Dental and Medical Counsel Blog

Understanding the Exclusivity and Use Clauses in Dental Lease Agreements

August 12, 2020
Lease Agreement

Whether you're building a dental practice, renewing your lease, or planning a relocation or expansion, there are a couple of lease provisions that could impact your dental practice's future. Namely, these are the exclusivity clause and the use clause.

Your dental practice is your most valuable asset and you'll want to protect it as much as possible from your competition. If another dental practice were to open up right next door to yours, it could seriously negatively impact your future business. 

You can use the exclusivity clause and the use clause simultaneously as a shield to protect your dental practice. A dental lease agreement is far more than just rate and term. You can protect your practice from the competition through exclusivity and use provisions, and ensure a landlord can't limit your expansion by allowing competition to move into the same building.

Typically, commercial lease agreements are drafted to favor landlords and their rights and considerations, therefore, it's essential you have a dental attorney take a look at and negotiate your lease agreement. 

What Is an Exclusivity Clause?

An essential component you need to take into consideration during dental lease negotiation is your competition. An exclusivity clause, when adequately drafted, restricts the landlord from leasing out space within the same complex or building to competing tenants with the same type of business. This is especially crucial if you're in a highly competitive market.

An exclusivity clause can:

  • Protect your dental office from competitors within the same area.
  • Help promote a diversity of tenants.
  • Help grow your dental patient base and revenue.

You certainly don't want to be one of several dental offices in the same building. So, you'll want to negotiate an exclusivity clause into your new lease or lease renewal agreement. Exclusivity clauses are a form of "restrictive covenant" where your soon-to-be landlord makes the promise they won't lease space to your competition. Your goal specifically will be to get an agreement by your landlord to never rent space to another dental office tenant.

How Can an Exclusivity Clause Impact Your Dental Practice?

A competing dental practice could potentially take away existing and would-be dental patients.  It could also undermine your investment, which includes money you've put into doing demographic research for selecting the area you've decided to open your dental practice at as well as the money you've used for building out your practice space.

You wouldn't want to spend years investing in customizing your dental space and building goodwill in the perfect area just to have another dental office open up right next door, while your landlord is holding their hand out in greed for more rent.

Before even entering into a lease agreement for space for your soon-to-be dental practice, you need to think about potential issues like these and take necessary steps into protecting yourself. As you start your lease negotiation, an essential component of the negotiations would involve negotiating exclusivity provisions into your lease agreement.

What Is a Use Clause?

The use clause in your dental lease agreement defines how you use the leased space.

A use clause is very important since it states:

  • Your right to use the premises for your specific business.
  • The activities you're allowed and required to engage in within the leased premises.
  • The control your landlord has of the uses inside the leased premises.

You'll usually find the use clause on the first page of your lease agreement. Usually, it states what you can use the space for and provide a short legal definition. You'll usually also find a more detailed legal definition of it in the standard form lease somewhere.

How Can a Use Clause Impact your Dental Practice?

As mentioned, use provisions in your dental lease agreement outline the services or activities you're permitted to perform in the lease space. The clause's details are frequently overlooked when it comes time to negotiate, and this could be very detrimental to the growth of your dental practice when it comes time for expanding the services you want to offer.

The use provisions in your lease agreement spell out the services or activities you "the tenant" can perform in the leased space. Therefore, this clause's language can also be very limiting to the growth of your practice if not negotiated sufficiently.

It's important you don't overlook the use clause and allow it to limit your ability to grow your practice. For example, language like, "for general dentistry solely and not for other use" isn't just unnecessary and restrictive, but it could keep you from having the ability to add another specialization to your practice.

So, you'll want to strive to use sufficiently vague wording like "for dental health and related activities". Wording like that describes the activities of your practice today, but also leaves room for future growth.

What If the Landlord Breaches the Agreement?

Remember, a promise by a landlord is only be as good as the consequences put in place for breaking it. So, simply highlighting the option of terminating your lease typically isn't a good enough consequence for breaching your agreement since you'll essentially end up having to relocate against your will after you've just invested a lot of money on improving your dental practice.

Ideally, the restrictive agreement includes a serious consequence for your landlord for failing to uphold their promise. This could be something like decreasing how much rent you'll have to pay if the landlord allows your competition to move into the building (i.e. decreasing rent to $1.00 per sq. ft.).

By having this type of consequence in place, it allows you to stay put and continue doing business while penalizing the landlord and providing them a huge incentive to mend their broken promise. This way, the pressure of enforcing the provision is put on your landlord and not you. 

How to Keep Your Options Open

Often, exclusivity language is left out of a lease and has to be negotiated into it by your dental attorney. However, like with any lease, you can negotiate everything, and you'll want to:

  • Be very specific when negotiating your exclusivity clause.
  • Avoid leaving anything out that could be misunderstood or misinterpreted.
  • Have a skilled dental lawyer appropriately define how restrictive this language needs to be.

If the landlord refuses to limit their ability to lease space out to other general dentists, you might still have the option to be more specific and possibly agree to a provision restricting their ability of leasing to a certain competing specialty, such as orthodontists or pediatric dentists.

It's particularly important to use sufficiently vague wording for a dental startup, which might not have as clear a vision about future practice plans and requires additional flexibility.

Takeaways

When you use the exclusivity and use clauses to their full potential, they are valuable tools that could help your dental practice be successful today as well as in the future. Having the ability to craft the perfect language not only helps to keep your competitors away, but it also helps with excessive restriction of your dental practice. Contact Dental & Medical Counsel if you need a lease review and would like us to negotiate your next lease agreement.

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