Buying a dental practice? Here’s what you need to know about getting your financing in place:
If there’s a fire, the banks want to be covered for the amount of the loan. For this reason, you will have to obtain fire insurance and assign it to the bank. The amount of fire insurance depends on the value of the contents.
If you die / become disabled, the banks want to be covered for the amount of the loan (or more in order to cover additional expenses). They’ll ask you to assign the life insurance policy to them (although you’ll still be required to pay the monthly premiums). So if you do have to do this, make sure you get EXTRA insurance to cover your loved ones (in the event of your death)!
You will need to provide the bank with proof of malpractice insurance. Since all dentists in Ontario are automatically insured through the Royal College of Dental Surgeons of Ontario (the “RCDSO“), this only requires you to write to the RCDSO and ask for a letter confirming that you have malpractice insurance in the amount of $2,000,000.
Another form of insurance required by the bank is general liability insurance. This is because the bank wants to know that, in the event of a lawsuit against the company, the insurance will be able to cover the costs of the law suit so that you may continue to pay back your obligations towards the bank.
Where the practice premises is leased, the bank will want to be provided with a copy of the signed lease assignment, coupled with the landlord’s consent. Where the practice premises is being purchased, the bank will want to see the purchase documents.
The bank will normally ask to see at least 10 years left on the lease. This can be an issue, for example, if you’re purchasing a practice where the lease only has 5 years left. What this means is that your lawyer will have to work extra hard to get you that 10 year term. But in the event that the landlord is not willing to give you the 10 years you seek, then a shorter term (i.e. 8 years) could work, but the terms of your bank loan, such as the amortization period of the loan, will have to change.
Another tricky situation when it comes to leases is that the bank will not tolerate a demolition clause in the lease which can be exercised during the 10 year term. The reason for this is because a demolition clause, properly exercised, could cause the dentist to be out on their rear without a location from which to practice well in advance of the lease term being up. Such a disturbance to the practice may result in loss of revenue and therefore a default on the loan.
For more information on demolition clauses you can read this blog.
If you are borrowing funds in the name of a dentistry professional corporation then, in order to ensure that you do not “hide behind the corporation”, the bank will usually ask that you, the dentist, sign a guarantee stating that you will be personally responsible for any default of the corporation.
8. General Security Agreement
Another way the bank will seek to protect its interest is by asking you to sign a General Security Agreement (the “GSA“). The GSA gives the bank interest in and recourse to all of the equipment, inventory, instruments, books & records, tangibles/intangibles, etc. at your office in the event that you and/or your corporation defaults on the loan. The bank calls these items “collateral”.
Once you agree to the bank’s terms, then the banks lawyer or your lawyer will register the GSA in the Personal Property Security Act (the “PPSA“) register. The PPSA register is a place where creditors can register their interest against a person or company. This registration will normally stay in place until it is renewed or until such time as you pay off your debt and the registration is “discharged”.
In some situations (depending on the bank, the amount of the loan, etc.) the bank will ask your lawyer to provide the with a letter of opinion. This states that the lawyer has examined certain documents and has done the necessary searches in order to guarantee to the bank that the borrower is a valid corporation which has the capacity to borrow funds, that there are no other PPSA registrations against the borrower, etc. Not all banks and not all loans require a lawyer’s letter of opinion, but in our experience, this is a more and more common occurrence and you should be aware of it.
Where your corporation is borrowing the funds for the purchase, the bank will want to see a directors’ resolution authorizing the corporation to sign the loan documents. A Certificate of Status of the corporation will also be required. This is a document from Service Ontario stating that the dentistry professional corporation is a valid corporation that is still in existence.
For further guidance and information on practice financing, you can contact me (Ljubica Durlovska), David Mayzel or Michael Carabash. We are your legal dental team.
Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.
Whether you’re a new dentist looking to start a practice OR an existing tenant who needs to renew their lease OR a dentist looking to sell their practice: you should NEVER BLINDLY TRUST your landlord. And to give you something to think about, here are some recent horror-stories:
We Own the Leaseholds, Now Pay Up!
