When reviewing your dental office lease agreement, there are many different clauses to evaluate.
Two of the most important are the “Option to Renew” or “Extend” clauses.
Looking at Your Options
Options to Renew or Extend the lease are typically written for the purpose of benefiting the landlord; therefore, it is your responsibility to negotiate this clause to tip the scales in your favor.
Landlords often craft “Options” language to minimize their value to tenants by applying limitations such as who may exercise these options, when, how, and what must occur at the time.
Landlords may also add further provisions that allow them to revisit the lease at renewal time and insert restrictive language such as “Demolition” rights, a “Relocation Clause” or “Assignment” language that works for their benefit at sale time. Despite what some landlords might argue, all lease terms are negotiable and it’s important to do so to protect your rights.
Leveraging Your Options
In the event that a less-than-favorable lease was signed at startup time, renewal options provide you with the opportunity to bring the landlord back to the table to perhaps renegotiate some of the original terms in your dental office lease. In addition, as you mature in your career, you may not have the same goals you once did when you originally signed your lease agreement. Maybe you are looking to sell your practice in the next 10 years, relocate, or expand your dental practice or service offering? Options to Renew/Extend can provide you with the flexibility to secure a more favorable lease agreement in your current location, that is more reflective of your present and future practice goals.
Lease Performance Provisions
It’s important to be aware that Options to Renew/Extend often include performance provisions. For example, your lease may specify that you, the tenant, cannot be in default in order to maintain the right to renew/extend the lease. This is reasonable since you should be current on rent at the time of an extension.
Rental Rates Upon Renewal
There are many different ways that rental rates may be determined within an Option to Extend or Renew clause. Often times, “fair market value rent” is referenced. It will be important to ensure that no lower rental limit is specified in this case. For example, if your lease adds “but at no time shall be less than the rent which was payable during the last year of the term,” you may not be able to take advantage of reduced rental rates in the market.
If a rental rate is not specified, be sure to include some type of dispute resolution clause to prevent the landlord from quoting an unfair rate to take advantage of your situation, or force you not to renew. In some cases, landlords reserve the right to terminate the lease in the event that the tenant and landlord cannot agree to a rental rate. In these cases, some methodology of third party determination is critical.
Improving the Resale Value for Your Dental Practice
Although you may not currently have plans to sell your dental practice, it is still important to ensure that your dental office lease does not include anything that may negatively impact a future decision to sell. For Extension/Renewal clauses, ensure that the options are not solely tied to you, the original tenant. Rights should be assignable or transferrable to a new owner.
Using Options in Your Dental Office Lease to Protect Your Business
The details in your dental office lease agreement impact the operation, finances, value and future sale of your practice. It is critical that Option to Extend Renew clauses are reviewed and written properly to ensure that your best interests are served in the long run.