The Incomplete Practice: Lease issues that could destroy your investment

Feb. 1, 2006
The most common question our law firm is asked when speaking with dentists acquiring a dental practice is, “But the landlord said it was a standard form lease, why would I need an attorney to review it?” Our answer: “Do you eventually want the ability to sell your practice and retire?”

The most common question our law firm is asked when speaking with dentists acquiring a dental practice is, “But the landlord said it was a standard form lease, why would I need an attorney to review it?” Our answer: “Do you eventually want the ability to sell your practice and retire?”

It is a common misconception for many professionals (dentists, doctors, veterinarians, etc.) that the most important issue facing the professional is the negotiation over rent and the length of the lease term. Once this is established, they think there is no need to haggle over the “body” of the lease. However, inside the preprinted lease form lurks unlocked doors which open up to your worst nightmares. Many of the issues inside a lease can significantly impact the value of your newly acquired dental practice and your ability to resell it.

The first thing to remember when reviewing your lease is: the landlord is not your friend! Like you, he is a businessman who wants to protect his asset - the property you are attempting to lease. Therefore, the landlord wants as little risk as possible when leasing you this valuable asset. The lease you are holding in your hand has been perfected over the years by attorneys who represent landlords, and it has become one of the most effective weapons a landlord can have. However, in our experience, landlords are generally ready, willing, and able to change areas of the lease as long as they feel they are still protected. The following is a small list of some of the areas within a lease which can negatively impact the value of your dental practice or restrict you from selling it to another dentist.

1.Damage to the Dental Practice. The way this section of the lease is written appears to be innocuous. The section appears to be stating the obvious: the landlord has a duty to repair within a reasonable amount of time. No problem; go to the next section. But wait. If you review this section carefully you will see that in most leases there are many “outs” for the landlord so he does not have to rebuild in a timely fashion. Unfortunately, our law firm has seen landlords use this section of the lease to force dentists to come back to their old offices and start paying rent two, three, even four years after the building was initially damaged or destroyed! In order to combat the landlord’s “outs” in rebuilding, we suggest asking for time frames for repairs to commence and to be completed, failing which you should have the right to terminate the lease. Generally, our law firm requests 90 days to commence repairs and 180 days to complete repairs.

2.Recapture Provision. Most leases now have a “recapture” provision which allows the landlord to terminate your leasehold interest if you ask for an assignment or a subletting of your office. In other words, when you find a buyer for your dental practice you must notify the landlord that you wish to assign your property interest (known as a leasehold interest) to the buyer of your dental practice. At that time, the landlord can either accept the assignment or terminate your lease, leaving you with an established dental practice in need of a new home.

3.Personal Options. This section usually makes any option periods to extend the lease personal to you, making them useless to any potential buyer. Without at least seven to 10 years of a viable lease term (including option periods), many lenders will not want to lend money to buyers to purchase your dental practice.

4.Transfer Premiums. Many new leases have provisions which allow the landlord to receive a “transfer premium,” which allows the landlord to arbitrarily decide the value of the leasehold interest and demand a percentage from you when you sell your practice. Some of these premiums are in excess of 50 percent of your sale price! Say goodbye to most of the goodwill you have accumulated, it’s the landlord’s now. If you limit this section to subletting (the original intent of this section), you can avoid having to pay the transfer premium.

5.Release of Liability. If you are lucky enough to have your lease assigned to your buyer, you will still be “on the hook” for the length of the lease, including any option periods left. This could mean that you have another 10 to 15 years of personal liability connected with the lease! So much for playing bridge, spoiling the grandkids, and taking that vacation to Europe. Try to be removed from future liability after a valid assignment.

The above list is a small sampling of the many issues dentists face when entering into a lease. When one of the attorneys in our law firm sits down with a dentist to explain the many unseen pitfalls in leases, they are astounded, and to be honest, they should be. As mentioned earlier, the “form” leases have been in the hands of attorneys for years, constantly being perfected and modified so that their clients - landlords - are protected as well as they can be. While the lease is only one component of owning and operating a dental practice, many times it is one of the most important and most overlooked. With simple changes to the lease, including the issues mentioned above, it can be a valuable asset to you, possibly even increasing the value of your dental practice.

Jason P. Wood, BA, JD, is an associate attorney in the law firm of Wood & Delgado, and Patrick J. Wood, BA, JD, is the founder and senior partner of Wood & Delgado, a law firm that specializes in representing dentists for their business transaction needs. Wood & Delgado has multiple offices in California. The Woods may be reached at (800) 499-1474, or by e-mail at [email protected] or [email protected].

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