In one transaction, it was discovered that the landlord (as per the lease) owned some of the cabinetry and the front desk in the dental office. So why would a purchasing dentist be paying the seller for those things? How did it get resolved? Thousands of dollars came off the purchase price.
Pay Me 5% of the Purchase Price Please!
This came out of left field. The lease was SILENT on how much the landlord was entitled to in the case of consenting to an assignment of the lease from a selling dentist to a purchasing dentist. But when the landlord was notified of the sale, they asked for a copy of the purchase and sale agreement and 5% of the purchase price as their administrative fee. Ouch! How did it get resolved? The landlord ultimately didn’t follow through on the 5% (perhaps they recognized that the weren’t entitled to it under this particular lease, but may have been entitled to it in other leases with other tenants in the building).
Show Me Your Audited Annual Financial Statements Please!
This came from an absolutely brutal lease (perhaps the worst one I’ve ever seen negotiated by a lawyer – not our firm). It included giving the landlord the right to have audited annual financial statements. Holy Cow Batman! Those are expensive to create and why does the landlord need to see them. How did this get resolved? The prospective purchaser did not move forward with buying the practice because of the horrific lease (and the landlord’s reluctance to amend it).
We May Need To Demolish!
In one famous example, a lease contained a provision allowing the landlord to terminate (and kick the tenant out) in order to demolish and put up a condo. There were condos all around the practice and a high vacancy rate in the building itself. The landlord was very uncooperative and refused to limit or remove the demolition clause. Any prospective purchaser would have nightmares of that demolition clause if they were to pay the $1-million the practice was appraised for. How did this get resolved? The purchaser paid $540k, largely in part because of the demolition clause, and relocated the practice to a new condo unit down the road which the purchaser bought.
Moral of the story: have a lawyer review the offer to lease or actual lease BEFORE you sign it to make sure there are no hidden disasters which could cost you money down the road.
Please keep in mind that this is not legal advice. The information provided herein is for educational purposes only. If you need to speak with a dental lawyer, you can contact me (Michael Carabash) or my law partner (David Mayzel).
So later this evening David Mayzel (my law partner) and I will be presenting to the Class of ’87 about “Maximizing the Value of your Dental Practice Before Selling”. For those who aren’t in attendance, I wanted to go over some of what we’ll be talking about. Also, if the situation permits, we’ll hopefully be recording and posting our discussion on this website sometime next week (because I’m off to Jamaica starting tomorrow). So with that said…
1. True or False: the current dental marketplace is a Seller’s market?
ANSWER: It is a Seller’s marketplace. The influx of new grads and foreign trained dentists into the marketplace, coupled with low interest rates and 100% bank financing, and the limited supply of patients and practices for sale means that a well-run dental practice can sell for more than it’s appraised value and with fewer conditions required in order for the deal to move forward.
2. What are dental practices selling for these days?
Based on a presentation by Bill Henderson of Tier Three Brokerage Ltd. that we sat in on at the Winter Clinic last month, the practices that he examined sold for about 115% of appraised value. There are discrepancies, however: one of our clients bought a practice for 54% of appraised value because of the presence of a demolition clause. Bill also mentioned another practice that sold for over 170% of appraised value.
3. What does the future look like for the dental marketplace?
This is debatable. For some purchasers, the future looks big and bright: many dentists will need to retire and there will be an influx of dental practices in the market. For purchasers, this will help lower the costs (given the available opportunities). If interest rates go up (which they invariably must do), only “serious” purchasers will be left to shop around in the marketplace, commanding a discount and many conditions in order to agree to get the deal done. But for some sellers, the future also looks great for them too: investor dentists (whose presence is ever increasing) will pay a premium for a well-run practice, even if there are many practices available. Brands, niches, franchises, corporate, and specialty practices will also command a premium. And the limited supply of independent dental practices available for sale will require purchasers to pay more.
