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Leasing Space – Important Issues!

By October 2, 2012September 21st, 2021Leases

Just when you thought I was done telling you about dental leases, here are a few more things for you to consider.

Demolition Clauses

Demolition Clauses give the Landlord the right to terminate the lease in case the building needs to be demolished. Landlords love including this ‘get out of jail free’ card, which means, if you’re buying an older building, you could be kicked out with no compensation after having spent years building up your practice! How can you negotiate against this from happening? Well, for starters, your best bet is to insist that it be taken out of the lease! If the Landlord insists on keeping it in, then you can try to put a limit on how the Landlord can use the clause. For example, you can say that the Landlord won’t be able to use this clause for at least 10 years. Sometimes, you’ll get that; other times, you may only get 5 or 7 seven years. Sometimes, the Landlord won’t budge and you’ll have to consider whether you still want to go through with the deal.

Sale of the Building

You also need to read this clause carefully to see if the Landlord slipped in something that gives them the right to terminate if they SELL the building. The lease should say that, if the Landlord sells, then that won’t terminate the lease and that the new owner will be bound by the terms and conditions of the lease.

Buying a Practice with a Lease?

If you’re buying a new practice, you’ll want to know how the rent deposit is being dealt. Is it being credited to you (in which case, you’ll need to pay the purchaser for it) or do you have to pay the Landlord because the Landlord is giving the rent deposit back to the vendor?

Parking

Is parking free? If not, can you get a free space? If not, can you get two spaces and pay for one? What about your patients? Can they get free parking? Is the Landlord set up to handle that? Just some things to think about.

Getting out of the Indemnity when you sell

Okay, I previously talked about the importance of being able to assign the lease by giving notice to the Landlord but not having to get the Landlord’s consent in the following circumstances:

  • When you’re transferring the lease (assigning it) to another dentist or dentistry professional corporation;
  • When you’re subletting all or part of the premises to another dentist or dentistry professional corporation; or
  • When you’re changing the ownership structure of your own dentistry professional corporation, which is the tenant (this covers situations where you are selling the shares of your dentistry professional corporation).

Ideally, in these situations, you don’t want the Landlord wasting everyone’s time and potentially killing a deal because they don’t like the prospective purchaser. They can use things like credit checks and the prospective purchaser’s financial situations to decline assigning or transferring the lease to the new purchaser. And that means you’ll be stuck with a practice that is hard to sell. So like I said before, I strongly believe in making this an important term of any lease when you start your negotiations.

And that leads me to the next issue: getting off the hook when it comes to the indemnity! What am I talking about here? Well, basically, when you have your dentistry professional corporation or other company sign a lease, the Landlord will want a personal guarantee from you to cover the rent and abide by the lease in case your corporation doesn’t! So no walking away from the lease! You’ll have personal liability if you do. And that’s normal (i.e. having to sign a guarantee or indemnification personally, along with having your dentistry professional corporation sign the actual lease).

So here’s the trick: when you get your ability to assign the lease to another dentist or dentistry professional corporation by only giving the Landlord with notice (no need for consent), then you ALSO need to get off the hook with the Indemnification too! You basically will need to swap yourself with the incoming dentist. This trick has worked many times in the past in lease negotiations, and I would strongly encourage you to include it at the beginning with your other key terms (i.e. rent, term, renewal, exclusivity, no demolition clause, signage, parking, etc.). If you impress upon a landlord how important it is to you at the beginning – and perhaps even make concessions to get it – then the Landlord may be convinced to swallow the risk and agree to your terms.

What happens if you don’t get off the indemnification? Well, basically, you’ll be in a situation where you have sold your practice but, if the new tenant defaults, you’ll still be on the hook for the rent (and other obligations) for the REST OF THE TERM! This could be 5, 10, 15, or even 20 more years. Who in their right mind wants this kind of liability? No one! So be sure to get off the indemnification when you sell. No more liability, financial or otherwise, is the name of the game!

 

 

DMC