June 19, 2023
Dental Office Leases
By Patrick Stanley
One question we often hear from dentists looking to start or relocate a practice is “what do I need to know about dental office leases?” This is an important question. Dental office leases are long-term commitments, typically lasting between five and ten years. Lease expenses are also a significant portion of the dental practice’s budget. However, many dentists know very little about the leasing process and the terms that can have a critical impact on their practice. If you are about to enter into a long-term lease, you should always have your commercial lease reviewed by an attorney, but here are just a few of the key questions you should consider:
What Is A Triple Net Lease?
A triple net lease is a type of lease that allows the landlord to pass the costs of property ownership onto the tenant. There are three categories of expenses that landlords often shift on to their tenants: (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. With 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. In a triple net lease, they will all be paid by the tenants. For multi-tenant buildings, each tenant’s share of the expenses will usually be apportioned pro rata.
Single and double net leases are fairly uncommon. Most dental office leases in Arizona are either triple net or gross. However, even within these two categories, there are often variations. For example, some leases will have “expense stop” provisions, under which the landlord will pay for expenses up to a certain ceiling. Others will will cap the increases in the triple net charges to a certain percent increase, year-over-year. Still others will cap some, but not all, of the expenses through so-called “controllable operating expense” provisions. 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.
Why Is The Landlord Asking My Spouse and I To Sign A Personal Guaranty?
Typically, the actual tenant under the lease will be a corporation or limited liability company you have created. Most landlords require a personal guaranty, especially for new practices. If the landlord doesn’t have the personal guaranty, it may not have any way to collect rent if the practice goes out of business. The personal guaranty provides that if the LLC or corporation doesn’t pay the rent, the landlord can come after you personally.
Your spouse will often be included as a personal guarantor because of a wrinkle in Arizona law. Arizona is a community property state and under A.R.S. Section 25-214, the signature of both spouses is required in order to bind the marital community under a guaranty. So, if the landlord doesn’t get the signatures of both spouses on the guaranty, the landlord will only be able to collect against one spouse’s separate property.
Can I Get Out Of My Lease If I Sell My Practice?
This likely depends on the lease language and the financial strength of the buyer. One of the major components you sell when you sell your practice is goodwill. Keeping the practice in the same location is critical for maintaining goodwill, so you will want to do everything you can to be able to transfer the lease to the buyer. This process is called assignment, and all dental office leases will have an assignment and subletting clause.
Landlords are often very reluctant to agree to give the tenant the right to freely assign the lease and release you from any further liability. After all, the landlord made the decision to lease to you, based on your credit history and net worth. The landlord will not want you to be able to transfer the lease to a new graduate with no experience and hundreds of thousands of dollars of student loan debt.
A lawyer can use some language in the lease to make it easier to assign the lease to a buyer. For example, the lawyer can craft language to automatically transfer the lease to a buyer with a sufficient net worth. Alternatively, a lawyer can include language in the lease prohibiting the landlord from unreasonably withholding consent to an assignment. You also want to include a requirement that the landlord respond to proposed assignments within a specified period of time. If you sell your practice, you also want to confirm that you are released from any personal guaranties. Otherwise, you could be stuck guaranteeing a lease for a practice you no longer own.
What Terms Should I Consider In The Lease?
Some of the key terms you may want to consider when negotiating a lease include:
- Renewal Options. You may want to have one or two five year options to renew. This will ensure that you can stay in the space beyond the initial lease term. Remember that there will be a window during which you have to exercise the renewal. This is typically between six and twelve months before the lease expires, but can vary.
- Tenant Improvement Allowance. Many landlords will offer an allowance for you to build out the office. In order for the landlord to pay the allowance, though, you may have to follow certain steps. These can include obtaining lien waivers from contractors and permits from the city.
- Signage. Visibility can be key to building a successful practice. You should check to make sure that the lease allows you sufficient signage so that new and existing patients can find your office. If the building has monument signage, you should check the lease to see if you can put your business name on it.
- HVAC. The lease should spell out who is responsible for maintaining and, if need be, replacing the HVAC system. Landlords often require the tenant to perform regular maintenance on the HVAC system through a licensed contractor. Sometimes landlords will agree to cover part or all of the cost if the system needs to be replaced. If the landlord won’t agree to that, it may be willing to pay the upfront cost of the HVAC system and have you repay it over time as part of the operating expenses. Regardless, this is a term that should be addressed in the lease.
These are just a few of the considerations to keep in mind before signing a lease. If you have questions about dental office leases, please feel free to contact one of our attorneys directly.
This post is for informative purposes only and should not be used as a substitute for consultation with a licensed attorney. It provides general information and a general understanding of the law, but does not provide specific legal advice. No attorney-client relationship is created by the posting of this information. If you have specific legal questions after reading this post, you should contact a licensed attorney.