Lease Factors that Affect Dental Practice Value: Part 1

June 20, 2019


Your practice’s lease is probably the most important contract you will ever sign during your career – so it’s important to get your clauses in order!

Many dentists, veterinarians and other professionals will come to us when they’re about to sign a new lease or renew their current one, asking for our opinion about how the new lease will impact the value of the practice. Most leases are carefully written by the landlord’s lawyers in order to protect the landlord and maximize their profit and the value of their properties, as well as giving them full control over the tenant.

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Let’s discuss the first 6 of the 12 important clauses that affect your lease, and with that, the current or future value of your practice:

Offer to Lease: Oftentimes, landlords or their representatives may ask you to sign an Offer to Lease and claim that it contains all the essential terms of the landlord’s Standard Lease. The Offer to Lease would contain a clause for signing the landlord’s Standard Lease Form with the essential lease terms to be inserted, and any other reasonable terms to be made.

As a rule of thumb, always ask for the landlord’s Standard Lease Form to be a part of the Offer to Lease to ensure there are no surprises later on when the time comes to sign it. Without doing so, and without requesting any changes required to the landlord’s Standard Lease Form, the landlord may then take the position that you are bound to sign the Standard Lease Form as is and without any modifications.

Demolition clause: This clause allows the landlord to terminate the lease and evict the tenant in the event of demolition, renovation or redevelopment. Demolition clauses reduce the value of the practice, as it unfortunately decreases its viability and stability. Some banks won’t finance with a demolition clause, especially if the purchase price is over $1,000,000.

The smartest thing to do is to not allow this clause in your lease to start with. Reality though is, many landlords are now adding this clause and refuse to remove them.  In this case another option would be to request a postponement which will then guarantee that the demolition clause will not be exercised for ten (10) years. This would then satisfy the lending institution as well as the buyer since the purchase price is amortized over 10 years. Also, try to ensure there is adequate notice time (1 year is ideal) in order to give yourself time to find new premises should the demolition clause be exercised.

Relocation clause: There should be no relocation clause in your lease, but if the landlord insists on it, then negotiate that any relocation is at the cost of the landlord and the new premises will be of similar size and exposure. You should also ensure that there is adequate notice time to allow for the building of the new location, etc.

Practice name: Some landlords may request that any name used for the practice be approved by them. It should be sufficient that you provide documentation of proof that the practice name complies with your College’s guidelines.

Percentage rent provisions: Many retail leases provide for rent based on a percentage of the tenant’s revenues. This clause constitutes professional misconduct under many professional college’s guidelines.

Renewal options: The length of the lease term is critical for the viability and stability of the practice, as well as during a sale negotiation. Many lenders will not finance leases with terms of less than 10 years, since most professional loans are amortized over a ten (10) year period. Leases with shorter terms are likely to affect the value of the practice. Make sure you keep up with your renewal/extension requirements. If you miss the notice period, the option to extend or renew may be deemed void. It is strongly recommended that you seek additional extension options before exercising an upcoming option. Replenish renewal options whenever possible to ensure top value and marketability of your practice.

So, there you have it! The first 6 important clauses that will have an impact on your lease, and ultimately, the current or future value of your dental practice. To learn about the other 6 clauses, head to Part 2 (link to Part 2).

Let Meridian help you with your practice value. 

At Meridian, we are always happy to consult with you to ultimately help you attain the highest possible value for your practice. Please feel free to call or e-mail to discuss the value of your practice, as well as how we can maximize the sale price.

 The Dentist Guide

 

Lease Factors that Affect Dental Practice Value: Part 1