Visibility and Audit Rights
Before you sign your dental office lease, it’s important to ensure that you have the “right to review and/or audit statements and invoices for all operating costs” negotiated into the agreement. This will ensure that you have the ability to take prudent steps to protect your practice from unreasonable or hidden charges set forth by the landlord. If you have the right to see exactly what is being charged, it is less likely that you will be billed for something completely unreasonable.
In a Net lease, operating costs are expenses associated with the landlord’s day-to-day maintenance and operation of the property. Your landlord should keep track of all operating costs, and at the end of the fiscal year, provide you with a detailed statement of the actual expenses. As a tenant of a commercial property, you should insist on having the reasonable right to verify, audit, and where applicable, contest any charges that have been passed on by your landlord. Dentists who have not secured such provisions in their office lease may find that they are vulnerable and exposed to unscrupulous landlords.
It is customary for a tenant to cover their proportionate share of charges relating to the maintenance of the building, common areas, insurance, and various taxes; however, some landlords take advantage of their tenant’s lack of knowledge as to what are reasonable pass through costs.
What charges are unreasonable for the landlord to pass along to a dental tenant?
- Structural building repairs or capital improvements
- Real estate broker commissions
- Professional or legal fees not relating to your premises
- Interest on debt costs
- Landlord’s personal income taxes
- Marketing association fees that are not driving traffic to the building or helping your dental business
It’s not uncommon for a dentist to receive notice from their landlord communicating that they were not billed correctly for a certain expense, dating back several years. Without proper preventive language negotiated into your dental office, situations like this can result in many unforeseeable future costs for which you will be liable.
Landlords typically include administrative charges in operating costs which can vary from 5%-20%. Ideally, these charges will be completely removed from application to particular clauses in the lease, or reduced to a level that is in keeping with generally accepted industry standards. Dentists should also beware of administrative charges applied to the landlord’s supervision of tenant repairs and alternations to the premises. While such supervision may be appropriate given the scope of work involved in the initial construction of a dental practice, there are numerous instances during the lifespan of a practice where such fees are not reasonable.
Duplications in the Summary of Operating Costs
Ensure you thoroughly review the summary of operating expenses to ensure your landlord is not charging you for the same services twice. You’d be surprised how many dentists are unaware that they are paying for the same expenses more than once.
Understanding Your Rights as a Dental Tenant
While operating costs may seem like a minor detail, hidden charges can often cost a dentist hundreds, if not thousands of dollars annually if the language within your dental office lease is not properly negotiated. It’s important to understand your rights as a dental tenant. If you are unsure about any language outlined in your lease or in your operating cost statement, contact a professional lease negotiator for advice. Remember, any money saved in identifying unfair operating cost payments goes back into your wallet, not your landlord’s!
Author: Magda Mroz, Lease Analyst, Cirrus Consulting Group
Click here to read Part 1 of our blog where we cover what dental practice operating costs are, common types of charges, how to protect yourself from being overcharged by your landlord, and more.