When you own or purchase the building you practice in, you probably thought there isn’t a need to sign a dental office lease for yourself. After all, you are your own landlord, so why is there a need to establish legally binding terms with yourself? Can’t you adjust everything to your liking whenever you want? The answer is no. The dental office lease agreement is important when you are a tenant as it establishes the terms you and your landlord are to follow for the duration of your tenancy. However, it is also crucial to your business when you own the building that you have a lease agreement between the building and the practice, and here’s why:
Having a properly structured dental office lease agreement between the building and the practice plays a huge role in maximizing the value of each entity. The lease agreement will provide protection to support the future growth of each business. Purchasing commercial real estate is expensive and will come with certain liabilities. You should always acquire the property through a different company (legal entity) than your dental practice; this will separate the different obligations and responsibilities for each party. For example, “Company A” should be the building/landlord, and “Company B” should be the practice/tenant.
The lease agreement will establish important details such as the amount of rent you are to pay every month, or who will be responsible for paying operating costs in the event the building needs repair/maintenance/upgrades, etc. Simultaneously, the dental office lease agreement will ensure that both parties (your dental practice and building) follow the rules and meet the requirements to maximize the value of each business.
What will happen when it’s time to retire?
As the landlord and dentist, the value of your practice will be determined by three main components when you decide to sell:
- Goodwill (patients)
- Dental Office Lease Agreement
The insurance of a properly structured long term lease will help generate more interest with potential buyers as they don’t need to spend time and energy re-negotiating the lease. Furthermore, a long term lease generally means fair and affordable terms have already been pre-established. As a result, there’s not much the new practice owner will need to do in terms of the office lease, which will provide them with the flexibility to operate and grow the practice straight away.
Lease terms to consider for your practice sale
- Term and Options: The lease should include some “options to renew” at the end of the lease term available to you and transferable to a future buyer. Options are generally 5-10 years in addition to the lease term so long as the tenant exercises his/her right prior to the lease expiration date. Many leases have language prohibiting the transfer of renewal options to future buyers, which could potentially deter an interested purchaser.
- Practice Assignment: If written poorly, assignment language could prevent the current dental tenant from assigning the lease agreement to a new dental tenant, ultimately prolonging retirement. However, if written correctly, assignment language will help facilitate a smooth practice transition while also providing protection to future buyers in their eventual practice assignment.
- “Use” and “Associate” Provisions: Ensure you customize the “use” and “associate” provisions to provide the freedom and flexibility for you and future tenants to bring in associates, and expand your practice. For instance, general dentistry is really broad, try to include all forms of dentistry such as orthodontics, maxillofacial surgery, perio, etc. so you and future dentists can expand your services offered in the space.
Creating a lease to drive success
These are just some of the terms that are important when you establish a dental office lease between your dental practice and real estate. Being a practice owner and landlord is not an easy job, it will take a lot of time away from your core business of dentistry if not done correctly. By securing a lease that outlines all the details that both your businesses should follow, there will be less room for error and less confusion down the line. Remember that the building acquisition and dental office lease agreement are both extremely expensive commitments; consider hiring professional dental office lease negotiators such as Cirrus Consulting Group to create a properly structured lease agreement for you that will help ensure the success of your property and your dental practice.
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