Putting the final touches on a lease agreement you just
negotiated, with what you believe are very favorable terms, is a time to
celebrate. Dream office. Great location. Generous tenant improvement
allowances. In fact, you’re feeling great and you want to shout with glee about
it. There’s just one minor issue you don’t know about: the landlord feels the
same way. There’s no wondering why the landlord feels the way he does either,
since there weren’t any lawyers to deal with and the dentist thinks he
essentially got everything he was after. That dentist just doesn’t know it yet,
but by representing himself without a lawyer representing him, problems will
likely be inevitable and costly.
Dentists should
remember they treat patients. Lawyers negotiate contracts.
Once the lease is signed, you and the landlord often have
opposite goals. The landlord wants the lease in effect as soon as possible so
he can begin collecting rent from you, even if it’s going to take three, four
or even five months to “build out” the office space to your specific
conditions. You just want to get into a nice, attractive new space and start
running your practice. But how would you know that if a contractor lags on
building out your space, he should be the one paying the rent for that extra
time, not you. And neither the landlord, nor the contractor, is likely to tell
you this, either.
When leasing space
for that dream office, you should try to gain every concession possible from
the landlord so that when it comes time to pay that first month’s rent, it
isn’t overwhelming.
If your landlord is building out the space, he will try to
economize on every item, reducing his costs and increasing his net profit on
top of the cash already paid to him, a lot of cash for the initial and standard
five- or 10-year lease agreement. Your ultimate goals may be the same –
long-term financial efficiency, but again, you are at opposite ends of the
spectrum when it comes to your dream office.
If you and your attorney agree that the landlord will build
out the space and act as a general contractor, you should be prepared to tell
him what type of cabinetry you want, whether you want Berber carpeting or tile
flooring and where you do and do not want your restrooms located. You should
have every detail spelled out: sinks, staff break rooms, patient waiting areas,
built-in desks, areas for administrative duties, and the like. But, again, you
treat dental patients. Lawyers advise clients on leases. It is sort of like
asking an MD to fill a cavity, or you to perform breast enhancement surgery.
Competent lawyers are the ones you should turn to when negotiating a lease because
the handful who specialize in dental practice law, know all the nondental items
you don’t.
With lawyer in tow,
and you deciding to take an active role in the building out of your office,
there are many issues and items that must be addressed.
In the paragraphs that follow, the authors examine common
lease issues that most dentists don’t know about when negotiating their leases.
Office Build-Out
Issues
Most leases provide the dentist with a limited time to
complete the build out of their space, and the landlord will even try to start
the build out period before the lease is even signed. Therefore, you should
require that the landlord have a limited time to review your plans, and you
should put penalties in your construction contract so that your contractor has
to pay your rent if he doesn’t finish on time.
Another common build-out issue is the tenant improvement
allowance the landlord gives you. When you negotiate the rent, the landlord
will rent the space based upon the leasable square footage, typically measured
from the exterior walls of the entire unit. However, the landlord will
routinely give the dentist a tenant improvement allowance based upon the usable
square footage, causing the tenant improvement allowance to be 10-20% less than
had it been based on the leasable square footage. Always insist that the tenant
improvement allowance be based upon what you are leasing, i.e., leasable square
footage.
Rent Increases
Nearly all leases have rent escalation clauses, which are
either contractual in nature or that are tied to one of any number of commonly
used economic indexes, such as the consumer price index, cost of funds, and
others you know from watching Lou Dobbs on CNN. This is what you and your
landlord will be negotiating and, with any luck, your lawyer can talk him into
tying such increases to one of the less volatile indexes. There should always
be a ceiling on such increases, just as the landlord will insist on a floor for
the same indexes.
