Commercial Leases – What Doctors Need to Know
If you own your own medical or dental practice, but not the building in which it is located, you have likely encountered the dreaded commercial lease. The commercial lease is legalese in its purest form: 25 or more pages of byzantine, sometimes incomprehensible lawyer-speak that can make even some lawyers’ heads spin. Although people can (and actually do) write entire books on dissecting and explaining the commercial lease, and although you should always have your commercial lease reviewed by an attorney, below are some key concepts you should understand when entering in to a commercial lease:
- Gross Leases Versus Single Net, Double Net and Triple Net Leases
Commercial real estate rental rates are usually based on a dollar figure per square foot, per year. However, what may seem like a good deal may carry substantial hidden costs, depending on the type of lease you have. There are three categories of expenses that landlords often shift on to their tenants, and which are often included on top of the base rental rate: (1) property taxes; (2) insurance; and (3) maintenance, including common area maintenance (CAM) expenses.
In a true gross lease, all of these expenses are included as part of the rental rate and are paid by the landlord. In a single net, one of these categories will be paid by the tenants, in a double net lease, two of them will be paid by the tenants, and in a triple net lease, they will all be paid by the tenants. In multi-tenant buildings, each tenant’s share of the expenses will usually be apportioned pro rata, based on the total leased square feet of the building.
These terms can also have significant variations. For example, some leases will have “expense stop” provisions, under which the landlord will pay for expenses up to a certain ceiling, and then the tenant is responsible for any additional expenses. Others will lock in the pro rata share of tenant expenses, so you will not be left paying significantly higher expenses due to vacancies. However, it is important to know what your lease provides because the triple net expenses can easily add thirty percent or more to the amount of the rent paid under the lease.
- Relocation Clauses
If you are in a multiple unit office building, beware of the relocation clause, especially if you have just committed to a multi-year lease because you like the office’s location. Some leases give the landlord the ability to force you to relocate to another unit in the same building, sometimes with little, if any, compensation. In most cases, you will want to negotiate to remove the relocation clause. At a minimum, the lease should require the landlord to pay for the move and any associated costs, like build-out expenses and signage.
- Assignment and Subletting Clauses
In addition to being your business, your practice is also an investment. As with any investment, there may come a time when you want to sell it. It could be that you are ready to retire, the market conditions may be favorable, or you may just want to give up the headaches and demands of ownership and focus on clinical practice. One of the major components you sell when you sell your practice is goodwill, and keeping the practice in the same location is critical for maintaining goodwill.
Therefore, you will want to ensure that you will be able to transfer the lease to a potential buyer. Although the landlord will insist on being involved in any lease assignment, you do not want the landlord to serve as a roadblock to the transaction. The lease should include language prohibiting the landlord from unreasonably withholding consent to an assignment, and you may want to include provisions requiring the landlord to respond to proposed assignments within a specified period of time to prevent a deal from being lost by the landlord dragging his feet.
One very important reminder about assignments and practice sales: if you sell your practice, you will want to ensure that you also transfer any personal guaranties to the buyer. You do not want to be stuck guaranteeing a lease for a practice you no longer own.
- Notice and Cure Provisions
Some leases contain provisions that allow the landlord to take drastic action, such as draconian fines or even eviction, for minor violations of the lease or for any late payment of the rent. Although in practice, landlords usually overlook these minor violations in order to keep the space occupied and the tenant happy, the inclusion of harsh and immediate remedies in a lease can be problematic. For example, if the landlord finds a potential tenant who will pay a higher rent, they can use these provisions as a pretext to try to evict you.
Therefore, it is best if the lease includes a provision requiring the landlord to notify you of any breach, such as the failure to pay rent, and give you an opportunity to cure that deficiency. That way, if your rent payment gets lost in the mail, or if you violate some small provision of the lease without realizing it, the landlord has to give you a chance to fix the problem, and can’t simply force you out.
Commercial leases are often incredibly long, complex and confusing documents, and these are just some of the potential trouble spots that you can find in them. You should review the lease with your attorney and real estate agent to ensure that you are comfortable with its terms before you sign a document that could bind you for the next ten years or more.