What Dentists Can Do Regarding Office Space Leasing Agreements – August 2007

Office space leasing agreements are complicated documents that require a lawyer to negotiate and draft the details. But in seeking an office space for locating a first dental practice or the transfer of a dental practice, there are certain aspects of the site and the prospective lease that a dentist should be aware of when looking for a site on their own or with another location specialist such as a realtor. Preliminary negotiations by asking the right questions of prospective landlords can eliminate time and frustration when finalizing a decision to lease a certain property for the use of a dental practice. Below are just a few of the areas that must be covered in these preliminary negotiations.

Rent and Control: Needless to say, the amount of the rent must be accurately stated as to amount and frequency of the rental figure. Additionally, the dentist needs to find out to whom the rent is payable and where the rent should be sent. The dentist should inquire as to whether the property is being subleased by a different lessor or larger group than the original party being dealt with. Can the dentist rely on all the statements made by the prospective landlord to be true and will not be changed by another entity when the lease is actually signed?

Common Areas: The dentist needs to find out the details of the common areas of the location such as a strip mall or other area where other tenants are involved. How many parking spaces will be available for the exclusive use of the dental practice or are these parking places going to be shared? Will signage be allowed to confirm this exclusivity of parking? Also is there room for negotiation as to more parking spaces reserved by the dental practice as the practice grows?

Maintenance: The landlord must agree to put in the lease specific language about repair and maintenance of the property. This language can be preliminarily set up by a thorough inspection of the property as to lighting, plumbing, electricity, ceiling panels, carpet, preexisting fixtures, air conditioning, heating systems, foundation, interior walls, and painting or repair of the exterior of the building. Make a note of every question asked in this inspection for future insertion in the lease.                                                                      

Signage: The dentist must ask the prospective landlord what control over and responsibilities for signage will exist in the lease. The initial items to be included are who will pay for signage erection and maintenance. Also there must be a consent form allowing the dentist to place signs of specific types on the property.

Overall, there are preliminary steps the dentist can take to be able to find out which landlord will be amenable to signing a particular lease agreement which will be suitable for the dentist’s need for a rental property for the practice. These are just a few of the areas that should be covered before the actual lease is negotiated and prepared by attorneys for the dentist and the landlord. Call Hatch Legal Group for assistance in the details of the negotiating process and the signing of the leasing agreement.

Dental Practice Leases and Foreclosures – June 2008

In these difficult financial times when foreclosures are becoming more and more common, dental practices with commercial leases may experience the possibility of losing their leases created by the lessors who are threatened with foreclosure on their property by lenders. This happens when there is an often inserted clause in their leases that subordinates their rights to the rights of the lender who is the primary lien holder on the property. However there are ways to prevent adverse actions taken by a lender to foreclose on commercial property leased to the dentist.

For practices with leases that are due for renewal or for practices initiating a new lease on a dental practice property there are specific clauses that should be included in the new lease and possibly a separate agreement with the lender. A non-disturbance right of possession clause should be written into a lease that allows a dental practice to continue to remain in possession of the property in spite of foreclosure upon the lessor if rents are being paid and no other parts of the lease are being violated. Since it is a common practice for dental practice leases to have subordination clauses, the right to non-disturbance should be contractually negotiated with the lessor as well as with the primary lender. During times such as a period of recession, the lender may be definitely willing to negotiate such a clause to protect itself against losing a valuable tenant who may be paying higher than the going rate for rent. Most lenders will require that there be an “atonement clause” so that the lessee will abide by the terms of the lease as the lender becomes the lessor and new owner.

Another clause that should be considered when negotiating a lease during an economy when foreclosures are taking rent commercial properties is readily available. This would allow the practice to relocate or negotiate for a lower rent in the existing location with the lender or a new lessor if the lender foreclosures on the mortgage of the property.

