Here’s a quick list of 10 things every Ontario dentist should know before entering into a commercial lease agreement with a landlord. Note that these 10 things are being provided in no particular order.
Figure out what premises (e.g. units, building, etc.) the Landlord owns and ask for an exclusivity clause that prevents other dentists who compete with you from being able to lease space in those premises. This will help reduce the competition around you. Without an exclusivity clause, you may find a new or established dentist setting up shop next door, and you may have no legal recourse to stop it! Be sure that the exclusivity clause is specific or broad enough to protect you.
Are you able to sub-let your space to another dentist? If so, do you need to first obtain the Landlord’s consent? If so, can the Landlord refuse consent arbitrarily, or will the Landlord be held to a reasonable standard? Will the Landlord have the ability to review potential Sub-Tenants? Will the Landlord have the right to ask for a copy of the Sub-Lease and approve it? Will the Landlord have its own lawyer engaged in the entire process of HAVE YOU pay for their legal fees? You need to be mindful of all of these things.
3. Assigning the Lease
In the event that you want to sell your practice, you should consult the lease to figure out what involvement the Landlord will have in transferring over the lease. Ideally, the Landlord’s involvement will be minimal: they will only be provided with notice that you are assigning the lease (i.e. transferring the rights and obligations therein) to another dental surgeon or their dentistry professional corporation. You won’t need their approval or consent. That would be ideal for the dentist tenant. But in reality, Landlords require that you obtain their consent to assign the lease. That consent may not be withheld arbitrarily, but my experience is that Landlords are notoriously difficult to deal with – so much so that they unreasonably delay and effectively withhold their consent (e.g. on the basis that they do not accept the proposed assignee’s financial information to their satisfaction). The Landlord may have also included a provision in the lease that says that a change in ownership of a tenant dentistry professional corporation ALSO constitutes a transfer requiring the Landlord’s prior consent. And finally, to top it all off, the Landlord would need to engage a lawyer and have the Tenant pay for all of its legal fees. This is a very important part of any buy/sell deal, so you should definitely engage a lawyer to review and negotiate the lease in your favour.
4. The Rent
Typically, tenant dentists want certainty over what their rent is going to be. Preferably, they want less than fair market value. Landlords, on the other hand, only want to agree to a specific rent for a limited period of time and then be able to renegotiate the rent (always higher) based on the rent that is charged in surrounding areas for similar premises.
5. Use of the Premises
Landlords love to specify what you can use the premises for. But this may be too restrictive. What if you wanted to sub-let some space to a lab? Would the ‘permitted uses’ clause in the lease allow this?
Signs can be expensive. Landlords typically want to pay nothing but have the final say over the design, placement, etc. of the sign. They also don’t want to cover the costs of replacing, repairing, or installing signage.
7. Renewal Option
Tenants typically want a long-term (i.e. 10 years at least) term with two (2) renewal options of 5 years each. Landlords always want shorter terms because this allows them to renegotiate the rent. Also, Landlords want to be able to review the rent during the renewal terms – so they typically say that it will be at “fair market value based on comparable premises in the surrounding areas” (or something to that effect). It’s unusual to see rent going down after time, so it’s better for Tenants to lock in at some fixed price during the renewal terms.
8. Leasehold Improvements
Check to see if the Landlord’s consent is required for leasehold improvements (e.g. cabinetry, plumbing, electrical systems, doors, ceilings, flooring, outlets, hookups, etc.) and who claims ownership of these things. Will the Tenant be required to remove leasehold improvements after the lease ends (and pay for that removal)? Will the Landlord share some of the costs of the Leasehold Improvements and their installation? The Landlord may require the Tenant to only work with its recommended contractors (who may not be as good and more expensive than the Tenant’s!).
9. Option to Purchase
Though rare, there may be an option to purchase the premises at some future time from the Landlord. Under this scheme, the Tenant would pay something extra for the option to purchase. The price would be set in advance or based on some formula. And for each month of rent that is paid in full and on time, the Landlord would typically provide some credit towards the purchase price.
10. Terminating the Lease
This is really important. If things don’t work out, how can the Tenant and Landlord part ways in the most cost-effective and amicable manner? If it’s a long-term lease and the Tenant wants to leave asap, they could be on the hook for damages for breaching the contract. The Landlord would be required to mitigate its damages. The lease itself should cover the various ways in which the lease comes to an end, including end of term, by mutual consent in writing, by assignment to another party, by default (e.g. breach of the lease), by substantial damage to the building, by the sale of the building to a third party, etc. Be sure to read these provisions carefully!