As a tenant, you expect to assign your lease at some point during your tenancy. Your ability is governed by subtle lease wording which controls whether or not you can:
1. assign the lease when the practice is being sold2. assign the lease to your professional corporation3. transfer tenant company shares when selling your practice or income splitting4. share your premises with an associate5. finance your practice
You will notice that “assignment” includes a broader range of conditions than you expected, and that you have or will encounter at least one of the above circumstances at some point during your tenancy. If your lease is not set up properly, any one of these provisions can prevent you from assigning the lease, therefore costing you the value of your practice.
CONSIDER THE FOLLOWING EXAMPLES THAT OCCUR IN ALMOST EVERY LEASE.
1. Assignment of lease when the practice is being sold, assigned to your professional corporation, or tenant company shares are being transferred by sale or income splitting.
The following Italicised wording is likely contained in your lease.
a. Landlords consent to assignment not to be unreasonably withheld. Typically, the landlord has the ability to consent to the assignment, and therefore can affect any one of the types of assignment as indicated above. Beware. A savvy landlord can and will withhold consent if the proposed successor is not equally substantial to the current tenant. Common sense says that your professional corporation or a much younger dentist has significantly less net worth than you do, so consent to assignment in this case can be withheld on reasonable grounds.
b. Tenant will pay the landlord standard assignment fees. A common sense interpretation is legal and administrative costs which are typically $3,500 plus HST. However, a number of the larger landlords are currently taking the position that the fee also includes a share of the practice sale value, justified as being its “standard” fee. In one case handled by my office, First Capital Realty Inc. required a “standard fee” of five per cent of the sale price which was $200,000 plus HST.
c. Tenant not released on assignment means that even though your lease has been assigned to your professional corporation, or to the person or company who buys your practice, the original tenant who is often you, is still responsible for all terms and conditions of the lease, even many years later when the practice belongs to someone else.
d. Landlord reserves the right to terminate the lease as an alternative to assignment is a provision which gives the landlord the option to terminate the lease instead of agreeing to assignment, which can and will destroy the value of your practice, since a practice with no lease has very limited value.
e. Landlord reserves the right to increase the rent on assignment gives the landlord the right to increase the rent on assignment, reducing the sale value of your practice by the increased rent amount.
2. Assignment of lease when the practice is sublet or shared with an associate.Your lease likely prohibits you from certain types of arrangements with associates such as renting chair time, or splitting treatment fees as these both may constitute a transfer of rights described by the lease to a third party.
3. Pledge practice assets as security for bank financing.Did you or your bank read your lease when your financing was set up? If not, your bank likely registered security against certain practice assets which is prohibited by your lease and you are therefore in default of your lease, which often results in certain rights such as renewal being withdrawn.
Most leases contain one of more of the above provisions.
IF YOU ARE A TENANT WITH AN EXISTING LEASE:
1. “Walk quietly and carry a big stick”.Know your lease. Have your lease reviewed to understand what your existing assignment clause says, and look forward to term renewal negotiation as an opportunity to adjust the assignment provision to protect your interest.
2. Retain capable representation.When you intend to assign your lease, hire an experienced negotiator with the ability and experience to understand what your lease says and how to administer your position.
IF YOU ARE CONSIDERING A NEW TENANCY:
Those who fail to plan, plan to fail. Retain a capable negotiator. Negotiate the assignment provision carefully. Often some circumstance that may happen in many years from now is given little attention, especially compared to the more immediate concerns such as how much rent is payable in the first year.