What Dentists should know about Negotiating Leases
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Dental Office Lease Agreements
Many dentists rent out space for their dental practice (unless you’ve got enough $$$ to buy a place of their own). So what kinds of things should dentists be mindful of when they approach a landlord about renting? Also, when a dentist is thinking about buying a practice from another dentist, what kinds of things should that dentist be mindful of? That’s the purpose of this blog: to give you an overview of the issues that are important to every dental office lease agreement.
Perhaps the most important issue that gets negotiated is the price. The price is generally broken down into basic rent + additional rent. The basic rent is the price per square foot during the term. HST will no doubt be added in that figure. That price gets calculated into an annual fee, then into a monthly fee. The additional rent is all that other stuff that dentists will be responsible for paying (either all or a portion of). This typically includes things like utilities (unless the dentist is going to pay for these things themselves directly to the service providers), the use of common areas and facilities (e.g. parking, hallways, landscaping), HVAC (i.e. heating, ventilation, and air conditioning), and TMI (i.e. taxes, maintenance and insurance). As these things fluctuate on a yearly basis, so too will the amount of the dentist’s additional rent. If the dentist is sharing space with other dentists in the same office or building, then the dentist’s amount of additional rent will generally be proportionate to the amount of space they’re taking up as a whole of the building.
The term of the agreement has a start date and an end date – if it’s a fixed term agreement. If the dentist wants some certainty about pricing and staying in the premises after that initial term, they can negotiate to include an option to renew the term for additional periods. Those periods can be however many years or months the dentist and the landlord can agree upon. It’s really an exercise in gazing into a crystal ball and trying to figure out if the dentist will stay there past the initial term and be willing to pay a slight premium to what they’re already paying in terms of rent.
The landlord will want a very restrictive definition of what the dentist can do in the premises (i.e. carry on a dental practice and that’s it). But what if the dentist wants to set up a dental consulting business in the back? What if they want to sell dental supplies? That’s where the dentist will come back and say that they want the use of the premises to include other things. This may turn into a heated debate because the landlord may not want other business operating from the premises. Indeed, the landlord may have signed an agreement with another party in or around the premises saying that they will have exclusive rights to use their premises as X and that the landlord won’t rent out space to a competitor of theirs.
As just discussed, the dentist may insist on including a provision that requires the landlord to agree not to rent out space in the building, plaza, premises, etc. to another dentist or type of dentist that practice the same thing as the tenant dentist wants to. This will help to eliminate competition in the nearby vicinity.
Subletting the Premises / Assigning the Lease
This is a biggy. Basically, if the dentist ever wants to rent out part of the premises (sublease), then does he or she need the Landlord’s consent to do so? Can the Landlord withhold consent? Can they do so unreasonably? What factors, if any, will dictate whether consent is unreasonable or not? For example, will the Landlord want to see who the sub-tenant is, check their credit, etc.? If the Landlord gives the OK, is the original tenant still on the hook if the sub-tenant defaults?
Now, there’s a difference between subletting a part or all of the premises and ASSIGNING the entire agreement. Assigning it means that they are actually transferring the agreement to another party. Again, is the Landlord’s consent needed? What if the dentist is assigning it to their own dentistry professional corporation? What if the share ownership of the dentistry professional corporation changes? Does that need the Landlord’s consent too? All of these factors come into play when it comes to subletting the premises or assigning the lease. Just be mindful!