Premise Lease Negotiations

The Changing Tenancy Envrionment


Ian D. Toms


February 23, 2013

February 23, 2013

Most dental clinics operate in leased premises. By leasing instead of owning, tenants are able to practice in properties without tying up millions of dollars in real estate. Collective tenancies provide a synergy with adjacent businesses, and the tenant can stay or leave on a periodic basis. On the other hand, the property owner is “the lord of the land” or landlord. Most landlords consider real property ownership a long term investment. The landlord and tenant exchange certain property rights for rent under a lease agreement.

The name of the tenants’ game is to exchange the lowest rent for the most property rights and privileges. The problem is that the bargain which made sense at the beginning of the tenancy may not make as much sense as time passes. Circumstances change and certain lease terms may become inappropriate. The lease does not change, the circumstances do, such as noted in the two illustrations.

Since time has passed when your practice lease was negotiated, your tenancy is being progressively affected by changes you need to know about.

First, real estate values and therefore rent are increasing significantly. Canada’s economy and political system is considered very stable, and our banking system is regulated in a way that protects real estate investment. Canadian real estate is available for private purchase at relatively modest prices compared to many countries. Therefore Canadian real property is a globally sought after investment commodity.

Secondly, the same banking system that provides the stable economic environment for real property ownership, and provides relatively low cost financing for practice purchase financing, has recently begun to decline  inancing arrangements involving leases containing certain provisions. Leases without adequate term plus option length, demolition, relocation, or impaired assignment clauses can be problematic.

Third, landlord and leasing agent sophistication and aggression has increased significantly especially during the past two to three years. Many leasing representatives now hold a graduate degree in finance, business  administration, or real estate. These people have many years experience and training concerning lease nuances and technicalities, and the psychology of lease negotiation.

Parking was free when the lease was signed;patient reimbursement now costs the tenant severalthousand dollars per year.

Fourth, the way lease provisions are interpreted and administered is changing, largely because of the increased real estate values, landlord sophistication, and banking requirements in the context of changing property use and demographics. For example, the industry standard Dye and Durham form 650 lease, which has been the standard “off the rack” lease for more than 50 years, is just now being a reason for bank financing failure because the probability of early termination due to redevelopment is now a real possibility. If this clause is present, the bank may not finance the practice, because if the landlord wants to redevelop the property then the tenant will have to relocate at great expense on short notice.

What do these changes add up to for the tenant? Potentially nothing. But because of the changes listed above, lease clauses which have been dormant since the lease was written will under certain circumstances become toxic. And some of these toxins can be fatal. The process to remediate a toxic lease ranges from a lease renegotiation to a relocation, with associated costs ranging from few thousand, to a hundreds of thousands of dollars.

The practice that was located to this site needed to move, in a hurry, and at a cost of almost $500,000.

Common lease assignment clause impairments permit landlords to:

a. Take a portion of practice sale proceeds,b. Increase rent on assignment, therefore reducing the sale value of the practice,

c. Charge outrageous fees to “process” the lease assignment,

d. Prohibit tenant financing against premises assets, or

e. Terminate the lease instead of agreeing to lease assignment.

Commonly, leases have limited term length which prohibits financing, or forces a tenant to relocate.

a. A demolition clause enables a landlord to terminate the lease if and when it wants to remodel or redevelop the premises or property.

b. A relocation clause enables the landlord to force the tenant to move within a development, often at tenant’s expense.

c. Banks may not finance leases without term renewal options.

Not you? Think again. If you have signed a lease within the past five years, or have a Dye & Durham form 650 lease, or your landlord is RioCan Real Estate Investment Trust, SmartCentres, First Capital Realty Inc., Bentall Kennedy, Oxford Properties Group, Dundee Real Estate Investment Trust, Morguard Real Estate Investment Trust, The Cadillac Fairview Corporation Limited, NorthWest Healthcare Properties, Ivanhoe Cambridge, H&R Real Estate Investment Trust, Crombie Real Estate Investment Trust, among many others, your lease very likely has at least one very serious problem.

The net result of a tenant discovering one or more of these toxic clauses is like finding out they have a potentially fatal genetic disorder. The implication of the clause is often not triggered until a specific event involving the lease such as a proposed practice sale, or a landlords triggered redevelopment.

Like most diseases, early detection and treatment can save many lives. Identify toxic leases before you sign. Have existing leases scanned for toxins and set up a treatment plan. PA