Premise Lease Negotiations

Surviving the Future: Manage Your Lease Affairs


Ian D. Toms


November 10, 2013

November 10, 2013

Life is a dynamic process. We are constantly remaking our future in the context of current demands. The more correct information we have, and the better we perceive and understand this information, the better our context is and the better decisions we make. Certainly a lease, being a complex summary of terms and conditions, requires a clear and broad understanding of all relevant information to be appropriately managed. This article considers four common mistakes tenants make when managing their lease affairs.

Sticker shockTenants renewing the term of their lease for the first time in 10 years may be in for ”Sticker Shock” – the shock of finding that rental rates have increased significantly. For example, one clients rent increased from $25 to $41 per square foot one year to the next, which increased his rent by $1808 per month, even though the new rate was below fair market for the space.

Real estate value and therefore the rental market has increased dramatically over the last 10 years because the cost of development has increased dramatically which in turn increases rent. Real Estate Investment Trusts now dominate the landlord market and strive to improve return on investment by increasing rent. Retailers, and in some cases dental practices themselves, are bidding against each other for space in certain markets driving demand for space and therefore rent. Landlords, like savvy tenants, are collecting and using true and comprehensive data to guide their decision making.

To manage your position, decide whether your shock is justified. The StasCan Consumer Price Index for Toronto shows all items increased on average two per cent per year from 2002 to 2012. Even with increased rent, your position is neutral if your production and rent increased by the same rate over this period.

To respond to Sticker Shock appropriately, clearly understand your position and formulate your strategy to minimize the rental rate increase by managing your position.

Detail DementiaMany tenants suffer from “Detail Dementia” which is a paralyzing and potentially fatal disability. Symptoms include stress, fear, confusion, anxiety, hopelessness and depression. This disease most often strikes those who are intense detailed thinkers, those with incomplete data and/or an incorrect perception of data, micromanagers, do-it-yourselfers, or those throwing money at perceived problems. In any case, the result of Detail  Dementia can be paralysis or flawed decision making, both with potentially disastrous results.

A tenant spent many years believing that his landlord was overcharging and otherwise abusing him, and as a consequence spent several thousand dollars in professional fees to negotiate a new lease at a new location, which move was irrational in the first place because an objective analysis of his existing tenancy showed that there was no abuse.

He ended up wasting all that energy and money planning to move to a new location whose landlord would absolutely have been abusive. His decision to proceed with relocation in the first place was based in appropriate fear.

Stay or LeaveConsider relocation periodically by completing a “Stay or Leave” analysis which compares the cost to stay where you are to amortized construction plus rental costs to relocate. Correctly completed, the Stay or Lease answer is obvious.

If you know your practice sale value is impaired by the cost to relocate, it may be less costly in the long run to relocate to a new 20 year tenancy now than to renew an unstable lease.

Bang for the BuckSometimes you don’t need a sophisticated analysis or overbearing professional to determine whether your rent is appropriate. If your rent net of HST and utilities is less than five per cent of your gross production, then your rent is OK. If your rent is more than five per cent of production, then it’s time to look for ways to improve “Bang for the Buck”.

Would production stay the same if you dropped the size of your practice and therefore rent? Would subletting extra space to a complimentary practitioner lighten the load? Have you had your lease audited to make sure you are only paying for what you agreed to pay for? Can you use your premises facilities to increase your new patient traffic and therefore increase your production?

Do not rely on your own perception; delegate lease matters to an objective and qualified lease advisor. PA