Anyone who has gone through the process of choosing a location for a dental practice knows that commercial lease agreements contain potential pitfalls for the unwary. One especially dangerous provision is known as a "relocation clause" (sometimes called a "substitution clause"). In this blog post, we discuss what relocation clauses are, how they may affect your dental practice, and ways your attorney may negotiate them to minimize your exposure.
A relocation clause gives a commercial landlord the right to relocate a tenant to a substitute space under contractually-specified conditions. On its face, it is a drastic and draconian provision that creates considerable risk for a tenant. After all, who would ever want to give a landlord the unilateral ability to force them to move to a different space? Whenever possible, tenants negotiating the terms of a commercial tenancy should strike relocation clauses from draft leases.
Sometimes, however, the market will bear relocation clauses, such as when there is a limited supply of desirable space or the tenant has unique needs that put a landlord in a position to exert leverage. When a tenant cannot realistically refuse a relocation clause, the only option is to negotiate it carefully to minimize the risk of a catastrophic disruption of the tenant's business.
California courts have not specifically addressed the enforceability of relocation clauses (although the Court of Appeal did, in an unpublished 2011 opinion, appear to acknowledge these clauses could be enforced). We see no reason to think that California courts would ever invalidate relocation clauses en masse. Commercial parties enjoy the broad right to contact as they see fit in California, even if one party ends up at a significant disadvantage.
A dental practice is no ordinary commercial tenant. The cost of building out a fully-equipped office complete with equipment, medical waste disposal, HVAC systems, and administrative and waiting area space can easily run north of $300,000 and take six to nine months to complete. Being forced to relocate a practice, as this dental professional learned, can inflict devastating financial consequences. If the dentist's advisors fail to take steps to mitigate the costs of building-out a substitute space, moving and reinstalling equipment, altering paperwork, and notifying tenants, a relocation could threaten the practice's very survival.
While the basic premise of a relocation clause is straightforward, the devil is in the details. Here are some of the relocation provisions and issues dentists and their advisors should give priority to in a commercial lease negotiation.
Cost Shifting (Dis)Incentives
Relocation clauses benefit landlords by giving them the flexibility to reassign tenants to alternative spaces in order to accommodate the needs of other tenants. Landlords should, if at all possible, be given a disincentive to exercise that right. One way to create that disincentive is to draft a relocation clause that shifts the tenant's cost of relocation onto the landlord. This may be accomplished by defining a fixed cash penalty or rent credit that the landlord must give the dental tenant upon exercising the relocation clause. Alternatively, to guard against unpredictable labor and materials costs, the relocation clause may define the landlord's cost shifting obligations in terms of specific tasks the dental practice would need to accomplish and services it would have to retain to get its new space up-and-running. Whatever the solution, the goal is to make a landlord internalize the tenant's financial burden of relocation in order to make it less likely the landlord will exercise that option.
Notice Period and Time-Frames
Whenever possible, a relocation clause in a commercial lease for a dental practice should specify an adequate notice period to give the practice time to plan for a move, adequate time frames in which to execute a move, and specific times before, during, or after which the landlord may not exercise the relocation option. More generous and detailed timing provisions serve a dual function: they give the dental office the time necessary to relocate without an interruption of patient services, and they also serve as a disincentive to landlords by narrowing the window of opportunity in which to force a move.
Substitute Space Requirements
A relocation clause should always specify the requirements of the substitute space. This is particularly important for dental and other health practices that need to combine accessible public waiting areas, administrative space, and patient care facilities in a single setting. One way to define substitute space is for the clause to identify the specific site(s) to which the landlord may relocate the tenant, thereby limiting the landlord's options and giving the tenant a modicum of predictability. When that level of specificity isn't feasible, a relocation clause should, if possible, require not merely that the substitute location has equivalent square footage, but also that it has the elements essential to the particular dental practice involved, such as the shape of the space, any necessary structural, plumbing, and HVAC components, and sufficient patient access (including ramps, elevators, and parking). The clause should also account for potential changes in signage, road frontage, and other public-facing aspects of the property that have value to the dental practice.
Finally, a dentist's attorney may push for a relocation clause to include the right for the tenant, at the tenant's sole discretion, to "break" a lease without penalty rather than be forced to relocate to a space designated by the landlord. When included in a relocation clause, this right can act as a check on the landlord worst impulses, and at the very least gives tenants some flexibility if there are better relocation alternatives in the marketplace than what the landlord can offer.
Dental & Medical Counsel, PC is a boutique law practice serving dental, medical, optometry, and veterinary professionals in every facet of their practices, from commercial lease negotiations to human resource matters. Before you negotiate a commercial lease for your dental office space, contact us below for a free consultation to discuss how we may be able to help you avoid the pitfalls of relocation clauses and other lease terms that can mean the difference between success and struggle in your practice.
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