Tips from a Lawyer: Negotiating the Lease on the Purchase or Sale of a Dental Practice
When a dentist is purchasing a dental practice the most difficult problems often arises in the negotiation of the lease. In virtually every agreement of purchase and sale for a dental practice there is a condition in the agreement in favor of the buyer being (i) able to obtain the landlord’s consent to the assignment
of lease or change in control of the lease by the tenant and (ii) negotiating amendments to the existing lease. Our clients have encountered several problems with landlords in the past year alone. It is always important to remember that many leases are standard and in most cases are not subject to many amendments save for important business terms so a balance needs to be struck with what you want in the lease and what the landlord is willing to accept.
Landlord fees on assignment1
Although many landlords act quite reasonably when it comes to approving the assignment of lease or change in control of the dentistry professional corporation (where the buyer is purchasing shares) we have encountered landlords asking for very unreasonable transfer fees. A reasonable fee would be around $1,500.00. A normal clause in a lease states “The Tenant shall not assign or sublet the premises or lease without the landlord’s consent which consent shall not be unreasonably withheld (the “Consent Clause”).
This year a landlord asked for the greater of (i) $3,500.00 or (ii) 5% of the purchase price. We were able to negotiate downwards to $3,500.00 only. The lease in this case contained the Consent Clause. We could have taken the landlord to court but no dentist buying or selling wants to start his/her relationship with a landlord in court.
In another situation we had an estate selling the practice of a dentist who had passed away, the landlord demanded security of $75,000.00 from the dentist’s estate. Although the buying dentist was very strong financially the landlord took the position that it would lose the covenant of the seller as the tenant had passed away.
In another situation the landlord charged $25,000.00 for giving consent. We were acting for the buyer and luckily we had inserted a clause in the offer that the buyer would share the costs of the landlord to a maximum of $1,500.00. In this case the seller acquiesced and paid the fee to get the deal done.
Time Required to Obtain Landlord’s Consent:
We have found that it is taking two (2) to three (3) weeks after applying to the landlord to obtain the landlord’s consent. Not only does the purchasing dentist have to be satisfied with the lease but the lending bank also has to be satisfied and must be given a copy of the executed lease and consent prior to being able to close.
Important Clauses in a Lease to Delete, Change or Add
We would suggest that when negotiating your lease or renewal that you have your dental lawyer review the whole lease and try to negotiate the following clauses either in the lease or out of the lease:
Termination Clauses. Many leases contain a clause permitting the landlord to terminate the lease if the tenant requests an assignment of the lease. Attempt to have this clause deleted.
Exclusivity. Try to negotiate an exclusivity clause giving you the right to be the only dentist on the property. This is possible where the property is not too large such as in a small plaza or store front – however almost impossible where you are in a large plaza or medical building. Be specific as to what exclusivities you want. We recently acted for a dentist selling his practice for almost $3,000,000.00 with an exclusivity clause that permitted him to be the only family dentist in the plaza. However, the buyer was interested in expanding the practice he was buying to include some specialties that would not have been possible under the family/general dentistry exclusivity clause. We were able to compromise with the landlord and the transaction closed. Remember that new dentists are performing procedures that at one time would not have been performed in a general or family dental office. Many exclusivities are stated to be personal to the tenant. Insert a provision that the exclusivity is for the benefit of the tenant and its permitted assigns.
Demolition and Sale. Many landlords are now inserting clauses permitting them to terminate the lease if they decide to demolish or sell the property. Some landlords will agree to take out these clauses or at lease extend the period during which they can exercise these rights. When you are purchasing a dental practice your bank may cause difficulties if it knows that the landlord can terminate the lease.
Assignment or Consent to Change in Control. Ensure that you have the Consent Clause. If you are signing the lease in your personal capacity you would want a clause permitting you to assign to a dentistry professional corporation without cost and without consent.
Moving Tenant. Many leases contain a clause permitting the landlord to move the tenant. You would normally want to avoid this type of clause and if the landlord insists ensure that the landlord pays for the cost of moving to a similar type location with similar type frontage, visibility and signage.
Renewals. Ensure that you have as many options to renew as possible – we would suggest that you always have at least 2 to 3 five (5) year options normally at rent to be negotiated based on fair market rent and subject to arbitration. If you are selling your practice buyers require at least 10 years remaining to satisfy their banks.
Signage. Ensure that you have good signage.
Rent free and Landlord Inducements. You should be able to negotiate a rent free period when moving in. However, if you are selling the practice the new purchaser most likely will not be able to negotiate any rent free or other inducements.
There are many clauses in a lease to protect you as tenant. A lawyer who practices dental law will be able to negotiate many clauses on your behalf to protect you while you are a tenant and an assignee when you sell your practice. Keep in mind that some landlords are more difficult to negotiate than with others – each side must compromise to get the lease done.
These are just some of the problems associated with dental leases. When planning on selling your practice we would strongly suggest that you consult a lawyer familiar with dental law to review your lease and try to be proactive in discussing your possible assignment with the landlord prior to putting your practice up for sale. Hopefully, this will make the process of dealing with the landlord smoother. This blog post is for informational purposes only and issues that arise with the sale of your practice or your lease should be discussed with a lawyer who has experience with dental law.