3 key considerations when looking at negotiating your practice space
Signing a lease is one of the many decisions that you’ll need to make when opening your own practice. When starting a business, however, it can be difficult to look ahead and ensure that you’re also properly planning for the future.
The clauses that you include in your dental lease can have major implications if you decide to move buildings, sell your practice or close. “Future-proofing” your lease involves negotiating the right clauses at the start so that you can exit your lease without having to pay massive penalties or be stuck in a contract you’re no longer negotiating.
For dentists, there are three main areas to consider when future proofing your lease: make-good provisions, assignments and sublets, and the overall length of the lease. We’re going to cover all three in detail to ensure you have all the necessary information to future-proof any lease.
Make-good provisions are such a common issue that they’re actually colloquially referred to as “dentists’ clauses.” Because of this, it’s essential to know what you’re talking about when you negotiate a make-good clause.
In this clause, the landlord stipulates in what state the tenant must leave the office at the end of the lease. Essentially, the landlord tells you what condition they want their premises in once your lease is up, and you have to pay for the necessary work to get it done. A common make-good clause would be for the tenant to return the building to its original condition, or even to strip it down entirely.
Obviously, this is a costly thing to agree to, especially if you’re going to be making major changes to the building when you move in. Make-good clauses can end up costing tenants anywhere between $5 and $10 per square foot. If you’re trying to exit the building, this can be a massive expenditure.
What can you do about the make-good clauses? Sometimes, all you have to do is ask. Some landlords will eliminate the make-good clause entirely if it allows them to sign a tenant for a long-term lease. If this is not the case, however, there are still some steps you can take to reduce the impact that a make-good clause will have on your business:
Agree on a maximum total expenditure. If the landlord won’t eliminate the clause, try to get them to agree on a maximum amount of money that you’ll be required to pay.
Only agree to undo the tenant improvements that you make. This is where a lot of businesses can be unfairly affected by make-good clauses. Depending on the wording, you may have to undo not only your leasehold improvements but also those of all the businesses. To eliminate the odds of this happening, alter the agreement so that you only have to return the premise to the condition that it was in when you moved in.
Have a condition report done before you move in. This document outlines the current state of the building, including any existing damage or alterations that have been done. Having a condition report gives a clear idea of what modifications (or damage) have been done by your business, so there are no disputes between you and the landlord when discussing what work to you need to pay for.
Avoid having to pay several months after the fact. Many make-good provisions don’t always stipulate when you need to pay for the modifications, and businesses can be required to pay up months after they’ve moved out. To avoid this, ask your landlord at the end of the lease if there’s any work they wish for you to do. If they say no, ask for them to release you entirely from the make-good provision.
Assignments and sublets
Assignments and sublets are clauses that allow you to transfer your leasehold obligations to a third party. These are useful if you want to get out of your lease before its termination, or if you’re selling the practice and want to transfer the lease to the new owner. Although the two terms are used interchangeably, there are important legal differences between the two of them, and which one you choose to pursue can depend on what the situation demands.
A sublet is an arrangement in which you, the tenant, transfer some of the rights and responsibilities you gained through your original lease agreement onto a third party. These rights and responsibilities could include things like the ability to access the space (which would be a right) and the requirement to pay a set rent every month (which would be a responsibility).
The important thing about a sublet is that you retain all of your original obligations to the landlord. This means that you’re responsible for any actions committed by the new tenant. If they fail to pay rent in a certain month, for example, you still need to pay rent to the landlord.
Because of this, sublets can be a little riskier. However, they’re also easier to negotiate and far more short-term than assignments. If your building is going to be empty for a short period of time, such as a few months, using a sublet can be an easy way to offset some of your rental expenses.
An assignment is an agreement through which you transfer all of the rights and responsibilities contained in the lease to a third party. This completely releases you from any obligations you had and allows you to not be liable for the actions of the new tenant.
If you’re selling your business or trying to move out of the premises early, assigning the lease can be a good way to exit the space if your landlord is unwilling to break the lease. Because of this, it’s a good idea to discuss assignment with your landlord before signing the lease to ensure you have a mutual understanding of each party’s expectations.
You need to get a landlord’s permission before assigning the lease to someone else, but the landlord isn’t allowed to unreasonably prevent you from passing the lease on to a third party. This creates a gray area from a legal standpoint, however, because the definition of “unreasonably” can be ambiguous.
Because of this, you should create clauses in the original lease that stipulate the terms under which you’d be allowed to assign it to someone else. This can make your life much easier in the future when you want to move to a new location, sell your practice or close the building entirely.
Obviously, the length of your lease has major implications for your business. Picking the right term and renewal options can save you some major financial and administrative headaches in the future.
A general rule of thumb when signing leases is that the longer you commit to in your lease, the more flexibility you’ll have to negotiate terms with your landlord. For example, the landlord may be willing to waive your make-good clause and pay for a portion of your tenant improvements in exchange for you signing a longer lease.
Being comfortable with this long of a lease depends on a number of factors, including how confident you are in your business, whether there’s a personal guarantee and how long you plan to run your practice. Consider all of these factors beforehand and ensure that the benefits you’re getting from your landlord are worth the increased risk and rigidity brought on by long-term leases.
Also, research how likely it is that you’ll be able to assign or sublet the leased space if you decide to exit early. If you’ve spoken to your landlord and they’re perfectly willing to help you assign the lease at any point, this can mitigate the risks that come with signing for a longer period.
Another consideration is renewal clauses. Signing a shorter lease and simply enacting your right to renew it every three to five years seems like a viable alternative to committing to a longer lease. However, there are some issues with this strategy. Renewing can be a tricky process, both administratively and when it comes to determining the rent you’re going to pay. Your landlord will almost certainly want to increase the rent from what it previously was, and you may have little to no say in the manner.
If you’re in a lease that satisfies the needs of your business and you want to stay for longer, renewing it can be a great way to save yourself the headache of having to move buildings. However, using renewal clauses shouldn’t be a substitute for negotiating good make-good and assignment clauses up front, because the latter options are a much better way to future-proof your lease.
Learn more about practice transitions, leases and more by checking out these Dentaltown CE courses.