In addition, a non-disturbance clause in a lease of a dental practice should consider the possibility of a new lender when a foreclosure takes place. In this case, the dental practice should expect not to be dispossessed of the premises if it has performed all its obligations under the lease. Additionally, this clause should take into consideration that the practice has expended money for improvements and may not relocate without losing a significant amount of investment in the property.

A related topic to foreclosures and dental practice leases are the covenants against lien provisions that protect landlords against subcontractor liens for dental practice work done on the property or office that is the subject of the lease. The landlord will most probably require that there is an automatic trigger of a default on a lease as soon as it discovers the lien exists on the property which is the subject of the lease. In most of these situations, the landlord pays off the lien and seeks reimbursement from the dental practice owner in the form of higher rent for the next period.

To protect a dentist from defaulting on his/her lease when there is an actual question as to the validity of a mechanics lien by the subcontractor, there should be a rewording of the covenants against liens terms so that the dentist lessee is allowed a longer amount of time to investigate the validity of the lien. The dentist often questions the validity of the lien when there is a dispute over the quality of the work done on the office. The terms usually negotiated by the dentist’s attorney in this situation are an extension of ten days before default on the lease in which the dentist has the time to initiate legal action against the subcontractor regarding the poor quality work.

Protecting Trade Fixtures in Commercial Leases – December 2008

Trade fixtures or dental office equipment that are attached to the dental office premises are some of the most important investments dentists make in their practice, and it is essential that they are the object of particular language in commercial leases that dentists take on to start or continue their practices. Often the landlord will present the dentist with a standard lease, hoping that it will be signed without many changes. Since these leases are skewed toward the benefit of the landlord, the dentist and his or her attorney must be careful to have certain language added to result in a reasonably favorable lease for the dentist.

It is important for the ability of a dentist’s lender to have security for any loans taken to improve an office, buy a new office, or for any other reason the dentist may need additional funds. The lender often will ask for this security on trade fixtures as a part of the loan agreement. In that case, it is important that the dentist be able to assure the lender that it will have the right to repossess the fixtures if there is a default on the loan. For this reason, the dentist must negotiate a landlord waiver of any primary right to put a lien on the trade fixtures in case there is a nonpayment of rent.

The lessee must have a clause in the lease which allows for an alteration of the premises to include new trade fixtures and other changes in the existing trade fixtures. If this is not added to the lease, the dentist might run into difficulty with the landlord in any case where there is a necessary change or expansion of the practice to include a new associate or associate with different trade fixture needs.

A surrender of the premises provision is a standard part of leases and requires the dentist to remove items from the premises or return the premises to its original condition upon the termination of the lease. The appropriate clauses include language that details which items may be removed from the premises, which items may not be removed, and which items the landlord may require to be removed from the premises. The landlord may be expecting to have a new tenant that is also a dentist or specialist, or a tenant that has a totally different business that will be located on the premises.

Another clause that must be recognized by the negotiating attorney for the dentist is a holdover clause. This is sometimes the least negotiated and most ignored part of a commercial lease for dental practices. The holdover clause from the landlord’s point of view stipulates that when the lease ends there is a penalty for the lessee remaining on the premises past the date when the lease expires. Often the penalty can be 125% to 200% of the existing rent. Remaining on the premises can often happen when negotiations for a new office are not finished in time for fixtures to be transferred to the new office before the end of the lease. While the higher rent may not be a burden to the departing dentist, a landlord may try to charge the old tenant monies that a new tenant is losing by not being able to take over the premises immediately after the old lease expires. There must be inserted in the lease language that states that the holdover rent is the

only recourse the landlord has against the dentist if the holdover is required. Additionally, the insertion of a reasonable grace period of 30-60 days for the penalties to apply, thus preventing a protracted holdover, is a good provision to add to the lease.

