Your lease can greatly impact the value/goodwill of your practice and your ability to sell it. Often times, landlords take advantage of clauses within the lease to take large fees or evict tenants with little to no notice and compensation. But, a well-negotiated lease will protect you and simplify the sales process for dentists seeking to retire or relocate. We have created a list of areas dentists should be aware of when negotiating a lease.
Sharing in the Proceeds of the Sale Price on an Assignment of Lease
Some provisions entitle landlords to a portion of the proceeds of the sale price. For example, landlords can say that part of the sale price is attributed to the desirability of the location and as the owner of the location, the landlord should be given a share of the proceeds. Be wary of such clauses as the “desirability” of a location can be quite expensive and time-consuming to argue and calculate. Moreover, a “transfer premium” provision allows landlords to decide the value of the leasehold interest and demand a percentage from you upon selling your practice. As well, on a sale, the purchaser may request certain amendments to the lease such as an additional renewal period. We have seen situations where a landlord will grant additional renewals or other amendments but charge a fee to add these clauses. If you do not know if there are clauses like these in your lease, we advise you to consult a professional.
Assignment Provisions
Dentists want the ability to transfer their lease to other dentists without interference from the landlord. Make sure your lease provides that the lease can be assigned on consent of the landlord, which consent shall not be unreasonably withheld. You also would want a clause providing that on an assignment you only remain liable for the lease covenants for the balance of the then current term.
Personal Financial Obligations
It is recommended that dentists enter a lease through a corporation. In this way, in the event of an incident, the dentist’s personal assets are protected and all liability is tied to the corporation’s assets. However, it is important to note that most landlords will require that the dentist be a personal guarantor or indemnifier if the corporation is a tenant, especially if the corporation has no credit history or assets. If this is the case we recommend that you try to negotiate with the landlord to limit (difficult to achieve) your personal guarantee to the first few years of the term after which you will be released.
Death and Disability Protection
Death and disability protection allows you to terminate the agreement in the event that you are deemed unable to work due to death or disability. It is very difficult to get a landlord to agree to add such a clause but we have had a few situations in the past year where this clause would have been helpful to our clients. If you can’t get this clause in place you should ensure you have the right insurance to protect your family in the event you were to become disabled or pass away.
Relocation
Pay close attention to this section as some clauses may be unreasonable. Ideally, there would be no relocation clause in the lease but if the landlord insists you should try to negotiate that any relocation is at the cost of the landlord and the new premises will be of similar size, foot traffic and exposure and that you are given adequate notice to have the new office completed.
Use Clause
A use clause determines what may be practiced in the space. Have a clear goal in mind for the future of your practice to ensure that this clause does not inhibit growth and expansion.
Exclusivity
An exclusivity clause protects dentists from competition by preventing other dentists from practicing in the same building. Depending on the type of building your practice is in a landlord may be agreeable to adding an exclusivity clause.
Options to Extend/Renew
The length of the lease term is incredibly important during a sale. Many lenders will not finance leases with terms of less than 10 years because they often require these loans to be paid back (amortized) over 10 years. If the lease term is shorter than the payback period, banks will sometimes amortize a purchaser’s loan over a shorter period of time but this will impact the cash flow. Leases with shorter terms are likely to affect the value/goodwill of the practice. Make sure you are keeping up with your renewal/extension notice requirements. If you miss the notice period the option to extend or renew could be deemed void.
Demolition
This clause gives the landlord the right to terminate the lease and evict the tenant in the event of demolition, renovation or redevelopment. Demolition clauses may greatly reduce the sale price as it decreases the security and stability of the practice. Some banks won’t finance with a demolition clause. If such a clause exists in your lease, you should try to have it removed, render it inapplicable for a certain period of time or negotiate adequate notice and relocation compensation. The reality is that in the Greater Toronto Area these clauses are becoming the norm and getting them removed is becoming increasingly difficult.
Surrender of Premises
The surrender clause outlines the responsibilities of the tenant when returning the property at the end of the lease term. Landlords can require dentists to simply clean the area (In-broom-clean condition) or return the property to its original condition which may include removing all of the leasehold improvements. It is important to understand the requirements of this clause as returning a property to its original state can be quite expensive, especially for dental offices that require large amounts of equipment.
Conclusion
These are just some of the important items you need to look out for when negotiating your lease. It’s unlikely you will get a landlord to agree to all of these items, especially if you are located in a desirable location or an old property but the more you can negotiate the easier time you will have as a tenant in the premises and the better protection for your goodwill.
The foregoing is for information purposes only and should not to be construed as legal advice.