So you’re a dentist that is looking to lease office space. Or perhaps you have a space and your lease is coming up for renewal. The question is: what should you be concerned about when you are presented with an Offer to Lease or Lease? Well, hopefully, this blog will shed some light on this topic.
1. Gross vs. Net Lease
A gross lease is every tenant’s dream. It’s one amount that doesn’t change from month to month. Hopefully, it includes all utilities too! Wow! Such certainty. But alas, most leases are not gross leases. Instead, they are some form of net lease. This means that the rent will be divided into a known amount (base rent), but the tenant dentist will typically also have to pay for their proportionate cost of other expenses (additional rent). The additional rent generally increases each year. It includes things like costs related to the common area, property and other taxes, etc.
2. Base Rent
The only way to get a better sense of whether the base rent is fair and reasonable is to do a comparative market analysis (have a realtor do this for you using MLS). Then you will have a better negotiating position. You can always use the length of the term of the lease to bring down the base rent. And dentists generally should try to make sure that the base rent does not increase too quickly (as it will never come back down!).
It’s generally in the dentist tenant’s interest to have a long and undisturbed term (i.e. no demolition or early termination clauses in favour of the landlord). Something like 4-5 years is typical, but 10 years in the right location with a good base rent would be ideal.
4. Renewal Options
If you’re only staying in the space for a short period of time, it’s definitely worthwhile to have the option to renew the lease on the same terms as currently exist under the lease. Most leases, however, won’t specify what the base rent will be. Rather, it is to be determined and negotiated by the parties according to what commercial rates are at that time. It’s best for a dentist to have the rate figured out and written into the agreement ahead of time (as rates generally go up!).
5. No Demolition Clauses
A demolition clause gives the landlord the right to terminate the lease early and kick the dentist tenant out (generally with little notice and without compensation). If there is a demolition clause being presented in an offer to lease or actual lease, your dental lawyer should fight to have it removed or at least rendered inapplicable for a set period of time. If it is triggered, then there should be adequate notice (e.g. 12 months) and relocation costs should also be pushed for. Landlords don’t generally budge on these issues, but if you don’t ask for them, you won’t get them!
It’s always in the dentist tenant’s interest to be able to transfer the lease to another dentist without the meddling of the landlord. That’s why we at DMC LLP try to include a provision that says, whenever the dentist tenant is transferring the lease or changing the corporate structure of their dentistry professional corporation, then they will only be required to notify the landlord but without needing to obtain their consent. Landlords are reluctant to agree to this, but we put forth very strong arguments that dentists are ideal tenants so the risk is minimal.
7. Entering into the Lease Personally vs. Professional Corporation
It’s always better for the dentist tenant to enter into the lease through a corporation (professional corporation or vanilla company). This is because the liability of this corporation is limited to its assets (if it has any) and the dentist’s personal assets won’t be exposed in the event that they default on the lease and get sued for the balance of the rent owed. Oftentimes, the landlord will ask that the dentist be a personal guarantor or indemnifier if their corporation is going to be the tenant. It’s hard to get around this, particularly with sophisticated landlords and where the corporation has no credit history or assets.
The last thing you want to see is a competitor be offered space in and around your practice. That’s why it’s imperative to get exclusivity in some form or another (e.g. in the building entirely, on your floor, via signage, based on the type of dentistry that you practice, etc.).
If you’re planning on spending a lot of money to make the premises look better or be practical for your dental practice (e.g. installing an elevator or putting in a ramp, etc.), then you should discuss financial incentives with the landlord. Also, if the Landlord will be paying for some or all of the leaseholds, just keep in mind that they may ask for money as a condition of consenting to a lease assignment on the basis that it owns the leaseholds. This happened in at least one case I know of where the landlord demanded and received $100k for leaseholds in order to give consent!
10. Early Termination Rights
Wouldn’t it be great if you could terminate the lease early with little repercussion? In rare cases, dentists will be able to walk away from the lease and pay liquidated damages that are less than what they would have otherwise had to pay (i.e. rent for the remainder of the term). Landlords generally want tenants to stay for the entire term. But if a tenant has an early termination right, then they could walk away with fewer financial consequences.
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. At DMC, we negotiate commercial leases for dentists every day and are happy to help ensure you and your business are protected. Send us an email or call our Commercial Leasing lawyer directly at 416-443-9280 extension 208. Whether you are entering a new agreement or renewing an existing lease, we have you covered.