Who is the most crucial party in the sale of your dental practice? You may think you are, being the person who built up the successful practice. Or maybe the buyer since you must rely on them to follow through with the purchase. But sometimes, it can all come down to someone else entirely. Someone with whom you may have previously had a good and probably long-term business relationship, but who now may block your ability to sell your practice – your landlord.
A recent case reminds us that your relationship with your landlord and how you approach them when ready to sell is paramount. Your sale could completely fall apart if your landlord does not cooperate or fails to act in a timely manner. And worse, any recourse you may have could come too late to resuscitate the sale.
Background
Most dental leases contain terms regulating your ability as a tenant to assign your lease to a new incoming tenant. For a dentist, these should be some of the most intensely negotiated terms in a new lease to ensure your landlord won’t be able to stall your future practice sale. Usually, these assignment clauses specifically require the landlord to not unreasonably withhold their consent to an assignment of the lease. But what is reasonable or unreasonable? Let’s look at an Ontario court case that reviews just that.
The Facts
Request for Lease Assignment
In late 2020, Dr. Rabin reached an agreement to sell his practice to two younger dentists for $1.8 million. His lease had 4 years remaining, with an option to extend for 5 additional years. The purchasers planned to incorporate a new Dental Professional Corporation (DPC) for the purchase. This DPC would then become the new tenant under the lease after the sale. Dr. Rabin retained a real estate lawyer, Kleinberg, to assist with the transaction.
Kleinberg wrote to Dr. Rabin’s landlord to provide a draft share purchase agreement and inquire about the process to assign the lease. After two weeks without a response, Kleinberg wrote to the lawyer he knew represented the landlord.
Response from the Landlord
Almost three weeks after the initial email, the landlord’s lawyer responded. He advised Kleinberg that the landlord would consent to a lease assignment if the lease was modified to include a demolition clause. Apparently, the landlord thought this proposal might spur negotiations along.
Dr. Rabin knew that a demolition clause would be detrimental to the sale of his practice. So, when faced with this possibility, he hired another lawyer, Drudi, to handle potential litigation against the landlord. Dr. Rabin’s position was that the landlord had refused to reasonably provide consent to the lease assignment and that this behaviour was prohibited by the terms of the lease.
Drudi wrote to the landlord’s lawyer and gave a deadline to either consent or refuse the assignment by the following day or face an application in court regarding the landlord’s behaviour.
Continuing Negotiations
The landlord’s lawyer did not respond to Drudi’s letter by the deadline set by Drudi. However, he did continue to correspond with Kleinberg, even suggesting alternate demolition clause scenarios. Within that correspondence, he also provided Kleinberg with credit application paperwork for the incoming tenant to complete.
The incoming purchasers of the dental practice completed the financial paperwork and submitted it to the landlord. Kleinberg provided a signed copy of the purchase agreement and again requested consent to assign the lease.
Meanwhile, Drudi wrote to the landlord again, providing a second deadline of the following day to give or refuse consent. This time the landlord’s lawyer did respond, relaying that the landlord did not find the incoming purchaser’s financial information adequate and therefore refused to consent to the assignment. Drudi requested specific reasons and reasserted that Dr. Rabin would begin an application in court regarding this course of conduct.
A few days later, Drudi wrote back to landlord’s lawyer. He advised that they required consent to assignment as the dental practice’s sale was set to close within weeks. Drudi wrote back again to suggest ways that Dr. Rabin could assure the landlord that the rent would be paid for the remainder of the lease term.
The Court Application
Shortly after Drudi’s last email, he began an application to the court on Dr. Rabin’s behalf to rule on the matter. He argued that Dr. Rabin had requested consent upon the initial contact with the landlord, and the landlord did not provide consent nor refusal within the 15 days required by the lease. The landlord had therefore breached the terms of the lease.
Within a few days, Drudi received a response from the landlord’s new litigation lawyer, stating that the landlord:
- would be seeking payment of the portion of the $1.8 million purchase price attributable to the value of the lease as believed permitted according to the terms of the lease;
- was having the location appraised and would be seeking higher rent upon assignment if it was found that the fair market rental was higher than the current rent; and
- required additional financial information from the new tenant (including an excessive list of requested documentation).