4. What are favourable terms to have in a lease?
ANSWER: good long term (e.g. 10 years at least), renewal terms (2 x 5 year terms is nice to have), low base and additional rent, exclusivity in the building / project / floor for dentistry and ancillary services (e.g. teeth whitening, hygiene, specialties, etc.), ability to assign to another dentist / dentistry professional corporation without needing the landlord’s consent (but providing them with notice), ownership of leaseholds, no demolition clause, and favourable terms concerning signage and parking.
5. True or false: a demolition clause in your lease will ALWAYS result in low offers from prospective purchasers.
ANSWER: False. If the practice is housed in a relatively new development, the risk of the landlord using a demolition clause to convert the building into a condo, etc. is relatively low. And if it’s a particularly hot property and the landlord agrees to delay using the demolition clause for a number of years, it likely won’t affect the sale price.
6. How do you present new contracts to existing staff without getting sued?
ANSWER: By giving notice! The amount of notice depends on a number of things. To find out more, read this blog post here.
7. True or false: if you don’t have an agreement with your Associate, they can leave and set up shop across the street, contact patients they have treated exclusively, take a patient list with them, and bring staff with them.
ANSWER: you might be surprised. For the answer, read this article I wrote in Ontario Dentist magazine.
8. If you are selling the assets of your dental practice (either personally or through a professional corporation) circle the one(s) that are true:
a) The Purchaser WILL ALWAYS assume liability for an employee’s past length of service under the Employment Standards Act, 2000 if they keep them after the closing.
b) The Purchaser WILL ALWAYS assume liability for an employee’s past length of service under the Common Law (i.e. judge made law) if they keep them after the closing.
c) You WILL ALWAYS be responsible for employee termination costs (to some extent) after the closing for one of your former employees if them Purchaser wants to terminate them.
ANSWER: None of the above. For a), the Purchaser can avoid liability under the Employment Standards Act, 2000 if they wait 13 weeks after the closing before hiring anyone. For b), the Purchaser can avoid liability by presenting new contracts to staff immediately after the closing with a clause that says their past service with the Vendor will not be recognized. For c) just remember: everything is negotiable! You may agree to have no liability whatsoever!
9. What does a purchaser prefer to buy and why: shares of a dentistry professional corporation or assets of a dental practice?
ANSWER: purchaser don’t want to buy a corporation because of hidden liabilities and unfavourable tax consequences. They only want the good stuff – i.e. assets of a dental practice (including goodwill and patient charts), the staff, and a new lease or assignment of a favourable existing lease. They don’t want hidden liabilities which the corporation may have – such as secured debts to creditors, accounts payable to vendors, liabilities under the lease, litigation-related matters (e.g. related to taxes owed by the corporation, unhappy patients, slip and fall, etc.). Finally, purchasers can choose who they want as employees and avoid liabilities if they present them with contracts from the beginning (with clauses that say that past length of service won’t be credited); their exposure under the common law is eliminated in these circumstances. Also, share purchase transactions are more costly and complicated than asset purchase transactions, as the purchaser corporation will need to immediately amalgamate with the target corporation immediately after the sale. Sellers, for their part, want to sell shares because of the lifetime capital gains exemption and the ease of transferring things over (i.e. because the corporation stays the same; just the ownership of the corporation changes).
10. Which of the following statements are true concerning the Lifetime Capital Gains Exemption:
a) Starting January 2, 1014, you can save up to about $184,000 in capital gains tax by selling shares of your professional corporation.
b) You can multiply the lifetime capital gains exemption by using family members.
c) Only certain shares qualify for the lifetime capital gains exemption.
d) You can ONLY sell the shares of your professional corporation after holding them for twenty four (24) months.
e) For the twenty four (24) months prior to the sale, your corporation CANNOT have more than fifty percent (50%) of its assets as “non-active business” assets (e.g. excess cash, investments, certain real estate, etc.).
ANSWER: a, b) c) and e). D is not true: you can transfer in assets on the day of the sale to a professional corporation, take back shares and then sell those share and still qualify for the lifetime capital gains exemption. Read this blog to know more!
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) or David Mayzel.
