November/December 2010, Volume 6, Issue 10
Published by AEGIS Communications
What every dentist should know about these critical contracts.
A dentist decides to start his own dental practice, either by purchasing an existing practice or starting from scratch. He finishes negotiating the rent for the new practice, which includes free rent, renewal options, tenant allowances. He is excited and cannot wait to sign the lease agreement.
The landlord presents him with a lease that appears to be a standard lease. Because "every other" tenant has signed the "same" lease, the landlord asks him to sign the lease. Should he? No-not without consulting an attorney.
Lease Commencement Date
Once a lease is signed, the tenant and the landlord have opposite goals. The landlord wants the lease to start as soon as possible so that the tenant can begin paying rent immediately, even if the office space may be under construction.
If the landlord is building out the office space, it is extremely important that the tenant gives the landlord the most detailed plans possible, specifying carpet type; type of cabinetry; location of bathrooms, sinks, laboratory, built-in desks, and reception area; and other details in an effort to guarantee that the new dental office will meet the dentist's needs and expectations. However, it is also very important to ensure that the rent payment does not start until the construction work has passed inspection (ie, Certificate of Occupancy).
Most lease agreements provide that the build-out will be deemed complete when the landlord or its contractor/architect certify that the build-out has been "substantially completed." Usually this means that "punch list" items will be completed by the contractor after the practice is open for business, and this certainly is not the image that a dentist wants to present to his or her patients.
If the dentist is building out the space, he or she should select the most qualified contractor possible and negotiate an appropriate build-out period. The dentist may also want to insert a liquidated damages clause in the construction contract, which states that if construction delays put the dentist behind schedule, the contractor will pay the rent (rather than the dentist) until the office is completed.
Nearly all leases have rent escalation clauses. Escalation clauses may either be specifically outlined in the lease so that the dentist knows the exact amount of rent he or she will be paying or the escalation clause may be tied to an index, usually the consumer price index (CPI).
Contractual increases are what the tenant and the landlord agree to over the term of the lease. The best practice is to set an exact amount that will be paid over the term of the lease. This way there are no surprises. Indexes are too unpredictable and can hinder the cash flow of a practice.
Rent During Option Periods
When negotiating a lease, the tenant should always include an option to renew the lease, which will specify the exact amount of rent paid during the option period. If using a "standard lease," tenants will usually find one of two methods that will be used in order to determine the amount of rent to be paid during the option period: (1) an increase tied to the CPI, or (2) the prevailing market rent in the area.
The term of the option period should be specifically stated (usually 5 to 10 years), and the rent for each option year should be specified. For example: For months 61 through 72, rent shall be $2,500.
Damage to Office
What happens if the office building is damaged by fire and the dentist is forced to cease practicing for 4 to 6 months? Most leases impose no real obligation on the landlord to rebuild. Unfortunately, most contracts give the landlord the greatest flexibility in determining when or if to rebuild. By contrast, the tenant is typically obligated to move back into the space within a short period of time after the building is repaired. Imagine a dentist's difficulty in retaining loyal patients when he or she moves into interim office space only to be forced to move back to the old space. Therefore, every lease should include a provision where a tenant shall have the right to terminate the lease if the landlord has not commenced restoration or has not completed the work within a reasonable period of time (the term "reasonable period" should be specified).
Ideally, the author recommends that the damage section of the lease contain at least the following requirements: that the landlord carry full replacement cost insurance, commence repairs within 60 days, and complete the repairs within 120 days; if these conditions are not met, the tenant may terminate the lease. In addition, a tenant should always carry full replacement cost insurance coverage to cover any type of tenant improvements and equipment.
Lease Assignment Upon Sale of the Practice
The landlord always has the option to grant or deny an assignment of an existing lease. All purchase and sale agreements should contain a clause that the sale is contingent upon the landlord assigning the lease to the purchaser. The growing trend in the rental market is to still hold the seller liable for the terms of the lease (ie, rent), even though the purchaser is occupying the seller's space, after the sale of the practice has taken place.
Therefore, the author recommends that a dentist build some "teeth" into the assignment language that will allow greater flexibility if he or she decides to sell the practice. He would strongly suggest that the dentist try to incorporate the following language into each assignment clause: that the landlord cannot unreasonably withhold its consent to the assignment; that the landlord must consent if the buyer has substantially the same net worth and credit history as the seller at the time of signing the lease; that the landlord cannot deny an assignment based on tenant mix or tenant exclusives if the assignee is a dentist; that the selling dentist be released from liability at the expiration of the existing term; that the landlord have no right to adjust the rent to market price based upon an assignment; and that the landlord has no right to claim a part of the sale proceeds upon the sale of the business.
What happens to the lease if a dentist dies or becomes disabled? Generally, no standard lease will permit the dentist or the dentist's estate from being released of liability. The dentist or the estate must still pay rent based upon the terms of the lease agreement. Therefore, the dentist should always attempt to negotiate a release or termination of the lease if the tenant (dentist) dies or becomes disabled, in exchange for payment of several months' rent following such occurrence.
Many leases contain relocation clauses whereby the landlord may move a tenant to another location within the building. As a result, special care must be given so that the dental practice is not moved in to a smaller space within the building.
As a final issue to consider in drafting a lease, nearly all leases protect the landlord from liability for their action or inaction. At a minimum, the landlord should be liable for their own actions, such as when they fail to properly maintain the building, which in turn causes water damage to the office space.
A prospective tenant should always remember that the landlord-or his or her attorney-has drafted the lease. The prospective tenant should use a qualified attorney to review the lease and make necessary changes. Otherwise, the tenant will end up with a one-sided lease, which will solely benefit the landlord.
About the Author
Stuart J. Oberman, Esq, handles a wide range of legal issues for the dental profession including practice sales, real estate transactions, lease agreements, non-compete agreements, and professional corporations. To reach him call 770-554-1400 or visit http://www.gadentalattorney.com.