Key Considerations Before Leasing a Cafe Space

Opening a cafe is an exciting venture, filled with the promise of brewing rich coffee, serving delectable pastries and creating a community hub. However, it’s also a substantial commitment that requires careful planning and consideration, especially when it comes to choosing and signing a lease for your new cafe. 

What are the most important things to have in place before signing a lease on a new cafe business space?

Today, we’re going to answer that question… but answering this question requires a multi-faceted approach, addressing financial, legal and operational readiness. So let’s go through each essential consideration to ensure that you know what well-preparedness looks like, so you avoid mistakes and make a wise, informed decision.

Financial Planning

Before even considering a lease, having a sound financial plan in place is really important. This involves understanding and calculating (usually guess-work) your startup costs, expected revenue and expenses.

While a having a financial plan doesn’t guarantee that a lender will give you funds to start a cafe business; knowing your numbers gives you clarity on just how much you can afford to pay for a lease. This gives you a budget when shopping around for a space to open your cafe.

Preparing Financially for a Cafe Lease:

• Business Plan: A detailed business plan outlines your concept, target market, competitive analysis and financial forecasts. It is the blueprint that guides every aspect of the first phase for your cafe business. This document, with its framework for your income and expenses, provides guidance on just how much you can afford to pay for your lease, especially in the early days after opening when sales will be at their lowest.
• Budgeting: Putting together a comprehensive list of expected expenses, including permits, promotion, equipment hire, utilities, furnishings, initial stock and employee wages (plus an emergency fund to cover unexpected bills), gives you a better understanding of how much you need to sell each day to cover these costs. Once you know these numbers, you can add on top the cost of your lease to find out how much more you’d need to be selling each day. The more your lease costs, the more you have to sell.
• Funding: Those experienced in business may be more confident in securing funding through savings, loans or investors. When this is the case, you need to ensure that the funding amount you have is enough to cover at least 6 months of operational costs (including your lease). That means knowing your financial position through a detailed business plan, or at least having a budget.

Location Analysis

Depending on how much you can afford to pay for rent can have a significant impact on where your cafe is located. This is the number one reason why people who are experienced in the cafe industry are able to take on expensive lease agreements for sensational cafe locations. They already have supplier relationships with known agreed prices, they’re confident in their recruitment processes and how to manage payroll costs, they have knowledge about marketing, selling techniques, customer loyalty and all these other aspects of cafe operations so that they can confidently negotiate very expensive leases.

For everyone else with less experience or no experience, compromise is required when it comes to location. The town or suburb you had your heart set on may be out of your reach financially. The exact cafe premises you want might come with a landlord who won’t negotiate or has a lease agreement with completely unacceptable terms.

While choosing the right location is a game-changer for any cafe business. If the lease is unmanageably expensive for your current cafe ownership skills and expertise, then you run the risk of business failure.

That means you need to be realistic about how much you can afford to pay in rent and for the other conditions of the lease – with your cafe experience, ability to borrow money and skills to manage the business. Then stick to this budget by choosing a location and property for your cafe that helps you succeed.

Choosing a Location Where You Can Afford to Lease:

• Demographics: Demographics means the type of people who are local to an area (realestate.com.au has lots of this type of information for locations right across Australia). It is important to understand that not all locations are equal when it comes to cafes. For example, in a big city you can have two suburbs side-by-side with completely different demographics. So you need to research and find out who the locals are for areas you can afford to lease in. Ideally you are looking for areas that have lots of the types of people you want to have as customers. So if you want a family friendly cafe, you want a location with lots of families, or if you want to have a cafe for hip young adults you may want to look for a location where there are lots of university students.
• Foot Traffic: Foot traffic is the term used to describe the number of people who pass by a particular location. High foot traffic means ‘lots’ of people pass by (a location on a main road would be a good example of this) and low foot traffic means very few people (a quiet side street with lots of houses all around would be an example here). As you might imagine, high visibility and pedestrian traffic can significantly impact your opportunity to grow your customer base. However high foot traffic doesn’t always mean high visibility and pedestrian traffic – it can also means lots of cars driving passed, or so many people walking passed that they don’t even notice what they are walking passed.
• Accessibility: Accessibility doesn’t just mean having wheelchair ramps. It is also about whether the location is easily accessible by different modes of transport, including public transportation. Ideally you want a location that is easy to get to by in lots of different ways (walking, driving, bus, train, tram, taxi, cycling, etc); and once there having adequate facilities, such as has lots of easy parking.
• Zoning: In Australia, properties in particular locations can be restricted based on local council laws called Zoning Laws. These laws are used to prohibit particular types of property uses to create appropriate environments suitable for specific purposes – such as manufacturing, retail, residential, etc. By understanding local zoning laws you can avoid situations such as, needing council development approval before you can fit out your cafe with the necessary fixtures and fittings (such as commercial kitchen equipment or coffee machines). In these situations, it can take a long time to get the necessary approvals and be an unexpected expense on top of your lease.
• Competition: The final major factor to consider when choosing a location, is how many other cafes are already there (they are going to be your competition). Assessing the local competition, means exploring how well each of them is doing financially – checking out their menu pricing and choices, taking the time to count how many customers they have per day, estimating how big their staff is and what ever else you can find out about them that will help you decide if you have any chance of taking away their customers from them. It’s also handy to know how many non-cafe businesses in the area could be your competition too. For example, a hairdresser or barber that gives clients a coffee during their appointment is also your rival, because that’s one less coffee that you get to sell.

