As a dentist negotiating a new lease or reviewing the lease of a practice you want to buy, there are two words you do not want to see: the dreaded Demolition Clause. But beware – even if you’ve successfully negotiated a lease without a demolition clause, you may not be in the clear long-term! Even if you already have a lease in place, your landlord may look to include a demolition clause in your new lease or extension agreement.
Why should you be wary of a demolition clause? First, demolition clauses can be fatal to getting financing for your start-up practice. Second, they can also make your existing practice much more difficult to sell, if not unsellable, due to the doubt this clause puts in the minds of the bankers about whether you can stay in your space long-term. This doubt makes them generally unwilling to finance a potential purchase loan. With this in mind, dentists often spend a lot of time when first negotiating a lease to ensure it won’t contain such harmful clauses.
But if you’ve already started your own dental practice, you should be all good, right? Not quite. In this post, we will review how you might find yourself facing a demolition clause after being a tenant for many years and what you can do to mitigate, or better yet avoid, this dreaded situation.
What is a Demolition Clause?
A demolition clause gives your landlord the option to terminate your lease upon a certain amount of notice. When the notice period runs out, you are forced to move out. Notice periods are generally mere months or maybe a year. More than that is unusual and typically only agreed to with considerable negotiation.
And be careful. Landlords may also use other terms or wording that have the same effect as a demolition clause:
- Redevelopment Clause: A redevelopment clause gives the landlord the option to terminate your lease if they want to tear down and rebuild part or all of the building or rearrange the development.
- Termination on Notice: Some leases even give the landlord the right to terminate your lease upon notice for any reason. They don’t even need to have set construction plans for demolishing or renovating the building.
Since these terms can come in many forms, it is crucial to read through your entire leaseor offer to lease before signing. You want to ensure there’s no way for your landlord to end your lease term earlier than expected.
I Don’t Have a Demolition Clause, So I’m Safe, Right?
Congratulations! You negotiated a lease with no demolition clause in it! That is an excellent step in avoiding future headaches. But you aren’t completely free yet.
Lease Negotiations Upon Renewal
Many leases contain terms that deal with a tenant’s right to renew the lease for additional periods. Sometimes these terms require the tenant to sign the landlord’s then-current form of a lease at the time of renewal. If, for example, a landlord has updated their standard lease to include a demolition clause, there may be an argument that the tenant must now accept this as part of their lease.
To avoid this issue, it is essential to also review the renewal terms in your original lease carefully. You want to ensure the landlord doesn’t have the leeway to insert detrimental clauses in the future. Once you’ve invested your time and money into building a successful practice, such a change to your lease will be harder to deal with. It may be reasonable for the landlord to update some terms as the law is constantly evolving, but something as significant as a demolition clause should be excluded if possible.
Lease Negotiations When Renewal Options Expire
Even if you manage to get a long-term lease with several renewal options, you may be back in the position of having to negotiate lease terms all over again when those options run out. Even if your original lease didn’t include specific clauses, once your renewal options have run out, your landlord is free to negotiate everything as if your lease were brand new.
A landlord entering a lease 15 or 20 years ago may not have contemplated demolition options. But these terms are becoming more common all the time. So your landlord may want to take advantage of this opportunity to give themselves more freedom in the future.
Are Demolition Clauses Always Fatal?
In general, a demolition clause in a lease will make a bank reconsider whether they are willing to finance the loan for the start-up or the purchase of the dental office. However, some landlords and certain location types (e.g. corporate landlords and large retail centres) will almost always require a tenant to accept terms that allow the landlord to demolish or redevelop. So, is there a way to make this work?
When it comes to leasing in a large shopping centre, some banks may be willing to overlook the inclusion of a demolition clause and still agree to finance because they understand the commercial reality of dealing with these corporate landlords. You may be able to arrange a loan for a start-up or get approval for your purchase of an existing practice. Still, it is better for you as a tenant to do whatever possible to remove any demolition rights from your lease. The banks may not make the same favourable decision when you try to sell in the future.
On the other hand, banks tend to be unwilling to finance a lease with a demolition clause if the landlord is smaller or the building location is less desirable. In this case, you may not be able to move ahead with a future sale of your dental practice unless you can find a buyer who can self-finance. You will severely limit your options if potential purchasers cannot obtain financing.
Negotiating a lease for a dental clinic involves more than just thinking about keeping rental rates low. You also need to make sure you have the correct legal terms in place to safeguard the long-term success of your business. And even if you manage to negotiate a lease with terms that protect your interests, you must ensure your landlord can’t introduce bad terms in the future. So, my advice is if you’re looking to lease space or renew your lease, speak with a professional about negotiating the terms.
An experienced dental lawyer knows how to deal with a landlord who insists on demolition options. And they can help to prevent these terms from becoming part of your lease in the future. So, if you are nearing your lease renewal window, or looking to enter a new lease agreement, let us know. DMC has extensive experience negotiating and drafting leases for dentists that protect you and your practice. If you are a dentist, you can contact us for a free consultation at any time. Send us an email or call me directly at 416-443-9280 ext 208 any time.