6 Common Traps in Dental Office Leases
A dental office lease can contain traps and causes that can cost you thousands of dollars, making it one of the most important documents you’ll ever sign.
Landlords use leases to maximize their profits from dentists. This is why you should keep an eye out for terms and clauses within contracts that may be designed to hinder you rather than to protect you.
Whether you are buying a dental practice or starting one from scratch, having an attorney with experience in the dental field to assist you with your lease negotiations can be extremely helpful.
Landlords often insert clauses that virtually destroy a dentist’s ability to sell his or her practice.
For example, a recapture clause is an assignment clause that allows the landlord to cancel the lease if asked to assign it to the dentist buying your practice. The worst part about this clause is once asked, you can’t take it back! Which means the landlord now has the power to demand money from you for the ability to assign your lease to your buyer!
Most of the time, leases have a condition preventing you from assigning your remaining options to extend the term of the lease. If you want to sell your practice, the buyer’s lender won’t finance the sale if this is the case because they want the lease to continue for as long as the lender’s loan is in effect (e.g., 7-10 years). If your options are “personal” to you, they don’t automatically transfer to your buyer. We have seen landlords demand large payments in exchange for assigning the options so you can sell your practice.
There are also many landlords who will insert clauses that entitle them a percentage of the profits you earn from selling your dental practice. These assignment clauses can destroy the nest egg you are building in a successful dental practice.
Office Build-Out Issues
A dental office lease usually specifies a period of time within which space build-outs must be completed. It is a good idea to limit the time the landlord has to review your plans, and to put penalties in your construction contract to ensure that the contractor has to pay your rent if the job isn’t completed on time.
Tenant improvement allowances are another common issue during build-outs. While rent is typically negotiated based on the rentable square footage, the landlord will routinely try to base the tenant improvement allowance on usable square footage which can be 10-20% less than rentable square footage. Always insist that the tenant improvement allowance be based upon what you are leasing, i.e., rentable square footage.
In your lease, does your landlord have the right to relocate your practice on 30 days’ notice? Relocation can:
1. Force you to absorb the cost of rebuilding your practice from scratch which can be upwards of $500,000, not to mention moving costs or the renovation of your current space.
2. Face you with 3 – 12 months of practice “dark time” before the move is complete, meaning there is no incoming revenue, and business is at a standstill.
There are rent escalation clauses in almost all leases, either contractually based or based on one of many commonly used economic indexes, such as the consumer price index. With any luck, your lawyer can convince your landlord to tie increases to less volatile indices, and declare a ceiling on such increases.
Damage to Office
Calamities such as earthquakes, fires, floods, and even riots can cause damage to any type of business. If a dental lease office suffers damages, a typical lease will stay in effect if the landlord elects to rebuild, but imposes no time limit on when it is required to be finished. You or your insurance provider may even be forced to pay rent even when the office cannot be used. So what can be done? Set a certain timeframe for the landlord to start and complete the repairs (e.g., 90 days to commence, 180 days to complete). In the event the landlord fails to meet these goals, you should be able to terminate the lease and find another place to rent.
Mortgage foreclosure clauses are very complicated, making the subordination clauses within them almost invisible. These clauses usually specify that your lease becomes subordinate to any new financing your landlord obtains for the building. If economic changes make rents decrease and your landlord can’t pay the mortgage, the new landlord does not have to honor your subordinated lease, and you may lose your dental office space. However, most landlords will agree to waive such clauses during lease negotiations because they understand they will not be able to own the building in the event this should ever occur.
Our Dental Practice Attorneys Can Help
We cannot stress how important it is to have a dental office lease reviewed before signing. Dentists should remember they treat patients. Lawyers negotiate contracts. In our firm’s experience, landlords are willing to negotiate these points, provided you know how/what to ask for. We can help. Contact our experienced dental practice attorneys at Wood and Delgado and we will negotiate critical terms in your lease to ensure you don’t fall into any of the common traps.
Wood and Delgado has represented over 8,000 dentists since 1980 and focuses its efforts on supporting the dental community with their business needs. If you have questions about leasing office space, or buying or selling a dental practice, don’t hesitate to contact Wood and Delgado at 800-499-1474.