A Dentist’s Guide to Office Lease Negotiations and Renewals
Published on
- 06-14-2024
Read Time
- 5 minutes read
A Dentist’s Guide to Office Lease Negotiations and Renewals
As a practicing dentist with your own practice, more than likely, you have a lease on your office. Perhaps you even required your lawyer to scour it before signing. And maybe you’ve required concessions and allowances from the building owner. Or, if you are just starting out in your practice, you will have paid some attention to the lease; the bank providing the financing will require that you have a lease long enough to cover the term of the loan. But the lease is just one item of many that you have to deal with when starting out.
In any case, you will have initially discovered that virtually everything in a real estate lease is there to protect the interests of the landlord/property owner. Furthermore, there is very little of the language in the lease that is negotiable. Depending on the landlord, you may have the opportunity to negotiate the monthly lease amount. If it is an individual owner, they may be more flexible depending on each individual circumstance.
Additionally, the owner may offer options to renew, which are beneficial to the lessee because they are cost-free and may allow you to stay in the building even after the lease has ended. Depending on the length of a lease or a renewal, the owner may offer an allowance to upgrade the interior of your space. Chances are that after that initial scrutiny, you have continued to renew it without paying much attention to the renewal.
As the years pass, dentists often overlook or neglect to ask for critical changes to the rental agreement. When you first negotiated the lease, your spouse may have been required to sign the lease as well. But, after you have completed the initial term of the lease and have proven to be a dutiful tenant, your spouse should be removed from the lease. Otherwise, you may encounter problems in later years, especially in the case of a divorce or separation.
During the initial term and any subsequent renewals, require that the lease be re-assignable to another dentist who may want to purchase the practice. Permission to assign the lease is usually only permissible with the approval of the landlord, but you want the further provision “… that such approval shall not be unreasonably withheld….” Without this provision, the owner may “hold you hostage” when you want to sell the practice.
The new buyer could be rejected out of hand or be forced to negotiate a new lease at higher rent—something that could kill the sale. You should remember that if you assign the lease, you will be secondarily liable for the rent if the new tenant defaults on the lease. Dentists buying other dentists’ practices are overwhelmingly successful; banks financing dental practice acquisitions have had a loss ratio of less than 1⁄2 of 1 percent.
So, while the risk of default may be negligible, you should nevertheless be aware of it. And, wherever possible, have the buyer get a new lease that will take you out of the picture completely. The next feature you should request will become more important as you get older, but, can also be very important at any age.
Ask the building owner to include a provision for the termination of the lease in the event of your death or disability. This may be harder to get and will depend on the individual property owner. But it is not unheard of to obtain such a provision, usually with the payment of 3 to 6 months additional rent at termination. You can try to include a termination based on your retirement but that may be harder to accomplish. Still, it never hurts to ask. You are a valuable tenant, as dentists usually invest in their premises in the form of leasehold improvements. As a result, moving is usually very expensive and they are most often long-term tenants in the property.
Another section of the lease to examine is the section regarding the destruction of the property. This section will spell out how much time the building owner has to decide to repair or rebuild the property. It might be 60 to 90 days for a decision, which doesn’t include the time it actually takes to complete the repairs. This is critical to you because it is difficult, if not impossible, to find temporary quarters for a dental office.
In the case of temporary relocation, the insurance agent or the law firm can find a nearby store front, rent furniture and computers, install phone lines and internet, and you can be back to helping your patients. If the landlord is unwilling to change this section of the lease, you should protect yourself with “business interruption” insurance to prevent catastrophic business loss if the unthinkable happens. Finally, more often than we would expect, we find dentists practicing without a lease at all.
They are operating on a month-to-month basis. In most cases, they signed an initial lease, but once it expired, they continued paying the rent without any form of a lease extension or renewal. Month-to-month means that they can be expelled from the premises with only 30-days-notice. Often these dentists are happy with the arrangement because they feel like they can quit at any time with very few complications.
While that may be true, they are taking a risk. The building could be sold to a new buyer who wants it for his or her own business, or to a buyer who wants to demolish the building. In one case, a seller had been on a month-to-month basis for most of the last twenty years. When the buyer approached the property manager about a lease, he was told that he could not get a lease. The building owner was planning to redevelop the space to attract a larger tenant. The new owner could only get a 6-month lease knowing that he would have to move his practice within the year. This had a major effect on the price the buyer was willing to pay for the dental practice. Laws vary from state to state so consult a real estate attorney in your area regarding leases. If your original lease lacks any protections, consider negotiating for those during the next lease renewal. The sale of your practice and/or the value of your practice may depend on it.