Damage to Office
Earthquakes, fires, floods, even riots are part of the
landscape in California. The authors have noticed all too often in their
practice that one of the victims of these calamities is the dental practice
owner. The typical lease provides that if the dental lease office is damaged, the
lease remains in effect if the landlord elects to rebuild, but imposes no time
limit on when it is to be rebuilt. Some leases even require the tenant, or the
tenant’s insurance company, to continue paying the rent while the office is
unusable. While most of the time rent is abated, even the highly motivated
landlord can have difficulty rebuilding, usually because of building permit
delays (in the case of widespread destruction) or because insurance companies
won’t pay enough to cover the cost to rebuild. The authors have seen numerous
situations where a dentist, tired of waiting for the landlord to rebuild, built
out a new office at a significant cost only to have the landlord call back two
or even three years later and tell the dentist he must return and start paying
rent because the dentist’s lease was still in effect.
The solution? Insist on having the landlord start repairs
within a certain time period (e.g., 90 days) and complete the repairs by a
certain date (e.g.,, 180 days). If the landlord fails to meet these goals, you
should have the option to terminate the lease so you can move onto a new
location.
Subordination Clauses
The subordination clause is an almost invisible clause in
most leases because of the intricacies of the mortgage foreclosure clauses.
These clauses typically require that your lease will become subordinate to any
new financing the landlord places on his or her building. If our real estate
bubble ever bursts, many landlords will lose their buildings as rents decrease
and they can’t pay the mortgage. If a lender forecloses and there is a new
owner, the new landlord does not have to honor your subordinated lease, and you
may lose your dental office space. However, most landlords will allow
modification to these clauses during lease negotiations because they know they
won’t own the building if this ever becomes an issue. Therefore, always ask the
landlord for a waiver of such clauses.
Assignment Clauses
A typical landlord wants to control who occupies his or her
space and will insert clauses that virtually destroy a dentist’s ability to
sell his or her dental practice.
For instance, it is common to have recapture clauses in the
lease, allowing the landlord to cancel the lease if asked to assign it to the
dentist buying your practice. They almost always have a clause making the lease
renewal options personal in nature, so that when you try to sell your dental
practice, you only can assign the lease through the current expiration date. If
this is the case, the buyer’s lender won’t finance the sale because they want
the lease to last as long as the lender’s loan will be in effect (i.e., 7-10
years). Many landlords may insert clauses that give the landlord a right to
claim a portion of the profits you receive from the sale of your dental
practice.
Virtually all standard form leases contain provisions which
keep the original tenant on the hook for the rent through the expiration of the
term, including all option periods. This occurs whether the lease specifically
states this, or if the lease is silent as to when the tenant is released from
liability, by operation of law. You want to ask the landlord to release you
from liability, either at the time you sell your dental practice or at the end
of the current lease term, so that you don’t remain liable throughout the
entire lease term. Even if the landlord won’t release a tenant at the time of
assignment, they usually will allow a release at the end of the then-lease
term, based on the argument that if the buyer is a bad tenant, the landlord has
lease remedies which allow the landlord to deny the buyer the right to renew
the lease term.
Recapture clauses should be negotiated out of leases, as
should all options - personal language. Leases should not give the landlord any
right to make a claim upon the purchase price you received for your practice.
You should try to obtain a release of liability to avoid the nightmare of a
default occurring well after you have retired and are unable to take over the
office.
These assignment clauses can destroy the nest egg you are
building in a successful dental practice. This is why it is so important,
whether you are buying a dental practice or building one from scratch, to have
an attorney with experience in the dental field assist you with your lease negotiations.
The list of legal “dos” and “don’ts” for dentists astounds
most of them when we sit down for an initial conference on selling, buying,
relocating, leasing, or otherwise affecting the ownership of a dental practice.
It is often said that he who represents himself has a fool
for a client. As the reader can tell from the points raised above, a dentist
representing himself rather than utilizing an experienced dental attorney can
miss issues which could make their dental practice relatively worthless. With
such a valuable investment as a dental practice, it obviously is in the
dentist’s best interest to retain the services of an expert in the leasing
area.
Jason P. Wood, B.A.,
J.D. and Patrick J. Wood, B.A., J.D.
Jason is an associate attorney in the law firm of Wood & Delgado, and
Patrick is the founder and senior partner of Wood & Delgado, a law firm
which specializes in representing dentists for their business transaction
needs. Wood & Delgado represents dentists in California, Nevada and
Colorado.