So you’re a dentist that is looking to lease space. Or perhaps you have a space and your lease is coming up for renewal. The question is: what should you be concerned about when you are presented with an Offer to Lease or Lease? Well, hopefully this blog will shed some light on this topic:
A gross lease is every tenant’s dream. It’s one amount that doesn’t change from month to month. Hopefully, it includes all utilities too! Wow! Such certainty. But alas, most leases are not gross leases. Instead, they are some form of net lease. This means that the rent will be divided into a known amount (base rent), but the tenant dentist will typically also have to pay for their proportionate cost of other expenses (additional rent). The additional rent generally increases each year. It includes things like costs related to the common area, property and other taxes, etc.
The only way to get a better sense of whether the base rent is fair and reasonable is to do a comparative market analysis (have a realtor do this for you using MLS). Then you will have a better negotiating position. You can always use the length of the term of the lease to bring down the base rent. And dentists generally should try to make sure that the base rent does not increase too quickly (as it will never come back down!).
It’s generally in the dentist tenant’s interest to have a long and undisturbed term (i.e. no demolition or early termination clauses in favour of the landlord). Something like 4-5 years is typical, but 10 years in the right location with a good base rent would be ideal.
If you’re only staying in the space for a short period of time, it’s definitely worthwhile to have the option to renew the lease on the same terms as currently exist under the lease. Most leases, however, won’t specify what the base rent will be. Rather, it is to be determined and negotiated by the parties according to what commercial rates are at that time. It’s best for a dentist to have the rate figured out and written into the agreement ahead of time (as rates generally go up!).
A demolition clause gives the landlord the right to terminate the lease early and kick the dentist tenant out (generally with little notice and without compensation). If there is a demolition clause being presented in an offer to lease or actual lease, your dental lawyer should fight to have it removed or at least rendered inapplicable for a set period of time. If it is triggered, then there should be adequate notice (e.g. 12 months) and relocation costs should also be pushed for. Landlords don’t generally budge on these issues, but if you don’t ask for them, you won’t get them!
It’s always in the dentist tenant’s interest to be able to transfer the lease to another dentist without the meddling of the landlord. That’s why we at DMC LLP try to include a provision that says, whenever the dentist tenant is transferring the lease or changing the corporate structure of their dentistry professional corporation, then they will only be required to notify the landlord but without needing to obtain their consent. Landlords are reluctant to agree to this, but we put forth very strong arguments that dentists are ideal tenants so the risk is minimal.
It’s always better for the dentist tenant to enter into the lease through a corporation (professional corporation or vanilla company). This is because the liability of this corporation is limited to its assets (if it has any) and the dentist’s personal assets won’t be exposed in the event that they default on the lease and get sued for the balance of the rent owed. Often times, the landlord will ask that the dentist be a personal guarantor or indemnifier if their corporation is going to be the tenant. It’s hard to get around this, particularly with sophisticated landlords and where the corporation has no credit history or assets.
The last thing you want to see is a competitor be offered space in and around your practice. That’s why it’s imperative to get exclusivity in some form or another (e.g. in the building entirely, on your floor, via signage, based on the type of dentistry that you practice, etc.).
If you’re planning on spending a lot of money to make the premises look better or be practical for your dental practice (e.g. installing an elevator or putting in a ramp, etc.), then you should discuss financial incentives with the landlord. Also, if the Landlord will be paying for some or all of the leaseholds, just keep in mind that they may ask for money as a condition of consenting to a lease assignment on the basis that it owns the leaseholds. This happened in at least one case I know of where the landlord demanded and received $100k for leaseholds in order to give consent!
Wouldn’t it be great if you could terminate the lease early with little repercussion. In rare cases, dentists will be able to walk away from the lease and pay liquidated damages that are less than what they would have otherwise had to pay (i.e. rent for the remainder of the term). Landlords generally want tenants to stay for the entire term. But if a tenant has an early termination right, then they could walk away with less financial consequences.
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 email@example.com.
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 firstname.lastname@example.org.
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 email@example.com.
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 firstname.lastname@example.org.
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 email@example.com.
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 firstname.lastname@example.org.
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.