The Decision
The court did not see the landlord’s initial request to add a demolition clause as a refusal to provide consent to the lease assignment. However, the court did see the landlord’s subsequent request for extensive financial information of the incoming tenant as overreaching and unreasonable.
However, the court also saw Dr. Rabin as sending mixed messages to the landlord by simultaneously engaging two separate lawyers in different discussions with the landlord’s lawyer. Kleinberg, the real estate lawyer, was continuing with attempting to negotiate the consent process. And conversely, Drudi, the litigation lawyer, was requesting an immediate response, or they would seek court approval of the assignment. And worse, Drudi followed up not with a court application but by again requesting consent to the assignment.
Ultimately, the court emphasized that whether a landlord has unreasonably withheld consent to a lease assignment always depends on all of the facts. And in this case, the parties’ conduct was a critical factor in the court’s inability to determine whether the landlord’s consent was refused. The court stated:
- … the case law establishes that in determining the reasonableness of a refusal to consent, it is the information available to and the reasons given by the Landlord at the time of the refusal and not additional or different facts provided subsequent to the court that are material.
- The difficulty of applying this law in the immediate case, is that the conduct of the landlord – and of the tenant – has obscured the circumstances that the landlord has neither consented nor refused to consent to an assignment and the tenant has been equivocal about whether or not to provide information or financial comfort to the landlord about the financial viability of the new tenants.
- The difficulty of applying this law in the immediate case is further confounded by the circumstance that the reasonableness of the landlord’s and the tenant’s conduct was an ongoing matter that started before the litigation and continued through the cross-examinations that were conducted three days before the argument of the Application.
As a result, no final decision was reached, and the case was dismissed without prejudiceit could be re-opened in the future pending certain conditions.
How Could This Have Been Avoided?
This case emphasizes once again the importance of how you approach negotiations with your landlord and the need for clarity in all communications concerning those negotiations.
In this case we can clearly see the significance of approaching your landlord appropriately when planning to sell your practice. Consenting to an assignment of a lease does not generally present a beneficial situation to a landlord as it
- adds financial risk by transitioning from a tenant with a known credit history to one that is new;
- adds paperwork/process that takes up administrative time and effort; and
- may limit their ability to raise the rent or create a lease more in their favour than if they were choosing the new tenant.
So, you want to take this and the history of your business relationship into consideration when requesting consent to a lease assignment. Not considering all the aspects of a landlord-tenant relationship may lead to an “unreasonable” denial of consent dressed up with “rational” reasons.
Also shown in this case is what may happen once tensions between tenant and landlord become heightened. Feeling threatened, the landlord above began asserting all of their rights under the lease, demanding a portion of the dental practice’s sale price and potentially higher rent from the new tenant. Dr. Rabin may have avoided some of this escalation by working with a lawyer experienced in dental practice sales instead of two lawyers with related yet unspecialized experience. You will want a lawyer who knows how to carefully maintain a civil relationship with your landlord during the assignment process.
No matter how you go about negotiating the lease assignment for your dental practice, clear communication is a must! By not plainly stating his request for consent, Dr. Rabin could not prove that the timeline according to the terms of his lease had expired. If your lease has a defined period in which to respond, you have to be clear that you are requesting your landlord’s consent to the assignment and that you expect a response within the time specified.
Bottom Line
Selling a dental practice takes patience and resilience. It is often a lengthy process filled with ups and downs and potential setbacks – tricky financing conditions, employee resignations, and of course, uncooperative landlords. Your lawyer must handle all of these to your benefit and at the appropriate time.
While requesting a landlord’s consent to an assignment of a lease is a routine part of a dental practice sale, this case illustrates how it must be handled carefully. Any failure to do so may have a devastating effect on your ability to sell. A lawyer experienced in dental practice sales can help you navigate all these situations and arrive at the best result – you as the happy former owner of a dental practice.
If you are thinking about selling, 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 give me a call directly at 416-443-9280 extension 208. Whether you are entering a new agreement or renewing an existing lease, we have you covered.
