When it comes to dental practice transitions, there is one piece of the equation that can slow things down or even grind things to a halt if not handled correctly. Everything else could be lined up to a tee: the legal documents are settled; the buyer’s lending bank agreed to provide financing; the buyer and seller are on excellent terms; the employees are all on proper contracts. Even then, our years working on hundreds of dental practice transactions have shown that transferring the lease can be the most crucial part of the transition.
The process of transferring a lease from the selling dentist to the buyer can be long and complex, often for reasons that have little to do with the practice sale itself. For example, landlords can be slow to respond, make unreasonable requests, or even take advantage of the situation and try to insert nasty new terms that make the lease worse for the new tenant. So, what can you do to help ensure this part of your deal goes smoothly? First, start with an agreed-upon plan of action. Whether you are the purchaser or the seller, you both need to agree upon when to approach the landlord and who should be the one to approach them, and then stick to that plan.
When Should the Landlord be Approached?
As a buyer, the earlier the lease assignment process begins, the lower the chances of severe delays occurring (and throwing other aspects of the transaction off, like your financing terms). However, a seller may be hesitant to alert their landlord to an upcoming change before they have certainty the transaction will proceed. Reaching out too early or too late can cause problems you want to avoid.
Reaching out to a landlord too early may backfire for a seller. For example, if a buyer withdraws their offer, or a deal fundamentally changes because the buyer insists on changes to the terms halfway through, this reflects poorly on the existing tenant. Suppose a landlord has already started drafting assignment paperwork or engaged its own lawyers to review the potential new dentist tenant’s requests to change any lease terms. In that case, this may lead to additional costs that the seller may need to bear.
Conversely, reaching out too late in the process may add months of unforeseen delay (i.e., once everything else is ready for closing, except for the lease). Of course, a seller may feel more comfortable waiting until other aspects of the transaction are settled before starting the lease assignment process. Still, neither party typically benefits from a closing date being delayed by weeks or even months due to lease negotiations.
At the end of the day, the question of ‘when’ is a negotiable item that depends on the circumstances and should be agreed upon by everyone (with advice from their legal counsel, of course). A good rule of thumb is to communicate with the landlord as soon as the parties’ main agreement of purchase and sale (APS) is signed. Using the signed APS as the reference point can work for both parties because, once signed, the APS is a binding legal agreement, unlike a Letter of Intent.
Who Should Be the One to Approach the Landlord
Generally, the selling dentist (or their lawyer) makes the initial contact. The selling dentist is the one who has an existing relationship with the landlord, so they are usually best placed to introduce the idea of a transition. After that, it shouldn’t matter which party handles the discussions as long as both buyer and seller are in agreement about what is being asked of the landlord. Ideally, both parties present a unified front. The best way to do that is to agree on a plan in writing, which could be as simple as emails between the buyer’s and seller’s lawyers agreeing to a plan.
Why a Seller May Want to Handle Landlord Discussions
The seller’s existing relationship with the landlord provides a solid foundation for discussing a lease assignment, but the seller may have additional reasons to retain control over the subsequent negotiations. Allowing a buyer or their lawyers to communicate freely with the landlord may lead to confusion. For example, if the buyer asks for one set of changes, and the seller’s lawyer asks for a different set of changes, this may annoy and confuse the landlord. Also, if the sale does not proceed, the seller will have maintained control over their relationship with their landlord and not unnecessarily introduced a third party.
Why a Buyer May Want to Handle Landlord Discussions
Since the buyer is entering into a new, potentially very long-term relationship with this landlord, the lease terms will naturally be much more important to them. Handling the landlord communication means they can get a sense of what terms may be acceptable to the landlord without having to communicate via the seller and advocate for their leasing needs.
Both buyer and seller have good reasons to lead the negotiations with the landlord, so a decision as to who should do so should be made well ahead of time. It may even end up that both keeping open communication with the landlord is the best choice in some circumstances.
Transferring a lease can often be discouraging because it depends on factors outside your control. However, having a plan for how you approach the landlord can go a long way to improving your chances of a smooth transition. As always, navigating these decisions will be easier for you with advice from lawyers who handle these situations regularly. DMC has extensive experience managing communications with buyers, sellers, and landlords so that transactions close as smoothly as possible. If you are buying or selling a dental practice and have questions about the lease, you can contact us for a free consult. We are dedicated to helping dentists understand and minimize the risks associated with running a business. Send us an email or call us at 416-443-9280 ext 208.