Dental transitions can pose to be a big challenge for dentists. Understanding each aspect is going to be key. Dental office lease negotiations is just one of the pieces but it's very important to fully understand what it entails. We got to interview an expert Ali Oromchian from Dental & Medical Counsel for this blog. See our interview to find out what you need to know.
How does a lease affect a practice sale?
"A lease can make or break a practice sale especially since it is the second most expensive li
ability a dentist will incur. If a buyer has a strong dental lawyer, it will increase the chance of
entering into a lease with little financial or legal risks. Typically when a practice sale occurs, the seller’s lease will either transfer to the buyer or the landlord will draft a new lease. Landlords will not want to renegotiate the lease terms but if a buyer ignores the lease or doesn’t attempt to negotiate the terms then they might be taking on more obligations and liability than they should."
Can you transfer a lease? Why or Why not?
"Most of the time, a lease can transfer or be assigned from a current “leasee” to an “assignee.” However, most leases include conditions to an assignment that needs to be satisfied. Usually the top condition is that the lease needs the landlord’s consent which hopefully cannot be unreasonably denied. The lease may also have more specific conditions such as a minimum net worth for an assignee. The point is that while there might be a few hurdles, most leases should be able to be transferred from a seller to a buyer without a problem. The determining factor of whether a lease can transfer or not, and what the conditions to such transfer are, is the assignment clause."
What is an assignment clause? How does an assignment clause affect your lease agreement?
"As a buyer, it is vital to the value of your business that your lease contain a reasonable assignment clause. This is because if you can’t transfer the lease, then you might have to sell your practice without a location for the buyer to practice in which significantly devalues your practice value. For this reason, to make your practice as valuable as possible, it is vital that the conditions to assignment aren’t excessive. Dentists want to remove onerous requirements (such as that the buyer’s net worth be at least equal to leasee’s) because with every requirement, your buyer pool may shrink. Requiring landlord’s consent is fine, but UNDER NO CIRCUMSTANCES should there be an outright ban on transferring the lease, which brings me to the top three things you don’t want to see in a lease agreement."
What are 3 things you don’t want in a lease agreement?
"When reviewing a lease agreement, there are three major things I look to remove for the protection of my client. The third-worst thing I regularly remove from lease agreements is a clause requiring that alterations or improvements be removed at the end of a lease. This is detrimental due to the cost and time constraints it may require. A tie for third-worst would be not having options to extend your lease at the end of the initial term. As a Buyer or a Seller, the second worst thing I think you can see in your lease is an outright ban on transferring the lease, because this can significantly devalue a practice. When negotiating with a landlord, a ban on assignment is a non-starter. The number one worst thing that you could see in your lease would be multiple reasons why a landlord can terminate your lease. If a practice owner’s lease is terminated, and if he or she wants to continue that practice, they then need to find a new location, and when you change locations you run the risk of losing patients."
What are 3 things you should want in a lease agreement?
"As for what you don’t want to see in a lease, well that’s easy: uncertainty. You don’t want to see more money going out than expected. A practice, like any business, is all about the money. The truth is simply that a lease is a necessary expense to many practitioners. Certainty can be obtained
by knocking out variables. The top three places to look for variable costs are annual rent increases, how common utility expenses are divided, and when you must pay for changes to the building where you’re leasing a space. When these portions of your monthly lease expenses change, for some, it could prove to be very costly, to others it may just be really annoying. Having your lawyer negotiate annual rent increases based on flat fees over CPI is a great example of how to have some stability with your lease. Remember, the
trick to having certainty in your lease is to craft your lease in a way that you know exactly how much it will cost you at any given time, and having an expert’s assistance can help a lot in this regard."
Who should be involved in negotiating a new lease agreement?
"The people you should have on your team of experts are a dental attorney and a knowledgeable real estate commercial broker. The reason I highly recommend a dental attorney is because you
need someone in the legal industry that understands dentistry and all the intricacies of a dental office for example how much electricity you need, the size of the plumbing pipes and what should happen if there’s a fire or other disaster.. A knowledgeable commercial real estate broker will not only help you find the right practice but he/she will also negotiate the key business terms. I highly recommend that you involve a broker early in the process."
In conclusion, having a successful practice transition requires taking some time to educate yourself on what's involved. Ultimately, it's recommended to build a team of experts who can help you with each aspect of your business's transition.