Do not simply sign on the dotted line
Philip M. Bogart, Esq.
A lease is one of the most important contracts a dentist will ever sign. Unless the dentist owns the property, the lease expense is the second largest consistent outlay of a dental office following payroll.
Although dentists may spend a considerable amount of time and resources finding the best practice location, they may fail to spend enough time reading and negotiating each and every lease provision. Dentists often mistakenly believe the landlord or the landlord’s broker when the person convincingly says the lease is “standard,” “boilerplate,” or “not open for discussion.”
Make no mistake, from the landlord’s point of view, the lease is there to protect the landlord and his or her investment. But while there may not be much flexibility on the initial per square foot price, there are so many other terms and conditions that warrant negotiation. For many issues, the landlord may be willing to meet in the middle (or somewhere close) in order to get the lease signed and the space filled.
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Assemble your team
Find an advisor who knows how to obtain and interpret current and projected demographic data, dentist-to-population saturation data, projected growth in an area, vacancies in the area, trends in the area, and other relevant information. Once you have the right location, a well-connected advisor with local ties and experience working with dentists is integral to negotiating competitive economic terms and other pro-tenant provisions. Landlords are often willing to sweeten the deal, but they must be asked. Rarely will a lawyer have this perspective and access to information to negotiate the best economic deal for a dentist. Instead, the dentist requires either a lease negotiator or tenant representative.
Be careful here! The tenant representative’s fee is typically paid by the landlord upon signing the lease. This is very enticing to a cost-sensitive dentist but may cause a suspicious dentist to question the representative’s impartiality. A personal recommendation for an impartial, nonpushy tenant representative is key to ensuring the dentist can trust someone without second-guessing the person’s motives and dedication to the best interests of the dentist.
Lastly, if a significant build-out is being contemplated, consider scheduling a walk-through by a contractor who has dental experience to verify that the space can be converted to a dental office without any major obstacles, such as structural or plumbing issues. Once the business terms are finalized, a lawyer with appropriate leasing and dental and health-care industry experience will be indispensable.
Term sheet or proposal letter
Before negotiating and signing a lease, a nonbinding term sheet or proposal letter is routinely signed to ensure the tenant and landlord are on the same page. This letter should include the fundamentals, including many of the items discussed in this article. Do not take this step lightly! Although this document is usually nonbinding, seldom will a landlord agree to subsequent concessions that are not already memorialized.
Assuming existing lease
When buying a practice, a dentist will typically assume an existing lease and may not have the leverage to negotiate a new lease. Still, if the buyer commits to staying in the space longer than the seller, he or she may have the ability to obtain friendlier terms.
The following is a nonexhaustive checklist of some of the more essential items that should be addressed:
How much will it cost?—Many leases are triple net; the tenant will pay for taxes, insurance, and maintenance expenses. The landlord may agree to pay a specific base amount of the taxes, and the tenant then pays for the pro rata share of any increase over that base amount. If the office is in a condominium, the tenant will also pay the pro rata share of common area maintenance (CAM) fees. Check for other hidden costs.
Rent escalator—How much does the rent increase per year based on inflation or a set amount? While a 3% or 4% annual increase may be acceptable, remember, this is compounded.
Term and options—A large portion of a practice’s goodwill is dependent upon its location. A move could jeopardize that goodwill value. Lenders require the lease to have a minimum duration (at least as long as the loan). An initial 5- to 10-year term with a few options to renew should suffice.
Grace periods—Stuff happens, and payments are late. The lease should give the tenant leeway for monetary and nonmonetary defaults. Also, the landlord should be required to give written notice and an opportunity to cure before terminating the lease.
Option to buy and right of first refusal—At times, landlords are willing to grant their tenants the option to purchase the real estate or a right of first refusal.
Assignment—A significant part of the value of any practice is tied to the location. Landlords may agree to an assignment clause that permits a future buyer of the practice to become an assignee without the landlord standing in the way. Upon the landlord granting an assignment, it can be extremely valuable to the tenant for the landlord to agree in advance to release the assigning tenant (and any personal guarantee) upon the completion of a sale. Lastly, ensure there is no excessive payment requirement upon an assignment, other than for reasonable legal fees.
Exclusivity—The landlord may be willing to agree to a covenant to not rent space within the immediate vicinity to a competing dental practice.
Build-out—If the dentist plans to build out or renovate the space, landlords sometimes agree to either design and construct the improvements or provide the dentist an allowance for construction expenses. The landlord may also agree to a temporary rent abatement.
Subleasing and space sharing—Will the dentist be permitted to sublet, for example, to a specialist? Ensure the lease contains this leeway.
Condominium issues—If the premises are part of a condominium, ensure that the dental office is a permitted use of the premises.
After-hours and weekends—If the office is part of a larger building, will the dentist have the ability to be open after hours for emergencies or during the weekends? Will heating, ventilation, and air conditioning (HVAC) be working during these off times?
HVAC—Who pays if the HVAC systems need to be repaired or replaced? While the tenant may be required to pay the cost of a maintenance contract to cover repairs, dentists often attempt to include language that requires the landlord to cover any replacement.
Relocation rights—Sometimes, other surprises may be buried in the small print. For example, does the landlord have the right to force the dentist to move to a new location within the complex? These clauses should be eliminated or softened in a manner to protect a dentist’s goodwill.
Personal exposure—Landlords normally require a personal guarantee from the dentist. Sometimes a landlord may also ask for a spousal guarantee (which is seldom advisable). At times, the landlord may agree to a liability cap to limit the tenant’s exposure or a “burn-off” period, where the guarantee would automatically terminate at a specific time in the future as long as the tenant has made all rental payments.
Death and disability—In order to protect the family of a solo dental practice owner, consider requesting an automatic lease termination upon the death or disability of the owner.
Leases contain many traps for the unwary. The good news is that a landlord may be flexible. Working with the right team of advisors who understand the local climate and the intricacies of dental leases is a smart investment.
Philip M. Bogart, Esq., is with Whiteford Taylor Preston in Baltimore, Maryland. For more information, contact him at firstname.lastname@example.org or (410) 347-8710. Mr. Bogart represents dentists and other medical professionals in business transactions and situations encountered during the lives of their practices. Services include structuring and documenting employee arrangements, partnerships, acquisitions, and exit strategies.