A dental office lease agreement 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 a business litigation attorney with experience in the dental field to assist you with your lease negotiations can be extremely helpful.

Assignment Clause

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.

Relocation Clause

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.

Rent Increases

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.

Subordination Clauses

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 Morgan and we will negotiate critical terms in your lease to ensure you don’t fall into any of the common traps.

Wood and Morgan 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 Morgan at 800-499-1474.

Frequently Asked Questions (FAQ) – Dental Office Lease Agreements

Why do dental office leases require special attention compared to other leases?
Dental office leases come with specific challenges and considerations, such as build-out requirements, unique clauses, and the potential impact on practice sales. These leases reflect the specialized nature of dental businesses and can directly affect their financial success and growth.

What are the most critical clauses to monitor in a dental office lease?
Key clauses like assignment clauses, relocation clauses, and subordination clauses can significantly influence the profitability and functionality of a dental practice. Being aware of these clauses and negotiating them effectively is essential for long-term success.

How is the tenant improvement allowance typically calculated?
Landlords often calculate tenant improvement allowances based on usable square footage instead of rentable square footage. This can reduce the total allowance by 10-20%. Negotiating for rentable square footage ensures the allowance properly reflects the full lease agreement.

What strategies can be used to minimize rental costs and base rent increases?
Strategies include negotiating escalation limits tied to stable economic indices, requesting free rent during build-outs, and comparing rental costs across competing dental office spaces in the local market. Legal professionals or leasing consultants can help identify additional ways to save.

Can a landlord relocate my practice without covering costs?
This could happen if a relocation clause is present in your dental office lease. Such clauses may allow landlords to move your practice with limited notice. Negotiating to limit the landlord’s relocation rights and requiring them to cover all associated costs can help protect your practice.

How can legal assistance during lease negotiations benefit dental professionals?
Legal representatives with knowledge of healthcare or dental leases can review agreements, detect hidden risks, and guide negotiations. They make sure the lease terms align with your business interests and safeguard your investment.

How can I protect my office lease if the landlord’s financing changes?
Subordination clauses can make your lease vulnerable if your landlord’s mortgage gets foreclosed. Including a non-disturbance agreement in your lease ensures that your practice retains the right to occupy the space, even in such situations.

What should I know about renewal options in dental office leases?
Some renewal options are non-transferable, meaning only the original tenant can exercise them. This can complicate practice sales if a buyer cannot extend the lease term. Ensuring renewal rights are transferable when negotiating your lease is crucial.

What provisions can help safeguard my practice from damage-related downtime?
Including specific timeframes for landlords to repair damage caused by events like fires or floods can minimize operational disruptions. Additionally, negotiating terms that pause rent payments during downtimes ensures you don’t incur financial losses when the office space is unusable.

Why is reviewing existing leases periodically important?
Over time, market conditions, projected growth, or changes to your practice may render old lease terms ineffective. Revisiting and renegotiating your lease allows you to secure better terms, adjust allowances, or address emerging needs.

What if a landlord seems unwilling to negotiate certain aspects of the lease?
Most landlords are open to some level of negotiation, especially for specialized tenants like dentists. A legal advisor familiar with dental office spaces can help address resistance and secure terms that work in your favor.

Should I consider a gross lease or a net lease for my dental practice?
Gross leases offer predictable monthly costs by including operating expenses, while net leases may require you to cover additional fees like maintenance or taxes. Choosing the appropriate lease type depends on your budget and the specific needs of your practice.

How can I ensure my lease supports long-term practice growth?
When signing a lease, consider factors like the location’s growth potential, parking access, and competition from other dental offices. Include terms that allow flexibility for expansion or changes to accommodate future business needs.

When should I involve a professional in lease negotiations?
The earlier, the better. Whether you’re signing a new lease, renewing an existing one, or addressing unexpected challenges, a legal professional can help you tailor your agreement to avoid pitfalls and mitigate risks.

We Can Help

For further guidance with dental office lease agreements, reach out to the team at Wood and Morgan. Tailored support can make all the difference in achieving a lease that benefits your practice.