Your lease agreement represents one of the largest overhead bills for your practice. With that in mind, due diligence in every facet of the lease agreement and property location is a major key to your practice's success. We've covered many of the main points you need to consider in previous blog posts, giving tips for negotiating, discussing the option to buy clause, and going over the relocation clause, exclusivity clause, right to assign clause, and recapture clause. In today's blog post, we'd like to discuss the option to renew clause in your rental lease agreement.
The option to renew, also called the option to extend clause, is included on most boilerplate lease agreements. It is negotiable, and you should be aware that the original clause is often written to protect or benefit the landlord, so it's important that you understand the clause and negotiate it in order to make sure that it benefits your own practice.
The renewal or extend clause is the portion of the lease that explains the process if you intend to stay in the property after the original lease has expired. This is an important clause for your practice because, in most cases, you'll want to stay in the same location for a long period of time. This makes it easier for patients to find your practice and minimizes the need for changes to marketing and printed materials.
Dental and medical practices also often need to make adjustments to rental spaces in order to accommodate all of the equipment and spacing needs. If you already have a good location and the office itself is renovated for optimal use for your practice size, it's more beneficial to stay long term. The option to renew clause is one that you'll want to fully assess when signing the lease so that you're fully prepared to meet its requirements, whether you want to stay or move to a new location.
The renewal option contains information about how to extend or renew your lease. It also contains information about how to give notice if you do not intend to renew. Some of the basic things that the renewal clause will contain include:
Term: The term in a renewal clause indicates the length of time you have to renew the lease. For commercial leases, it's often a five or ten-year lease agreement. Many newer practices might opt for the shorter lease. You might also be able to negotiate an extended-term. For instance, instead of setting the term at five years, you might set it at three to five years. This would give you additional time to assess the greater market and determine whether the current location is most beneficial for your practice in the coming years.
Notice: The renewal clause in your lease agreement stipulates the type of notice that that practice needs to give to the landlord. The notice needs to be delivered in writing and there is a time frame that's spelled out in the lease. Often, you'll need to verify your intention six to twelve months prior to the end of the lease. The time frame is one of the areas of the clause which can be negotiated and the more flexible the notice period, the more beneficial it is for the practice.
Fair Market Value: In some clauses, this will be noted as the rental rate which is a predetermined rate. This doesn't work well with commercial real estate because the terms are often far longer and it's difficult to determine a fair rental rate that far in advance.
More often than not, it's the fair market value of the rental property. Fair market value can fluctuate wildly over the span of a commercial rental agreement. This part of the clause includes language to determine what the fair market value is at the time of the renewal, which will alter your monthly rental payment. Depending on the market, this may or may not be beneficial to the practice. The landlord will try to include language that makes this clause beneficial to them, but it's important that your counsel understands how to make sure that this clause is as fair for your practice as possible.
The option to renew clause is important because it gives you a structure to renew your lease in the most cost-effective way for your practice. The clause can and should be negotiated to best serve the practice.
The best way to negotiate a fair clause is by hiring counsel that excels in commercial lease agreements. At Dental and Medical Counsel, we work specifically with dental and medical practices to negotiate the best terms in the agreement in order to protect your practice. Contact us today to learn more.
If you'd like more information about the recapture clause or any other scenarios that negatively impact your commercial lease, download our whitepaper, The Top 10 Pitfalls to Avoid with Your Lease.
Stay updated with industry news!
