We’ve all heard this bedtime story. The one about the dentist who after years of dental school and associating, decided to start their own practice.
Eager to get their practice underway, they go through the necessary steps to select a location, secure financing, and happily sign off on a ten year dental office lease provided by their landlord. But, they miss the critical and most important stage that ensures a healthy and successful dental business — reviewing the details of the dental office lease.
The fairytale starts to go south when our doctor realizes that the office lease they were so eager to sign initially is now impeding the growth and security of their business. They find themselves buried in clauses and contractual obligations that hinder their ability to practice alternative forms of dentistry, bring in associates, expand the practice, or eventually sell it.
Having incurred significant financial loss due to unreasonable rent escalations, a forced practice relocation (at the doctor’s expense), and a decline in business, our dentist is forced try and sell the practice and return to associating.
The moral of the story? Starting a practice requires planning, long-term thinking, and a thorough understanding and review of the dental office lease.
The Storyboard: Outlining the Plot
Before starting a dental practice, it’s important to understand your current situation and what your career goals are as a business owner. A young dentist fresh out of school will have different needs and goals than an established, end-of-career dentist. Identifying your needs and career goals will clarify what your dental office lease should do for you.
- Consider what type of dentistry you will practice down the line. Many leases contain limitations in their “use” provisions that disallow you to grow and expand your service offering (ex. a General dentist expanding their services to include a Dental Spa).
- If you’re planning to start a practice in a dense urban area, a detailed exclusivity clause will be an asset as it will prevent your landlord from moving competing dentists into the building or centre.
- What does your career trajectory and timeline look like? If you’re close to, or are planning to retire or sell your practice in the next 5 years, the last thing you want is any legal obligation or financial penalty as you transition into retirement. Assignment provisions in your lease should be written in detail to support your future transition plans, protecting you from continued personal and financial risk.
Create a plan that will clearly define your budget, timeline and long-term business and professional goals. The office lease should support your objectives, not hinder your ability to achieve them.
The Plot Thickens…
The dental office lease is a legal agreement, often 30 to 60 pages or more, containing technical jargon and harmful clauses that can pose significant and expensive risks to a dentist. While it may seem like an onerous process, the review and negotiation of your lease can either set you up for success or drive your practice to the ground.
What to Look for in the Lease
- Liability: Who is guaranteeing the lease, you or your incorporated business? If you are personally named as the tenant, your landlord can hold you financially liable for defaults of the lease, even after you transition and sell.
- Practice Expansion: Every dentist wants their practice to grow, and sometimes that means expanding into a larger space. Ensure you have the “right of first refusal” to expand into the space adjacent to you should it ever become available.
- Growing Your Business: You’ll want to ensure that the lease allows you to bring in associates and expand your service offering.
- Practice Relocation: A surprise practice relocation is a very real occurrence that can be financially devastating to a business. Ideally, the “relocation clause” will be structured to prevent a move by your landlord. In the event that a relocation does occur, set up this clause to ensure your landlord is required to pay for all moving and build-out expenses, and that the new premises is comparable in size, location, etc., to your current space.
- Selling the Practice: Does your lease permit you to sell the practice and retire? Many leases can prevent a dentist from selling their practice, or entitle the landlord to proceeds of the practice sale, as a form of “consideration”. Ensure you have the flexibility to transition and retire seamlessly and profitably out of dentistry with a properly set up “assignment clause”.
Happily Ever After
Before you commit to a new practice location, ensure that the details in the dental office lease are right for you. Landlords write the terms in the lease in their favor, giving them a villainous advantage over you, the tenant. By reviewing the terms of the lease in the early chapters, a dentist can write their own happy ending and set themselves up for long term practice success.