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Going to Extremes to Secure Your Lease Term

By April 27, 2021September 21st, 2021Leases

As a dentist negotiating a new lease, you likely have a few ideas of conditions you’d like to include and things you want to avoid. Some lease clauses, like the dreaded demolition clause, can have a substantial negative impact on the value of your practice. Others, like an exclusivity clause, can lock in value for you.

But there is something equally as important as the specific provisions you settle on when entering into a new lease. And that is to secure a lease term with a sufficient length of time and multiple renewal options. A recent Ontario case highlights the stress and expense you could face if you don’t negotiate a longer lease term.

Background

A lease agreement has a start date and an end date – the ‘term’ of the agreement. It’s generally in a tenant’s best interest to have a longer term (inclusive of renewal options). This helps ensure you’ll have a location for your dental practice and protect your ability to sell. A relatively short initial term with multiple renewal options with a fair base rent would be ideal. The specific length of the initial term and will depend on what you can negotiate.

However, landlords frequently don’t want to lock themselves into long-term commitments. They prefer a shorter length of time because the end of each term allows them an opportunity to renegotiate the rent, consider a redevelopment of their property, or make the property more attractive to a potential buyer.

So, what happens if you couldn’t secure a long lease term and are now approaching the end of the lease? Let’s first look at what you shouldn’t do. The Superior Court of Justice in Ontario recently decided a case that dealt with a dentist who went to great lengths to secure a backup option when his lease term was running out.

The Facts

The Building and Exclusivity Clause

A new plaza consisting of commercial condo units was being constructed in Brampton. An investor, Urmila Holding Inc. (Urmila), was interested in purchasing one of the units, intending to lease it as a dental office. Urmila negotiated for the condo documents to contain a clause restricting the operation of a dental clinic to their unit only. No other unit in the plaza would be permitted to operate as a dental practice.

The purchaser specifically sought units with such an exclusivity clause within the building because:

  • they are in high demand, so their investment is likely to grow in value
  • they can currently demand rent of $8.00 more per square foot than comparable units without exclusivity

Therefore, it was important to Urmila to make sure the condo they bought would be the only one in that building permitted to be a dental practice.

Original Lease and Renewal

Once purchased, Urmila found a tenant for the unit that was interested in operating a dental clinic. They agreed to a 10-year lease with a 5-year renewal option. When the original 10-year period was nearing the end, the tenant dentist approached Urmila to see about securing another 10-year term rather than the existing 5-year option. Urmila was unwilling to agree to another 10-year term. The dentist was limited to exercising the existing 5-year option with no further renewal rights.

The New Unit

Facing a lease term ending sooner than he would like, the dentist started looking into alternative options. When the unit next door to his dental practice came available for purchase, the dentist decided to take advantage and purchase the adjacent space. And with only two years remaining on his lease of the existing unit, he moved his dental practice into the new one and continued to pay rent for the original space.

But what about the exclusivity clause? How would the dentist be able to operate a dental practice in another unit when the original space had exclusivity? There was an additional section within the exclusivity clause included in the condo board documentation. This section appeared to allow one tenant to “transfer” their exclusivity benefits to an owner or tenant of a different unit. The clause stated that no other unit would be permitted to be used as the “Existing Business” (being a dental practice):

Unless any Owner, tenant, occupant or licensee already carrying on an Existing Business within or from their Unit, consents in writing to allow any other Owner, tenant, occupant or licensee to carry on such Existing Business, which consent may be arbitrarily withheld by any such existing Owner, tenant, occupant or licensee conducting, operating or carrying on such Existing Business (2021 ONSC 2707 (CanLII)

So, the dentist wrote to the property manager to show his consent to the new unit (which he now owned) “taking over” the exclusivity from the existing rented unit. Everything seemed to have worked out until Urmila discovered that the dental clinic had moved.

The Court’s Decision

Urmila applied to the court, claiming that the dentist’s “transfer” of exclusivity without their knowledge was against any reasonable interpretation of the exclusivity provisions in the condo documents.

The court decided that the dentist could not validly transfer the benefit of exclusivity permanently from the unit he rented to the unit he now owned. Even though the condo documents seemed to suggest that was possible, it was not commercially reasonable that a tenant could transfer on an owner’s behalf what that owner had paid for (the dental exclusive use) to another owner.

During the litigation, the court learned that the dentist had tried to purchase a unit at the plaza around the same time as Urmila. Since the condo with the dental exclusivity had already been sold, the dentist reached out to Urmila and negotiated the original lease instead. And before asking for the additional ten years during the renewal negotiations, the dentist first offered to purchase the unit from Urmila. These previous purchase attempts implied to the court that the dentist knew about the premium value of the exclusivity clause, putting a negative light on his workaround attempts. These details made it easier to find in favour of the landlord who had paid the premium price to obtain the unit with exclusive dental use.

Ultimately, the court did agree that so long as the dentist remained a tenant of the original unit, he could permit another owner, in this case, himself, to carry on the dental practice next door. But, when the original lease expires in just over a year, the dentist would have to find a different solution.

Bottom Line

The dentist in this scenario clearly valued the location and the exclusive use provision. Over more than ten years, he built up a successful practice which he wanted to continue. Unfortunately, he ran into trouble with a lease expiring far too soon and no secure long-term options. His questionable solution ended up being very expensive and unworkable in the end. The court decision forced him back to the table to negotiate with his existing landlord. But this time, with even less time left on the original unit’s lease and a very strained relationship.

Instead of paying rent on an empty unit, moving costs, and court fees, the best action for this dentist would have been to get help with the renewal negotiations. Negotiating a lease renewal takes attention to detail and knowledge of what is standard or reasonable. It can sometimes be as challenging to navigate as the original lease negotiations. Often landlords want to review the rent cost during the renewal and previously agreed to provisions. They sometimes even try to insert new clauses for their benefit and at the expense of your practice. Having a professional manage this process will help you secure the lease terms that best support your business.

So, if you are nearing your lease renewal window, or looking to enter a new lease agreement, let us know. 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.

2 Comments

  • ED says:

    What are the options of getting an exclusivity though? How did Urmilla get it and the dentist didnt.

    Was Urmilla the builder themselves as in such a case not much u can do

  • DMC says:

    There was only opportunity for one unit in the complex to have exclusivity for the practice of dentistry. Urmila bought earlier and the dental exclusive was still available at that time. After that, no subsequent buyer would have been able to – so yes, in this case there was no other option to get exclusivity.
    The reported decision doesn’t mention that Urmila was the builder (which could either mean that they weren’t or just that it was not raised in the trial).