Commercial leases are often drafted using a “one-size fits all” approach, and with some minor modifications, generally the same lease will govern all tenants in an office building, shopping mall, or strip plaza. While this may work for the typical office or retail tenant, it doesn’t necessarily work for specialized tenants - particularly healthcare - who are looking for space in those complexes.
As a lawyer and lease negotiator at Cirrus Consulting Group – a commercial real estate and tenant representation/lease negotiation firm for healthcare professionals across North America – it is my responsibility to review and negotiate the lease on behalf of our clients entering into new leases or working through the renewal process.
Through many years of working in this field, we have developed an understanding of what these professionals require out of a lease agreement that the standard form commercial lease simply does not provide. It is crucial that these clients be treated differently from retail or office clients, and that extensive analysis into the nature of their businesses is conducted to ensure that their lease will work for them. Here are some of the areas we pay critical attention to:
The use clause is often significant for retail tenants, and fairly insignificant for office tenants. Its importance to the medical, dental or veterinary client is something in between. What you should know is that the use clause should be broad enough to encompass the range of services that the client provides; for example, specialities of dentistry, such as orthodontics, which may not be covered by “general dentistry.”
Exclusivity is often of utmost importance to a medical, dental or veterinary tenant, particularly for start-ups. The nature of their business means that they serve a clientele within a geographical area, and another competing professional in the same centre can be detrimental to their business model. It is worth carving out an exclusivity provision for the specific services your client provides. This clause will be of greater importance to smaller communities and rural areas than to metropolitan centres, and of more importance to new professionals rather than those with established practices.
One of the most important elements of a medical, dental or veterinary practice are the trade fixtures. These are often comprised of expensive pieces of equipment, including x-ray machines, lighting, operation tables and patient chairs, and these pieces often far exceed the value of the fixtures a retail or office tenant may have. It is crucial to ensure that your medical, dental or veterinary tenant, firstly, maintains ownership over their fixtures during their tenancy and, secondly, can remove them at the end of the tenancy. These elements are often bundled into the sale of a practice, but if the Landlord can claim ownership, the doctor will be unable to sell them and your client is liable to lose hundreds of thousands of dollars. It will often be useful to carefully define what your client maintains are their trade fixtures, versus the Landlord’s definition of leasehold improvements.
As we have described, the sale of a practice is a critical element of the retirement plan for many medical, dental and veterinary professionals, and a sale is usually predicated upon the ability to assign the lease to the buyer. If a lease cannot be satisfactorily assigned, the value of the sale is greatly diminished. This is a point which greatly separates this type of client from office or retail tenants, who do not need to assign their tenancies as regularly and frequently as those in the medical, dental and veterinary field do. Assignment clauses in leases are generally structured to place great restrictions upon the ability to transfer the lease, often requiring new assignees to meet strict standards set out by the Landlord. The challenge we often face on behalf of the medical, dental or veterinary client is to make amendments to this clause which will make it easier in the future for their client to assign the lease when they choose to sell. This is especially crucial for the client who is in the later stages of their career, and may well be wishing to transition out of practice at some point during the term of the lease.
One might be tempted to renew for a short term, such as three to five years, thereby allowing their client to transfer the lease at the end of the term and walk away. But buyers generally want to step into a long term lease, and banks who are financing the practice acquisition often require at least ten years on a lease in order to secure a loan. The challenge will be to ensure that transferring the lease is simple, in a way which satisfies a buyer’s need for a long term, and which does not leave your client stuck with a ten year lease if the assignment is rejected by the Landlord.
Death or Disability
Medical, dental and veterinary tenants face enormous problems should something happen to them during their lease term; if they die or become disabled, they or their estate are potentially on the hook for the covenants of the lease for whatever remains of the term, including the rent. This can often be a crippling expense. These clients are seeking some form of security which would cap their exposure in the event of death or disability. We typically negotiate a clause into the lease which limits the number of months the individual or their estate remain liable for the lease, or a dollar value which the Landlord can recover before releasing the Tenant of their obligations.
These are but a few of the important clauses to examine with your medical, dental or veterinary client. It is a better understanding of the nature of their business which will provide you with success in securing the right kind of lease agreement for your client.
About the Author
Cameron Bryant is a lawyer and lease negotiator with Cirrus Consulting Group based in Toronto.