For dentists looking to buy or sell a practice, every piece of the puzzle seems like the most important piece. While it is true that everything is important, our years working on hundreds of dental practice transactions have shown that the most crucial puzzle piece is transferring the lease.
Why? At the end of the day, if you don’t have a lease, you don’t have a place to practice, and if you don’t have a place to practice dentistry, then you won’t get a loan to buy the practice (if you are a buyer), and you won’t have a buyer to sell to (if you are a seller). Even if the rest of the transaction has proceeded smoothly, the whole deal may be put at risk if any obstacles come up when transferring the lease.
But what is the process to transfer a lease?
There are three main paths to have a lease “transferred”. Which you must take depends on the circumstances of the transaction and the terms of the lease. The following is a quick summary of these three main options:
This is when the actual lease is handed over from the existing Tenant to another person or entity that will take over the lease and become the new Tenant. In this situation, the terms of the lease generally stay the same apart from tenant names. Sometimes this process can also include amendments to the existing lease if the Landlord and Assignee – that’s the fancy legal name for the one taking over the lease – agree on changes as part of the assignment process. The formal process for assigning the lease is usually already spelled out within the lease itself. It may include requirements like the Landlord being satisfied with the new Tenant’s creditworthiness and the tenant paying an assignment fee to the Landlord. After the assignment is complete and all parties (the Landlord, existing Tenant and new Tenant) have signed all the legal documents, then the transfer is complete, and there is a new Tenant. But be warned. Sometimes the landlord asks that the Assignor – that’s the person or entity giving up the lease – remain liable for a period of time after the assignment if the new Tenant defaults on their lease obligations.
Change of Control
In this case, the Tenant is a corporation that will remain the Tenant on the Lease, but the owner of the Tenant is changing, and so the Landlord’s consent is required for the process. In a classic scenario, a dental practice is being sold in a share sale (as opposed to an asset sale). The Tenant is the seller’s Dentistry Professional Corporation (the “DPC”). The buyer will be taking over ownership of the DPC, which they will then usually amalgamate with their own existing DPC, and the name of the DPC may even change, but at the root, the Tenant is remaining the same. Almost all leases contain a “change of control” clause that, in simple terms, says something like: in the event of a change of control of the Tenant (if the Tenant is a corporation), the Tenant will require the Landlord’s consent to the change in control or else it will be treated as an assignment that the Landlord did not consent to. This is put in leases by landlords to protect their interest because it prevents a tenant from pulling a “bait and switch” and ensures the landlord knows precisely who its tenants are, and ensures they meet the landlord’s criteria. In a Change of Control situation, the Tenant would need something signed by the Landlord showing the Landlord’s consent to the change.
Cancellation / Termination
This option is the most basic but also least likely to occur. In this case, the existing Tenant’s lease is cancelled or terminated, and the Landlord then enters into a brand new lease with the purchaser as the Tenant. Here, there is no need for an assignment or a change of control to transfer the lease because the new Tenant is getting their own lease. Transfer accomplished.
Whether you are the buyer or the seller, the landlord’s consent to an assignment of a lease is crucial and must be handled correctly. Any failure to do so may have a devastating effect on the whole deal. You will want to have someone experienced in dental practice sales to help you navigate this part of the process. Negotiating with a landlord takes attention to detail and knowledge of what is standard or reasonable.
We negotiate with commercial landlords for dentists every day and are happy to handle this to ensure you and your business are protected. Send DMC an email or give me a call directly at 416-443-9280 extension 208.