If I were to ask you which part of your dental office lease is the most important, what comes to mind?
I doubt you would consider the assignment clause – the clause which governs your ability to purchase a practice or transfer the lease alongside the sale of your practice.
You probably wouldn’t think about the surrender clause – the clause which outlines how you are meant to leave your space when your lease term ends. Almost certainly you wouldn’t think about the relocation or redevelopment/demolition clauses, which, if exercised by the landlord, could unexpectedly force you out of your space!
No, I’m willing to bet you immediately thought the most important part of your lease is the rent. Well, I hate to be the bearer of bad news, but….it’s not just about the rent! While rent is certainly one of the key components of any lease, I’m here to teach you that it should not be your number one concern.
It’s Not Just About the Rent
Who could blame you for believing otherwise? Rent is the most obvious cost that a dental tenant incurs. Sometimes the payment of that monthly cheque is the only contact a dentist has with their landlord all year. It is therefore no surprise when a dentist focuses entirely on achieving the lowest rental rates possible at negotiation time, completely ignoring the rest of the lease agreement. However, to be perfectly frank, this approach is just plain wrong. Rent may be an “obvious cost”, but there are numerous hidden yet important costs that you should be more concerned about.
Hidden Costs vs. Obvious Costs in Your Dental Office Lease Agreement
An Assignment Nightmare
One such hidden cost is often found lurking in the assignment clause, and if this clause is overlooked in favor of a rent-focused lease negotiation, it could cost you far more than what you’re paying on a monthly basis. If your lease is structured in such a way that the landlord is entitled to “consideration” upon the assignment of the lease – a vague term that could encompass the proceeds of the sale of your business – you could stand to lose the value of your practice, which could amount to hundreds of thousands of dollars.
If your lease will not permit the assignment of your tenancy upon the sale of your practice, or puts undue restrictions on your ability to do so, you could lose all the money that your buyer was willing to give you. This has significant long term ramifications; not only could you lose the value of your dental practice, but it could entirely scuttle your retirement plans. The far reaching effects of this have more financial impact than the rent you’re paying while in your space.
Gutting Your Dental Practice From the Inside Out
Another such “hidden cost” is in the surrender clause. You’ve spent years designing your space and investing money into it, only to find that at the end of your tenancy, the landlord requires you to rip it all out, costing you tens of thousands of dollars in demolition costs. Not only that, but lurking in that clause could be the landlord’s ability to claim ownership of your trade fixtures at the end of the term. In other words, your dental equipment could be taken away from you upon practice exit – another loss of tens of thousands of dollars.
Unexpected Practice Relocation/Demolition by the Landlord
Hidden costs may also be hiding in a relocation or demolition/redevelopment clause in your office lease. These clauses are increasingly common. Imagine a scenario in which you’ve built out your beautiful dental practice, invested hundreds of thousands (maybe even a million) dollars into its design, and then the landlord exercises their right of relocation. They want to move you to another part of your building, and they want to do it within 30 days, and they want you to pay to build out your space…again!
Unfortunately this horrifying scenario is not uncommon for dentists. And as if it couldn’t get any worse, the demolition or redevelopment clause could also be hiding in your lease. Imagine you’ve invested all that money into your space only to find the landlord wants to knock your building over to put up a condo tower. In this case, you’re out on the street, and the landlord isn’t obligated to pay you a dime. You now have to find another office and start all over again. Both scenarios can cost you hundreds of thousands of dollars.
Dental Office Rent is an “Obvious Expense”
As a dentist, it is important to understand that there is much more to a dental office lease negotiation than just rental rates. Rent is an obvious expense, but there are hidden expenses lurking throughout your office lease agreement. Assignment, surrender and relocation/demolition/redevelopment clauses are just some of the dangers hiding in the standard form lease. Even if you are happy with your rental rates, it’s important to pay attention to other, often more important, terms in your lease agreement. If you feel your rental rates are unreasonable, it is important to discuss this with your landlord; however, this should not overshadow the other issues in your lease.
Cirrus Consulting Group takes a holistic approach to dental office lease negotiations to ensure we tackle everything, including rent, without considering one to be more important than the other, because, it’s not just about the rent.
Author: Cameron Bryant, J.D., Lawyer and Lease Negotiator at Cirrus Consulting Group