|12 Months Ended
Dec. 25, 2022
|LeasesThe Company determines if a contract contains a lease at inception. The Company's material long-term operating lease agreements are for the land and buildings for our restaurants as well as our corporate offices. The lease term begins on the date that the Company takes possession under the lease, including the pre-opening period during the construction, when in many cases the Company is not making rent payments. The initial lease terms range from 10 years to 15 years, most of which include
renewal options totaling 10 to 15 years. The lease term is generally the minimum of the noncancelable period or the lease term including renewal options which are reasonably certain of being exercised up to a term of approximately 20 years.
Operating lease assets and liabilities are recognized at the lease commencement date for material leases with a term of greater than 12 months. Operating lease liabilities represent the present value of future minimum lease payments. Since our leases do not provide an implicit rate, our operating lease liabilities are calculated using the Company's secured incremental borrowing rate at lease commencement. We estimate this rate based on prevailing financial market conditions, comparable companies, credit analysis and management judgment. Minimum lease payments include only fixed lease components of the agreement, as well as variable rate payments that depend on an index, initially measured using the index at the lease commencement date.
Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepaid or accrued lease payments, initial direct costs and lease incentives. Lease incentives are recognized when construction milestones are met and reduce our operating lease asset. They are amortized through the operating lease assets as reductions of rent expense over the lease term.
Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease payments that do not depend on a rate or index, escalation in the index subsequent to the initial measurement, payments associated with non-lease components such as common area maintenance, real estate taxes and insurance, and short-term lease payments (leases with a term with 12 months or less) are expensed as incurred. Certain of the Company’s operating leases contain clauses that provide for contingent rent based on a percentage of sales greater than certain specified target amounts. These variable payments are expensed when the achievement of the specified target that triggers the contingent rent is considered probable. As of December 25, 2022, all of the Company's leases were operating.
During the second quarter of 2020, the Company suspended lease payments for the months of April through June 2020 as a result of the COVID-19 pandemic. The Company was able to negotiate rent concessions, abatements and deferrals with landlords on a large portion of our operating leases. FASB issued a clarification to accounting for lease concessions in response to the COVID-19 pandemic to reduce the operational challenges and complexity of lease accounting. The Company used the relief provisions provided by FASB and made an election to account for the lease concessions as if they were part of the original lease agreement. As a result of these negotiations, the Company recorded $0.2 million and $0.6 million of deferred rent as part of our operating lease liability as of December 25, 2022 and December 26, 2021, respectively. The recognition of rent concessions did not have a material impact on our consolidated financial statements.
Components of operating lease costs are included in occupancy, closed restaurant costs, restaurant pre-opening, general and administrative expense and property and equipment, net:
Supplemental cash flow disclosures and other lease information:
(a) The year-ended December 25, 2022 includes $2.9 million of termination payments for four of our closed restaurant operating leases. The year-ended December 26, 2021 includes $7.8 million of termination payments for six of our closed restaurant operating leases.
(b) The year-ended December 25, 2022 includes a $9.1 million increase due to new lease commencements and a $1.6 million increase mainly due to extending remaining lives of certain leases, partially offset by a $2.5 million decrease to operating lease assets and liabilities related to the termination of four closed restaurant leases. The year-ended December 26, 2021 includes a $10.1 million decrease to operating lease assets and liabilities related to the termination of six closed restaurant leases and a purchase of one existing lease, partially offset by a $9.5 million increase mainly due to extending remaining lives of certain leases.
The Company recorded $1.9 million of deferred lease incentives during the fiscal year ended December 25, 2022 and no deferred lease incentives during the fiscal year ended December 26, 2021.
Supplemental balance sheet disclosures:
Future minimum rent payments for our operating leases for each of the next five years as of December 25, 2022 are as follows:
As of December 25, 2022, operating lease payments exclude approximately $3.0 million of legally binding minimum lease payments for leases signed but which we have not yet taken possession.