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Dentists have unique office space requirements, making dental office lease renewals difficult. How many other tenants drill chairs into the floor and have a sink in every room? This substantial investment into equipment and tenant improvements can lead to landlords trying to charge premium rental rates on commercial lease renewals.
Here are the 5 common mistakes dentists make in their dental lease negotiation.
Most commercial tenants are guilty as charged on this item. Unlike residential real estate, most jurisdictions do not protect the commercial space user on being able to stay in their space at the expiry of the lease. It is more accepted to make a business homeless than a person.
In other words, it is just not an automatically protected item for them. Our findings show that 64% of dental office leases do not have a right to renew.
Here is why:
Most businesses on their initial lease will ask for a 5 year lease term with an additional right to renew the lease for another 5 years. That is the case if they ask for it - if it does not occur to the tenant to ask, then the landlord usually does not offer.
By the time the lease comes to the expiry date, most tenants have forgotten if they negotiated a renewal right or not. In the case of a 5 year, plus a 5 year extension right, typically the extension right is extinguished during the last 5 years, leaving the dental practice with no further right to extend.
In many cases if there is a positive relationship between the dentist and the landlord, a new deal can simply be worked out, but the dentist has no protection to automatically renew the lease - the landlord is free to rent the space to any other tenant. This can be a problem when there is an expanding tenant that may want more space and can compete for the dentist's premises.
A fixed right to renew pegs the extension rental rate, so it is an amount that is locked in and cannot be negotiated.
The advantage for the dentist is price protection. It also makes the renewal process simpler - there is no price haggling.
If a dentist has a renewal right but it is at fair market value, that is still better than not having a renewal right, but the landlord may just be able to force the dental practice out by providing an outrageous number for the "fair" market rent.
You then go back to the landlord to ask for a fair rate, and this happens...
An arbitration right is the equalizer to having an unreasonable "fair market" price provided by the landlord.
Although having a renewal right without an arbitration clause is better than no right to extend at all, a renewal right without an arbitration right still allows the landlord to be unreasonable. That is because there is no "policing" of the landlord's opinion of what fair market is.
Normally the arbitration process is that both sides pick arbitrators and if they cannot work it out then they jointly pick another arbitrator and all costs are split equally. Learn more about it in this post: Do Not Exercise Your Option to Renew.
Medical users are more guilty of this than conventional office, retail and industrial tenants because they tend to have many more meetings (appointments) throughout the day.
This does not leave enough time to actively search competing properties. How are you going to have a successful dental office lease negotiation if you have not scouted out the competitive leverage?
The golden rule about negotiating a dental office lease is that the side that cares the least is normally the winner.
As a general rule every landlord treats existing tenants as captive until proven otherwise. In the case of retail tenants, this is especially true since the physical location is such a meaningful component to the success of the business.
To overcome this, businesses must get actively excited about the possibility of moving their location (if just for the purposes of posturing). The landlord must be made aware that the business can still retain a large piece of their clientele through brand loyalty even through a relocation, and that a new site may offer substantial perks.
Although most tenants do not want to go through the hassle of relocating their business, they should create a credible case that such a move could be worthwhile.
By going through this strategic exercise there may surface some legitimate alternatives that are either lower rent, a better location, more space or all of the above.
BONUS MATERIAL - THREE MORE TIPS
This is why we have corporations to begin with.
Especially if the landlord is not funding any leasehold improvements or providing free rent, or paying broker fees, do everything you can to avoid a personal guarantee.
A creative way around this is to commit to a larger deposit than the industry standard two months. We would suggest having that deposit apply to rent closer to the beginning of the term than the end.
For example, a 4 month deposit could be applied to the first two months, the 13th month and the last month of the lease term. For a complete guide on personal guarantees, check out this post.
Although this can be difficult to remove, it is expensive to demolish your space to a base building shell at the expiry of the lease. A clause like this is typically a $5 per square foot (or higher) cost.
Ensure that your offer has the following wording:
The tenant shall not be obligated to restore the premises to a base building condition at the expiry of the lease and the landlord shall accept the premises in an as-is condition.
Does your space need some renovation? Most landlords are willing to contribute a tenant improvement allowance, so why not ask for one?
If you require further help, we are happy to provide a dental office lease review with a 24 hour turnaround time.
Additional Resource: online community for dentists.