Lease Terms & Conditions

Understanding the lease terms and conditions is crucial for avoiding unexpected financial surprises. It is in your best interest to thoroughly understand the terms and conditions set out in a lease, so that you can negotiate terms that best protect your interests and ensure operational sustainability.

In Australia, there are different laws in each state and territory that determine what can or can not be put into a commercial lease agreement. So we’ll cover what’s typically common to most jurisdictions, starting with some basic legal jargon.

Some Basic Legal Terminology

It takes most people a long time to get the hang of reading and being able to interpret legal documents, such as lease agreements, and that’s because there is a lot of unfamiliar terminology that’s used. Here we have a few common legal words and their meanings in (hopefully) simple language.

Even people with business experience can find understanding the implications a certain terms in a lease agreement difficult. So for anyone about to sign a lease for the first time; know that there is no shame in getting professional help when doing this.

Here we go over four common sections to a lease agreement. Be warned, that property owners/landlords can get some pretty tricky conditions inserted into lease agreements – that under certain situations would be considered ‘unfair’. That’s on top of these documents often being written in confusing legal jargon; and using the document structure to break up terms across sections making it unclear how the clauses in different sections stack together to have important meaning.

When presented with a lease agreement, take it away with you and give yourself several days to read it slowly (use Google search or AI to help you decode it) so you can understand what you are really getting yourself into.

Four Key Terms in a Lease Agreement:

• Lease Duration: This is how long you can occupy a property for to run your cafe business. A short-term lease gives cafepreneurs the flexibility to trial their cafe business and close up business quickly (and without too many penalties) if the concept doesn’t work. While long-term leases often come with more favourable terms and offer business stability by locking in your location.
• Escalation Clauses: Escalation clauses are used to outline how the landlord will increase your ‘rent’ over the duration of the lease. It is common for there to be a review schedule in a commercial lease that documents when the amount you pay in rent is assessed and how increases are calculated.
• Maintenance & Repairs: There are likely to be multiple sections and clauses scattered through out the lease agreement related to which party pays for what, when it comes to property maintenance and repairs. Do not assume that you pay only for what’s on the inside and the landlord pays for everything on the outside. You will need to piece it all together yourself to clarify who is responsible for which maintenance and repair costs to avoid unexpected surprises.
• Exit Clauses: Exit clauses are used to outline all parties rights and obligations at the end of the lease, or when ending a lease early. While it may seem fatalistic, savvy business operators will often have a clear exit strategy for lease termination before they sign a lease agreement. They look at their age, family circumstances and personal wealth position to identify the things that could cause them to need to end a lease early (and then do the calculations). For example, at 50 years old there are more health risks, than when you’re 30. A personal investment portfolio of $500K gives you more financial certainty than a bank account with a balance $20K if unforeseen events (like a COVID pandemic, unprecedented flooding) happen.

Compliance Readiness

Compliance preparedness ensures you adhere to all regulatory requirements.

In Australia the are multiple levels of government that impact on issues of compliance for most businesses. In the cafe/hospitality industry there are these and more. That means doing some research and making sure that you know what your obligations are and how to keep on top of the paperwork required to make sure you are always in compliance.

