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3 Ways Bad Leases Can Cost You Thousands!

By March 2, 2021September 21st, 2021Leases

We’ve seen it time and time again. Dentists (without proper representation, no doubt) sign a very long lease with a lot of small print. And years will go by without them ever thinking about that small print. Until… the time comes to sell the practice. That’s when all sorts of problems arise.

So, in an effort to help eliminate those pesky lease issues before they arise and cost you thousands of dollars to deal with at the worst possible time, I’ve narrowed down three terms in bad leases every dentist should know.

1. Demolition Clause

This clause gives the landlord the right to terminate the lease by giving notice to redevelop the building (e.g. tear it down and build a condo). We have seen this clause cost one dentist three hundred thousand dollars because of the landlord’s high vacancy rate, location next to lots of condos, and adamant reluctance to remove the demolition clause when asked. Sometimes, these demolition clauses come with an obligation on the landlord to provide relocation space and leaseholds and reimbursement of some kind (but not for business interruption typically).

Purchasers and their banks HATE these clauses because it gives the landlord the ability to terminate the lease prematurely. Banks need to see at least ten years remaining on the lease with no demolition. We have seen sellers forced to pay the landlord thousands (think $25k) to persuade them to remove the demolition clause for a few years. Again these are unexpected ‘dings’ that you can avoid if the lease is negotiated correctly. Or, when you’re in the process of selling your practice, you can mitigate their harm with the help of an experienced professional.

2. Consent Terms

Landlords are generally brutal when it comes to considering a prospective assignee (i.e. the purchasing dentist) and consenting to a lease transfer. They generally like to give themselves all discretion and power in judging the incoming tenant. We have seen leases with consent terms so brutally one-sided a landlord could:

  • Ask for every kind of document you can think of (including the purchase and sale agreement) in considering whether the prospective assignee is worthy.
  • Deny granting consent for several listed reasons (some of which didn’t make sense – like the length of time or reputation the prospective assignee has run their practice).
  • Withhold consent unreasonably.
  • Reject giving consent and decide to terminate the lease (attempting to rush the existing tenant to withdraw their request).
  • Ask for money from the sale.

When it comes to asking for money, there are a few ways in which landlords do this.

  1. They can say that, according to the lease, they own all the leaseholds which are being purchased and therefore should be reimbursed (we’ve heard about this happening to the tune of $100k!).
  2. They can ask, pursuant to the lease, no doubt, that they are entitled to 1% of the purchase price. Ouch!
  3. They can say that they need a set amount of money to consider the prospective assignee and their worthiness.

And don’t forget that the tenant, or the prospective assignee, will need to pay the landlord’s legal fees, regardless of whether they grant consent to the assignment of the lease!

3. Staying on as Guarantor

Sometimes, you may be personally on the hook for the lease for the duration of the lease. That might include being on the hook for any renewal terms too. And, in the worst-case scenario, you might be on the hook EVEN if you transfer the lease. In one situation, a dentist we know was on the hook until 2024 as a personal guarantor! That meant that if the incoming tenant defaults on the lease, the landlord can come after the original dentist for what is left owing on the lease (i.e. rent x remaining term!). Ouch!

We try to avoid this by recognizing that the term is there and either removing it or mitigating its effect. For example, we can try to put a timeline (either after the lease starts or after the lease transfer) on how long you would be a personal guarantor. This can look like 5-10 years after the start of the lease or 5 years after the lease transfer.

Bottom Line

My advice is if you’re looking to lease space or renew your lease, speak with a professional about negotiating the terms. That will increase your chances of getting off the hook when you transfer the lease in the future. And if you are getting ready to sell, an experienced negotiator can lessen the damage of your current bad lease.

If you are thinking about selling your dental practice or entering a new lease, please call us. We negotiate commercial leases for dentists every day and are happy to help ensure you and your business are protected. Send DMC an email or call our Commercial Leasing lawyer directly at 416-443-9280 extension 208. Whether you are entering a new agreement or renewing an existing lease, we have you covered.

The Content of this post is provided for informational purposes only. It is not intended to be legal, financial, tax, or other professional advice of any kind. You are advised to contact DMC (or other counsel) to seek specific legal advice concerning your individual situation.