When your clinic is located in leased premises, you have to remember that your lease controls the relationship between your landlord and many aspects of your practice including sale value. If the lease is impaired, the practice is impaired because the landlord, not you, has control. Tenants must work diligently to manage their premises’ lease to maximize flexibility, minimize risk, and protect their interests.
The current leasing environment is unfriendly to tenants. Tenants must negotiate with well-educated, seasoned negotiation experts in markets where there is no alternate space available and very little or no negotiating leverage. Unfortunately, most tenants do not know or understand what the terms of their leases are, mean, or how to negotiate in a hostile environment until it is too late. Once committed, a tenant cannot relocate because he/she is committed to a lease, relocation is too expensive, and there are no other suitable locations.
The first step in gaining control of your position is to be aware of key elements of the lease. Then, whether you are managing your lease, buying an existing practice, negotiating a lease for a new practice or renewing an existing lease, you can make sure each issue is negotiated and worded properly in the lease.
Key Elements
Tenant. The “tenant” may be a person or persons, a company or companies, or any combination of these entities. Be careful here to minimize risk by limiting any personal obligation. Ensure that the “tenant” is chosen to enable assignment of the lease when selling the practice, and the tenant’s liability is limited following a sale.
Rent. Rent is related to the size of the clinic and is subject to market conditions. To determine whether your rent is reasonable, you need to know the rental market. A wise tenant understands that a high rent may be the cost of doing business in an exceptional location and will also know exactly how their rent is calculated, what costs are included in rent, and how the rent is set in renewal options.
Term. The term of the lease is the length of time the tenant can stay in the premises. Frequently, the term may be renewed or extended under certain circumstances. It is critical that the term plus renewal option period in total be long enough to accommodate the life span of the practice. The life span of the practice includes the length of time you wish to practice, plus the time for your successor to practice which could total 60 or more years. Since it’s unlikely that a landlord will commit to more than 20 years, tenants are faced with challenging lease negotiations concerning issues such as no renewal options, early lease termination for demolition, or options to renew which are not assignable. Any one of these issues can and will seriously impair the value of the practice.
Premises Use. Your lease should clearly state both the planned and the potential uses of your premises, and that no other premises in the same development can be used for the same use. A broad use clause permits you to change use over time on an “as needed” basis. The exclusivity clause protects your practice by preserving your patient population.
Lease Assignment. Your ability to assign the lease determines your ability to sell your practice and retire. In short, the assignment clause controls the value of your practice. Your assignment clause should not permit the landlord to take proceeds of practice sale, remove tenant rights such as exclusivity or options to renew, permit the landlord to terminate the lease instead of agreeing to assignment, or provide the landlord with the option to replace the existing lease.
Premises Size. Premises size determines rent cost. Understanding how the premises is measured for purposes of rent calculation is critical. Make sure you do not pay for space that does not exist, or a disproportionate share of costs.
There are many other lease issues which can and will impair the value of your practice. In this leasing environment, it is critical that you retain a professional who is capable of effectively negotiating with the landlord. It is also imperative that tenants have a realistic expectation of lease negotiation outcomes and understand how to maneuver to enjoy the best possible position of leverage.
I
an D. Toms, B.Sc. (Hons) is President and Broker of Record, Realty Lease Consultants Inc. He has more than 30 years of lease negotiation experience, has been a multi-unit tenant and is a landlord. He can be reached at 877.216.1013 or at iantoms@realtyleaseconsultant.com