While compliance isn’t always a requirement in the terms of a lease agreement. Understanding that there will be additional costs related to compliance that can differ by location can give you ammunition for lease agreement negotiations.

Cafe Business Compliance in Australia:

• Business Regulations: In Australia the Federal Government requires cafe business owners to make sure that the way they operate their business complies with Australian Consumer Laws, Taxation Laws, Fair Work and Discrimination Laws, Work Health and Safety, Food Standards Code and Food Safety Requirements.
• Licenses & Permits: In Australia, each state and territory has it’s own compliance requirements for cafe businesses. These can include the need for licenses and permits related to operating a food and beverage establishment – preparation and selling of food, display of signage, outdoor dining, waste management, playing of music/sound recordings and a business registration as well as a fire safety certificate.
• Local Permits: In some local council areas there are additional permits needed for a cafe business. Such as, business or tradesperson vehicle parking permits, footpath trading permits, as well as certificates for food safety accreditation, zoning, building occupancy etc.
• Legal Review: Now that you are stepping into the world of business, it can be very reassuring to have a legal expert you can call on. Finding a lawyer with hospitality industry experience isn’t an option for everyone, but finding and retaining a lawyer who can help you will business law is vital. In the early stages, get a lawyer to review your lease and any other contractual agreements you are entering into. Later they can be helpful for employment contracts, problems with compliance complaints and other legal problems.
• Insurance: In addition to protecting you cafe business through compliance, insurance is another way to make sure that if something unexpected happens you have support. There are lots of different types of insurance to consider; from those that protect your income if you are seriously injured or sick, to policies that cover the loss refrigerated supplies if the power goes out. Only you can assess what adequate insurance coverage looks like for you and your cafe business.

Operational Preparedness

Operational readiness is about how prepared you are when you open your cafe doors for the first time.

You might wonder how operational preparedness matters when you are signing a lease … ?

When negotiating a lease agreement, there can be a difference between the date the lease is signed and when you start having to pay your rent. For a cafe owner that needs to do repairs or a fit-out before they open their doors, this can be very handy.

For example, if you know that you will need, or want, to do some interior design work on the property before you get your cafe open, then you don’t want to be paying rent when you can’t make any sales. Just like if you still need to hire employees or decide on a POS system, you’ll need some time to get those sorted.

So your operational preparedness can help you understand how much time you are going to need between signing your lease and the start of rent payments. The landlord will want those two things to be the same date, so you will need to negotiate hard to get the dates that work for you.

Factors that Influence Preparedness:

• Staffing: Not only do you need to hire staff, you also need to train them and work out rosters. You may also need to negotiate pay rates with them if you want them to do some of the set-up work (like assembling flat pack furniture, unpacking new cutlery or crockery and cleaning it ready for use, be available to receive supplier deliveries, clean floors, windows or surfaces, etc) before your coffee shop opens.
• Technology: Today few people use cash, so you must have a POS system set-up, configured and ready to go from day one. Security systems, inventory management, climate control and all the equipment (fridges, coffee machines, toasters, etc) and other software applications (book-keeping, marketing, email, delivery services, etc) at least need to have been decided on.
• Interior Design: Most will have a plan and have purchased furniture, fixtures and equipment that match the brand they want for their cafe to create an inviting atmosphere. Beyond the ‘front-of-house’ there is also the kitchen, patron toilets, staff room, storage areas, waste and rubbish recycling area and outdoor dining spaces to consider.
• Supplier Contracts: Your suppliers and starting inventory need to be in place before you can open you doors for business (without coffee beans or milk you can’t sell coffee). That means negotiating contracts with reliable suppliers to ensure a steady supply of high-quality products for your opening day and every day after that.

Before Signing a Lease Agreement…

• Be realistic about what you can afford to pay in rent
• Review your life and make a list of things that would force you to end a lease early
• For every lease you look at, make a list of all the additional costs the lease says you’ll have to pay
• Compare leases for different properties by the rent amount as well as specific clauses and costs
• Shop around for a lawyer you can trust and want to work with
• Make sure all your compliance, permits and paperwork are ready to lodge after you’ve signed
• Get quotes for insurance policies you’ll need
• Have the budget and money ready to do interior design work straight after you’ve signed
• Have a plan for opening your cafe as quickly as possible after you sign the lease

While this may all feel overwhelming, it is possible to break it all down into easy to manage task lists that help to protect you from entering into a lease agreement that sabotages your cafe ownership dreams.