How Your Lease Agreement Impacts the Value of Your Practice Part 1

Your practice lease is likely one of the most significant contracts you will sign throughout your career whether you're operating or preparing a dental practice for sale so it's essential to ensure all clauses are properly structured.

Many dentists, veterinarians, and other professionals approach us when they are preparing to sign a new lease or renew an existing one, seeking advice on how the terms may influence the value of their practice. In most cases, leases are carefully drafted by the landlord's legal team to protect the landlord's interests, maximize their returns, enhance property value, and maintain full control over the tenant.

Below, we'll review the first 6 of the 12 key clauses that can impact your lease-and consequently, the present or future value of your practice:

1. Offer to Lease:

It is common for landlords or their representatives to request that you sign an Offer to Lease, often stating that it includes all essential terms of the landlord's Standard Lease. Typically, this offer will include a clause requiring you to sign the landlord's Standard Lease Form later, with the main terms inserted and any additional reasonable provisions added.

As a general rule, always request that the landlord's Standard Lease Form be included as part of the Offer to Lease. This helps avoid any unexpected terms when it's time to finalize the agreement. If you don't review it in advance or request necessary amendments, the landlord may later insist that you sign the Standard Lease Form as presented, without allowing any changes.

2. Demolition clause:

This clause gives the landlord the right to terminate the lease and remove the tenant in the event of demolition, renovation, or redevelopment. Demolition clauses can negatively affect the value of a practice as determined during a Dental Practice Appraisal, as they reduce long-term stability and viability. In some cases, lenders may refuse financing if such a clause exists-particularly when the purchase price exceeds $1,000,000.

Ideally, this clause should be excluded from your lease altogether. However, many landlords now include it and may be unwilling to remove it. In such cases, you can negotiate a postponement period to ensure the clause cannot be exercised for ten (10) years. This approach can satisfy both lenders and buyers, as many practice purchases are amortized over a 10-year period. Additionally, it is important to secure sufficient notice—ideally one year-so you have enough time to relocate if the clause is enforced.

3. Relocation clause:

A relocation clause should generally not be included in your lease. If the landlord insists on adding one, negotiate terms that require the landlord to cover all relocation costs and ensure that the new location is comparable in size and visibility. It's also important to secure adequate notice to allow time for planning and building out the new space.

4. Practice name:

Some landlords may require approval for the name used by your practice. In most cases, it should be sufficient to provide documentation confirming that the name complies with your professional College's guidelines.

5. Percentage rent provisions:

Certain retail leases include provisions where rent is calculated as a percentage of the tenant's revenue. However, this type of clause is considered professional misconduct under the guidelines of many professional Colleges.

6. Renewal options:

The duration of your lease term is crucial for both the stability of your practice and its value during a sale an important consideration for those looking to buy existing dental practices. Many lenders are reluctant to finance leases with terms shorter than 10 years, as most professional loans are amortized over a ten (10) year period. Shorter lease terms can reduce the overall value of your practice. It's important to stay on top of renewal or extension deadlines—missing the notice period can result in losing your renewal rights. It is strongly advised to negotiate additional extension options before exercising an existing one. Maintaining and extending renewal options whenever possible helps preserve the value and marketability of your practice.

So there you have it-the first 6 key clauses that can influence your lease and, ultimately, the current or future value of your dental practice. To learn about the remaining 6 clauses, continue to Part 2 (link to Part 2).

Alan Rustom