When it comes to finding the ideal tenant for commercial office space, dental tenants are one of the most desirable businesses to landlords.
Yet, dentists often fail to use this to their advantage when negotiating their dental office lease agreement. Before you enter into a new lease or renewal negotiation, here are a few things you should consider to understand why landlords prefer dental tenants, and how you can leverage this in your upcoming negotiation.
Why Landlords Prefer Dental Tenants Over Other Commercial Tenants
Low Default Rates
Dentists are favored tenants in the eyes of a landlord for many reasons. For one, they generally have low default rates in comparison to other types of businesses. In fact, they are known to have one of the highest credit ratings among professionals. Dealing with defaulting tenants can be a cost and organizational nightmare; therefore, landlords tend to favor businesses with generally low default rates.
Given the amount of work and large financial investment involved in opening a practice, most dentists choose a location with the intent of staying 10-20 years or more. This means a long-term lease and options to renew/extend, translating into a promising and steady revenue stream for landlords.
Increased Foot Traffic
There’s no doubt that a dental clinic draws foot traffic to a building/center, which in turn is helpful for other businesses in the vicinity, adding value to the building and resulting in a win for the landlord.
How Landlords Use the Lease Agreement
Landlords know very little about the business of dentistry, but what they do know about are lease agreements. The standard dental office lease is typically 30–50 pages long, outlining the tenant and landlord’s obligations to one another for the duration of the lease term. The lease is engineered by landlords for their financial benefit, used to increase the value of their properties and maximize control.
Common Landlord-Favored Lease Terms
Unless your lease terms are thoroughly reviewed and negotiated properly, landlords generally have the upper hand. It is important to review and understand the provisions in your dental office lease agreement and amend them to your advantage before you sign. Here are a few common lease terms that dental tenants should pay close attention to.
The “Use” clause outlines, and potentially restricts, the type of business/service you may conduct in your space. For example, language may only permit “the practice of general dentistry” in the space; however, this language can be amended to allow for future inclusion of services such as Orthodontics or dental surgery, giving you the flexibility to expand or bring in associates/specialists down the line.
The “Relocation” clause could allow your landlord to move you from one unit to another, usually to accommodate a higher paying tenant who wants your space. Additionally, this clause is often written so the tenant bears the entire cost of the move.
Not only are unplanned relocations inconvenient and expensive, they are usually paired with several months of practice dark time and loss of business/patient attrition. Dental tenants should aim to strike this clause from the lease, or, at the very least, alter it putting the onus on the landlord to pay for moving expenses and cap the number of moves permitted over the lease term.
Assignment Provisions & Personal Guarantees
Assignment provisions and personal guarantees in the lease impact the ability to sell your dental practice. Many dentists are shocked to learn that they need landlord approval to assign the lease to a new tenant. Furthermore, personal guarantees can keep you personally liable for the lease terms even after you’ve transitioned. If you can’t assign or remove yourself from obligations under the lease, then you technically cannot sell your dental practice.
In the event that you can sell, it’s not uncommon that the landlord is entitled to proceeds of your practice sale due to language in the lease; therefore, it is extremely important to negotiate these terms in your favor. Even if you do not have current plans to transition, this could change at some point in your career.
Landlords Prefer Dental Tenants, So Use This to Your Advantage!
Given the many benefits to carving out the details in the office lease, it’s clear why landlords prefer dental tenants. Landlords will put on their best poker face to make you think they have the upper hand. It is up to you, the dental tenant, to know how to play your cards right and use them to your advantage. Recognize the impact of the terms in your dental office lease and their impact on your business’ success, ability to operate, grow, and sell your practice. If your poker face needs work, consider hiring professional dental office lease review and negotiators like Cirrus to help secure fair and affordable terms on your behalf.