger rent price to the Landlord in order to take over the business. In this case, the rent provided by the third party may become the new rent amount.

This does not mean that the lease period will be long. There are many contracts in which the borrower is granted an option to renew the lease term. Lease contracts vary widely, so various things need to be considered. As each business need differs, we recommend that you consult a lawyer before signing a lease contract.