When signing the dental office lease for your practice, it is important to think about both the present and the future.
Although you may not be considering retirement or selling your dental practice at the moment, things can certainly change during the term of your lease. Details in your lease agreement may directly impact the sale of your practice by preventing a smooth transition or reducing the value of your business. The following are a few important aspects of your lease agreement from a practice sale perspective.
Assignment Provisions in the Lease
Ability to Transfer the Dental Office Lease
When the time comes to sell your practice and you’ve found a buyer, the transfer of the lease can often be a little tricky due to “Assignment” provisions in the lease. It’s not uncommon that this clause permits the landlord to deny your request to transfer the lease; or the proposed transferee. They can often terminate the lease altogether at the mere request for an assignment, leaving you with 30 days’ notice to vacate!
The Right to Dental Practice Sale Proceeds
In the event that your landlord does approve your request to assign the lease, how would you feel about them taking 50% of your practice sale proceeds? Often, the Assignment Clause grants the landlord rights to a percentage of your sale profits, resulting in a less than favorable retirement savings plan.
Personal Guarantees in the Dental Office Lease
Who is listed as the tenant on the lease? Your lease may list your business, or you personally, as the lessee. Personal guarantees can leave you responsible for the lease even after you have transferred it to a new tenant. If the new tenant defaults, the landlord could have the right to pursue you for payment.
Ideally, you want to negotiate personal guarantees in the lease to expose you to the least amount of personal risk possible. Try to improve the language to state that when the lease is transferred to another tenant, the original tenant is no longer financially responsible for the lease. If this is not possible, try to attach a time limit to the guarantee. For instance, perhaps the language can be amended to state that you will only be responsible for rent for a maximum of one year after the lease is assigned.
Restoration or Surrender Clauses in the lease can depreciate practice value and act as a deterrent to potential purchasers of your business down the line. Surrender language often requires a dentist to return the space back to its original vanilla shell upon vacating the premises; involving demolition, construction, and other costly, unplanned expenses. Purchasing a practice with such provisions means inheriting a large future expense (possibly hundreds of thousands of dollars), which in-turn decreases the current value of the practice and appeals less to future buyers.
Practice Expansion Potential
Many leases contain limitations in the “Use” provisions that disallow the practice of alternative services and forms of dentistry in the space. Although you may not have any plans to expand your business presently, expanding the practice may be important to a future purchaser. Your lease should include the flexibility to bring in associates and practice alternative forms of dentistry in the space without restrictions from the landlord.
More on How the Office Lease Impacts the Sale of Your Practice
These are just a few terms in your lease that should be analyzed and negotiated in preparation for your future transition. Don’t wait until you are in the later stages of your career to begin thinking about your practice sale. Start preparing at least 10 years ahead of your planned exit by setting up your office lease properly. Thoroughly review the details for risky language and pitfalls, and have the right dental office lease negotiation strategy in place to secure a lease that will support your eventual risk-free and peaceful exit out of dentistry.