One of the most valuable assets of a health care practice is its location. If you do not own that location, it is extremely important that you secure the value of this key asset through a well-drafted medical office lease. To help you with this process, here are nine important points to keep in mind when negotiating a lease for your health care practice.
1. Remember That Everything is Negotiable.
Both landlords and brokers are notorious for telling prospective tenants that “everyone has signed this lease,” “it’s just a standard form,” or “no one ever negotiates my lease.” This simply isn’t true. Sophisticated tenants always negotiate their leases, and any term in a lease should be open to discussion. Remember that most leases are drafted by the landlord, and most landlords fill their leases with terms that are extremely favorable to the landlord, usually at the expense of the tenant.
2. Understand How Your Rent is Calculated.
To negotiate the best possible rent for your office space, you need to understand exactly how rent is calculated. Unfortunately, few people outside of the real estate business actually understand the arcane formula that is normally used to calculate the rent for office space. (Hint: You don’t just multiply the rent per square foot by the square footage of your space.) If you are not sure how office rent is calculated, take a quick look at “Why Your Office Space May Be More Expensive Than You Think,” to get yourself up to speed.
3. Measure Your Office Space Yourself.
Do not just assume that the landlord’s calculation of the area of your office space is correct. Have the space measured by a professional, such as an architect or interior designer, hired by you (not the landlord). You would be surprised at how often landlords overstate the area of office spaces, and, when they do, it can cost their tenants thousands of dollars in unnecessary rent.
4. Negotiate the Buildout of Your Space.
It is expensive to build out a dental or other medical office. Do not just assume that you have to pay for 100% of that buildout yourself. Landlords often pay for some, or all, of the buildout of a tenant’s space. Just how much a landlord will pay, and for what, depends on the particular market where you are leasing space. The best way to get a feel for what a landlord in your market might do for you is to talk to several landlords in your area and then try to negotiate the best possible deal, using what you have learned from these discussions.
5. Secure Your Future With Multiple Options to Renew.
Once you have completed an expensive buildout of your office space, you will want to make sure that you can stay in your new office as long as that makes sense for you and your practice. To accomplish this, you will need to include options to renew your lease after the initial term expires. Ideally, you should, through these options, be able to stay in your new location until you retire, but you should also, through these options, secure your space for a reasonable time after you retire, so that the health care provider who purchases your practice will be able to continue to operate in your current location, even after you leave.
6. Make Sure That the Assignment/Subletting Provision of Your Lease Will Not Stop You From Selling Your Practice.
Since the location of a dental or other medical practice is one of its most valuable assets, you should make sure that you can assign your lease to someone who purchases your practice. At a minimum, the assignment/subletting provision of your lease should provide that your landlord cannot unreasonably withhold, condition or delay his or her consent to the assignment of your lease. Better still is a provision that states that you do not need to obtain your landlord’s consent to an assignment of your lease, if that assignment is made in connection with a sale of your practice. Best of all is a provision that also states that you will no longer have any liability under your lease after you have assigned it to a purchaser of your practice.
7. Consider Requesting an Exclusive Use Clause.
If you are leasing space in a building with multiple tenants, you may want to include a provision in your lease that prohibits the landlord from leasing space in that building to your competitors. Allowing a competitor to operate in the same building could dramatically reduce your patient count and, as a result, reduce the value of your practice to a successor.
8. Do Not Rely on a Broker to Negotiate Your Lease.
Brokers are charming and gregarious people, and it is often easy to mistake a broker’s friendly demeanor for real friendship. The thing to remember is that a broker normally represents the landlord, not the tenant, in a lease transaction, which means that the broker usually does not represent you. Moreover, even if this is not the case, and you are using a broker to represent you in your search for space, keep in mind that, the more you pay and the more quickly you pay it, the more the broker is paid and the more quickly the broker collects that payment. This means that, as a practical matter, a broker has little incentive to negotiate hard to get your rent reduced or to argue, at length, about an issue that is really important to you, such as the lease assignment clause, if that argument will delay the execution of your lease and the payment of the broker’s commission.
9. Hire an Attorney.
The tricky thing about leases is that you can lose thousands and thousands of dollars and not realize it because there are so many leasing customs and practices (like the formula for the calculation of office rent) that are little known outside of the real estate business. Unfortunately, experienced landlords often take advantage of inexperienced tenants, frequently shifting substantial costs onto tenants that are usually paid by the landlord. I have, for example, seen tenants without lawyers agree to pay to replace expensive HVAC systems that are usually replaced at the landlord’s expense or agree to pay rent during the buildout period when that rent is usually abated. No matter how smart and well-educated you are, if you have not negotiated hundreds of leases in your career, you are no match for a landlord who has. Consequently, you should never go it alone. Level the playing field and hire an attorney who knows as much about leasing as your landlord does. If you do, you are much more likely to pay the right price, get the best deal and secure the best possible lease for your practice.
How The Gauthier Law Group can help: Ready to lease new space for your health care practice? The Gauthier Law Group can assist you with all of the legal issues relating to your new medical office lease, including drafting and negotiating your new lease, as well as any related letter of intent or work letter.
This article was written by Janice L. Gauthier, Esq. Ms. Gauthier has an A.B., cum laude, from Harvard University and a J.D, cum laude,. from Harvard Law School. She is a business and real estate lawyer and the owner of The Gauthier Law Group, LLC, a boutique business and real estate law firm that represents dentists, physicians, optometrists, chiropractors, veterinarians, and other health care providers in leases and other business and real estate transactions in the Greater Milwaukee, Chicago and Madison Areas, as well as in other parts of Wisconsin and Illinois. You can contact Ms. Gauthier at 414-270-3855, ext. 101 or by email. To learn more about Ms. Gauthier’s background and experience, please review her Google and LinkedIn profiles.
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