As a dental professional, you will have to enter into dental office lease negotiations with your landlord at several points throughout your career, including when you are opening a practice, mid-to-late career when you are renewing your office lease agreement, and when you are planning for transition or for the sale of your dental clinic.
Since your practice goals are likely to change, so should your lease agreement. At each stage of your career in dentistry, your priorities and needs will be different. Therefore, your approach towards dental office lease negotiations should vary as well. Below are some important lease terms to consider at the different stages of your dental career.
Dental Office Lease Terms for Startups
Free-Rent Period and Tenant Improvement Allowances
Dental practice buildouts are expensive and can take up to 6-9 months to complete. It’s often possible to negotiate a rent-free period with your landlord in order to build-out your practice before opening your doors for business. In addition, landlords will often provide you with a Tenant Improvement Allowance (TIA), a sum to allocate towards the built-out of your space.
A well written out “Relocation” clause in your lease agreement can prevent your landlord from relocating you to another unit throughout your tenancy, or, limit the number of moves permitted during your term.
As your business grows, you will want the flexibility to expand your services and perhaps bring in associates. “Use” provisions in the lease outline the activities or services that you are permitted to perform in the space. Flexible wording in this clause is effective because it captures current and future use for your dental practice, without being restrictive.
Having a direct competitor in the same building as your practice can negatively impact the success of your business. You will want to negotiate exclusivity protection into your lease agreement, preventing your landlord from moving competing dental professionals into the building/center.
Reviewing your lease for the above terms and negotiating them in your favor is important to the success of any new dental practice.
Mid-to-Late Career: Office Lease Renewal Negotiations
Mid-career, you may have the benefit of more clarity in your business plan than when you first started your dental practice. This is a great opportunity to evaluate your goals and negotiate your office lease. Be sure to think further ahead, and to consider your potential exit strategy.
There are several important provisions to keep in mind when you are renewing the terms of your dental office lease: personal guarantees, death and disability, and assignment options.
Your lease may list you personally, or your business as the lessee. Personal guarantees in the lease can leave you responsible for payments even after you have transferred it to a new tenant down the line. Negotiate this language to state that when the lease is transferred to another tenant, the original tenant is no longer financially responsible for the lease.
Death and Disability Protection
As you move closer to your inevitable retirement, your chances of succumbing to unforeseen circumstances that interfere with your work increase. Your lease should contain a “Death and Disability” clause to protect you and your family in the event of an illness or accident that could prevent you from continuing your practice.
The Assignment of Lease
Beware of problematic assignment terms in your lease. 85% of dentists have a lease with language that can prevent them from ever selling their practice. Make sure your landlord is not required to approve your sale, and will not directly benefit from the proceeds of that sale.
Your mid-to-late career lease agreement should protect you from liability while granting more flexibility to expand or sell your business. The three provisions listed above will most significantly impact those potential changes to your practice.
Lease Negotiations When Planning for Your Practice Sale
If you are nearing the end of your career, you are likely to sell your business and retire. The focus during lease negotiations at this point should be on securing lease terms that may impact your ability to sell, or that may reduce the value of your practice to buyers. The value of a practice at the time of sale is largely predicated on how the lease is set up. When it comes time to transition, most dentists are horrified to learn that their practice is worth much less than they expected due to the terms and clauses within their lease. Other lease terms that directly impact the value of a dental practice are surrender, demolition, and expansion language.
“Surrender” clauses specify what must be done to the leased space once you vacate, often requiring a dentist to return the space back to its original vanilla shell upon vacating the premises. Purchasing a practice with such provisions means inheriting a large future expense (easily hundreds of thousands of dollars in demo and construction costs), which in-turn will decrease the current value of the practice and appeal less to future buyers.
The “Demolition” clause in the lease can permit your landlord to terminate your lease with 30 days’ notice if they decide to demolish, renovate, or redevelop the building or center. The disruption to your practice, loss of business, and moving expenses associated with the Demolition clause can easily make or break a flourishing practice, thus greatly impacting the value of your practice at sale time.
Finally, ensure that your lease offers flexibility for growth and expansion (both in space and service offerings). The buyer of your dental practice may have goals that differ from yours, so flexibility in “Use” is extremely important for sellers.
More on Dental Office Lease Negotiations
Whether you are a new dentist, mid-career, or are nearing retirement, your lease terms should always support your short term and long term practice goals. Since your goals are likely to change, so should your lease agreement. Be sure to carefully evaluate the terms and clauses in your lease agreement to ensure the language aligns with your current and future needs, and provides you with the runway, flexibility and protection you need to be successful.