One of the most important parts of starting, buying, or selling a medical or dental practice is the real estate lease agreement. All too often, doctors rely on the representation of the landlord that “it is just a standard lease agreement.” They sign the document without considering the terms of the lease and what impact those terms may have on future decisions about selling the practice, downsizing, or closing the practice to retire or move to a different geographical location.
Two terms that are in lease agreements that you need to give special attention to are: the right to assign the lease; and the right to sublet the space. Each term of the lease needs to be separately negotiated by an experienced lawyer.
Assignment of the Lease by the Original Lessee
An assignment of the lease means that all the rights and obligations of the original tenant are “assigned or transferred” to the new tenant. This can come up in many different circumstances but most often it becomes relevant when you want to sell your practice, which means the buyer becomes the new tenant of the property.
When you open your first practice, you are likely not thinking about the possibility of someday selling the practice or transferring it. But, just like any other financial planning you do for your future, you need to plan for the possibility of selling your practice before your current lease ends. This means that before you sign on the dotted line, you want to be sure that the lease provides you some choices if you need to assign the lease or sublet the space.
Beware of a clause that says you can assign the lease only “at the sole discretion of the landlord.” This means that the landlord can deny approval of assignment for any reason at all or even no reason.
The right to assign the lease to a new owner can seriously affect your financial future. If you cannot assign or transfer your lease, then you essentially have no practice to sell. Before you enter into a lease agreement, you need an attorney who can negotiate for you, at a minimum, a term that says the landlord cannot “unreasonably” refuse to allow the assignment of the lease.
The ideal negotiation will result in giving you the right to assign or transfer the lease to the new owner of the practice in a way that releases you from all financial obligations in case the new owner defaults on the rent payments. You do not want to go to bed every night worrying that you may be on the hook for the lease payments if the new tenant defaults on the rent.
When you assign the lease to someone else, you want to be relieved from your obligations to make lease payments and to be sure that obligation is transferred to the new lessee. The new tenant is the one who will now be responsible for making the lease payments and complying with any other terms of the lease. The buyer to whom you have assigned or transferred the lease will deal directly with the landlord.
All parties involved need to sign the new lease agreement.
When the Original Lessee Sublets the Space
There may come a time when you want to sell your practice, downsize your practice, or retire and move to another location. Transferring or assigning the lease may not work for you, but subletting may provide you the relief you need. You may want to sublet the entire office space or only a portion of it. This is not the same as space sharing which is covered in a separate blog.
When you sublet office space, you become the sublessor and your tenant becomes the sublessee. You are still the primary person responsible for paying the rent. The original agreement between you and the landlord is still in effect. You will need the written consent of the landlord who cannot unreasonably withhold consent.
You will want to check the sublessor’s financial statements and credit report. You want to be sure the sublessor has the means to meet the monthly rent because if he or she fails to make the payments, you are the one responsible.
If you are considering assigning your lease or subletting your space, consult with an attorney who has experience with lease agreements and can advise you of the option that is in your best interest. Your attorney can negotiate with your landlord to get the best terms possible for subleasing.
There are many clauses to consider in your lease agreement that may be beneficial to you. If you need assistance, contact the leasing experts at Dental & Medical Counsel.
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