The topic of subleasing the premises by the dentist is an important part of the lease. The dentist may want to sublease excess space to a different dentist who installs new trade fixtures, thus taking advantage of increasing the value of the leased premises. The landlord should not be able to insert a clause that requires that consent from the landlord be obtained for all subleases. Language that states that only a reasonable consent must be required, or no language at all regarding consent, should be negotiated.

A commercial lease is one of the most important documents a dentist may sign in his or her career, and it is essential that one of the most important investments in the dental practice, the trade fixtures that are used on a daily basis, be taken into consideration in negotiating many parts of that lease.

How to Lease Dental Equipment Effectively – May 2010

Dental equipment, including everything from dental chairs to autoclaves, can be an expensive part of ownership of a dental practice, and effective use of alternatives such as leasing equipment are important to the growth, stability, and modernization of every practice. Leasing equipment has the advantage of being able to use capital effectively, without a costly down payment, with deductible regular payments and other tax benefits, and without the lengthy and sometimes difficult approval process for bank financing, and with an important aspect of being able to keep up with the latest technology without significant expense.

There are a number of different types of leases that are available to fit needs for financing, obtaining good tax breaks, and upgrading technology in your office. Probably the most popular type of lease is the “True Lease” which has lease payments of generally 10% or more per year with a residual option to buy out at the end of the term. It is one of the more common commercial leases, with the ability to deduct rent payments at the end of each year, and then purchase the equipment at a set time at the fair market value (an Internal Revenue Service Code requirement), with an ability to capitalize the purchase at the time of decision to take the option. This is a lease which allows dental offices to modernize their equipment every three years or so, with the option to buy the items if the equipment seems to be retaining its value   with time. The $1 buy out lease is used with equipment or such items as software with larger implementation or installation costs, and the interest part of the lease and depreciation can be deducted and the asset and lease capitalized. A third option is the technology wrap around lease, which allows a dental practice to keep up with technology by upgrading without any additional cost and before the term ends.

The tax consequences and benefits of leasing must be weighed in making the decision to lease or buy, with the I.R.C. Section 179 benefits of deduction of 100% of the monthly payments an attractive alternative. There must be a consideration of what the option to purchase is as a percentage of the cost of the equipment as the lessor must maintain a 20% interest in the leased item until the end of the term in order for the transaction not to be determined to be a “conditional sale” by the IRS.

An owner of a dental practice should consider several different aspects of the terms in the lease in order to gain full benefits of the use of the equipment without some added headaches that may prove to be costly. For instance, it is important to sure that there is an adequate warranty on the equipment, there is a repair clause which will allow for repairs by reputable dealers or private service companies without any or much cost, and particularly without delays which would seriously impair the smooth continuation of the practice while the equipment is being fixed. Replacement parts must be readily available, and perhaps a clause inserted which would allow for replacement of portions of the existing equipment with technologically upgraded parts. Exit terms must be clearly laid out, for if the dental practice happens to leave the site, closes, or needs to change its equipment drastically for any reason, the owner dentist must be able to leave the lease without paying too high of a cost or facing a breach of contract action. Look to see if there is a default provision which allows a cure of the default with makeup payments within a certain period of time, for example,10-15 days, and written notice of any late payments or breach of obligations of the lease. For more complicated equipment, how training is to be accomplished and by whom should be taken into consideration. A forward looking lessee often includes a section on renewal terms of the lease, whether the renewal terms are based on a fixed amount, or if the terms are gauged according to a predetermined rate, such as the Consumer Price Index.

Overall, the leasing of equipment, rather than purchasing, can be a most beneficial part of the overall plan of improving the practice. Consider when making the decision the overall financial situation of the practice and needs for capital and whether the dealer or lessor is making the estimate of lease terms and/or purchase price based on the retail cost of the equipment or what the lessor could actually get in a sale. Finally, get quotes from the dealer about the price of purchase versus the price of leasing for comparative purposes in order to make an important financial decision such as how to obtain the expensive equipment required to run a practice efficiently, effectively, without undue costs, and with an eye towards keeping up with technological advances.