We’ve seen it time and time again. Dentists (without proper representation no doubt) sign a very long lease that has a lot of small print. And years will go by without them ever thinking about that small print. Until… the time comes to sell the practice (typically). That’s when all sorts of problems arise. So, in an effort to help eliminate those pesky lease issues before they arise (and which cost dentists thousands of dollars to deal with at the worst possible time), I’ve narrowed down 5 things in bad leases every dentist should know:
1. Demolition Clause
The gist of this clause gives the landlord the right to terminate the lease by giving notice in order to redevelop the building (e.g. tear it down and build a condo). We have seen this clause cost one dentist three hundred thousand dollars because of the landlord’s high vacancy rate, location next to lots of condos, and adamant reluctance to remove the demolition clause when asked. Sometimes, these demolition clauses come with an obligation on the landlord to provide relocation space and leaseholds and reimbursement of some kind (but not for business interruption typically). Purchasers and their banks HATE these clauses because it gives the landlord to prematurely terminate the lease. Banks need to see at least 10 years remaining on the lease with no demolition. We have seen sellers have to pay the landlord thousands (think $25k) in order to persuade them to remove the demolition clause for a few years. Again, when you’re in the process of selling your practice, these are unexpected ‘dings’ that could have been avoided had the lease been properly negotiated.
2. Consent Terms
Landlords are generally brutal when it comes to considering a prospective assignee (i.e. the purchasing dentist) and consenting to a transfer of the lease. They generally like to give themselves all discretion and power in judging the incoming tenant. We have seen leases that were so brutally one-sided that a landlord could: (1) ask for every kind of document you can think of (including the purchase and sale agreement) in considering whether the prospective assignee is worthy, (2) be able to deny granting consent for a number of listed reasons (some of which don’t make sense – like the length of time or reputation the prospective assignee has run their own practice (how does this work for a new grad or a foreign trained dentist?), (3) be able to withhold consent and can act unreasonably, (4) can reject giving consent and decide to terminate the lease (in which case the existing tenant might be rushed to withdraw their request before the lease is terminated!), (5) and can ask for money. When it comes to asking for money, there are a few ways in which landlords do this. First, they can say that, pursuant to the lease, they own all the leaseholds which are being purchased and therefore need to be reimbursed (we’ve heard about this happening to the tune of $100k!). Second, they can ask, pursuant to the lease no doubt, that they are entitled to 1% of the purchase price. Ouch! Third, they can say that they need a set amount of money to consider the prospective assignee and their worthiness. And don’t forget the tenant and / or the prospective assignee will need to pay the landlord’s legal fees, regardless of whether consent is granted!
3. Staying on as Guarantor
Sometimes, you may be personally on the hook for the lease for the duration of the term. That might also include being on the hook for any renewal terms too. And, in the worst case scenario, you might be on the hook EVEN if you transfer the lease. In one situation, a dentist we know was on the hook until 2024 as a personal guarantor! This means that if the incoming dentist tenant (or anyone else they transferred the practice to who ended up being the tenant) defaults on the lease, the landlord can come after you for what is owed in the lease (i.e. rent x remaining term!). Ouch! One way we try to avoid this is by recognizing that it’s there in the lease and either removing it or mitigating its effect. For example, we can try to put a timeline (either after the lease starts or after the lease is transferred) on how long you would be a personal guarantor. This has sometimes worked out to 5-10 years after the start of the lease or 5 years after the lease has been transferred.
My advice: if you’re looking to lease space or renew your lease or getting ready to sell, speak with a professional about negotiating the lease terms. This will increase your chances of getting off the hook when you transfer the lease and paying the least amount of money (and losing the least amount of money as well).
Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice, contact me (Michael Carabash), David Mayzel or Ljubica Durlovska.
David Mayzel and Michael Carabash of DMC LLP discuss the key terms to have in your lease, as well as whether the presence of a demolition clause ALWAYS results in lower offers for your dental practice.
David Mayzel is your legal risk manager. He is a trained courtroom lawyer and has spent many years resolving disputes both in and out of court. He knows how to prepare documents and execute transactions in a way that avoids or mitigates legal risks. He can be reached at 416.528.5280. or firstname.lastname@example.org.
Michael Carabash is your business law adviser. He is an entrepreneur at heart who helps you see the big legal picture. He drafts clear and effective agreements that protect your rights while promoting your interests. He can be reached at 647.680.9530. or email@example.com.
Ljubica Durlovska is your transition lawyer. She helps you with staff and associates, maintaining your corporation, and other business matters. She can be reached at 416.443.9280, extension 206 or firstname.lastname@example.org.
Jonathan Borrelli is your employment lawyer. He helps you with staff and associates matters, including hirings, terminations, switching staff to written contracts and resolving disputes. He can be reached at 416.443.9280, extension 204 or email@example.com.
Benjamin Kong is an experienced business law clerk. He assists David and Michael with corporate matters and purchase / sale transactions. He can be reached at 416.443.9280, extension 207 or firstname.lastname@example.org.
Julie Whitehouse is an experienced business law clerk. She assists David and Michael with corporate matters and purchase / sale transactions. She can be reached at 416.443.9280, extension 203 or email@example.com.
David, Michael, Ljubica, Jonathan, Ben and Julie are a truly dynamic team. Their diverse knowledge, skills, and experiences will help you get the best deal possible while promoting your interests and protecting your rights. You can read dentist testimonials here.