It is no exaggeration to say that your premises lease can make a massive impact on the profitability and sellability of your dental practice. While many landlords will issue their tenants with a proposed lease, saying that what is proposed is “standard”, and imply that there is little to be negotiated or concerned about, it is important to seek advice, as not all commercial leases are created equal.
There are many variable clauses in every dental practice lease and, as a business owner, there are many potential pitfalls that you will want to avoid if you want to sell your practice down the track.
While there are many, many clauses that need to be carefully considered, below are 6 that we feel can often be poorly understood:
THE COSTS
1. Rent
The most obvious thing to look for in a commercial lease is the cost and the frequency of payment.
2. Increase in rent over time
Commercial rent in a lease will go up every year. In some leases this is fixed to CPI, in others it is a set percentage (usually between 3-5%).
3. Outgoings
Outgoing are the costs of the premises you will be obliged to pay, on top of the rent. These outgoings sometimes include utility bills, such as water and electricity. Sometimes, the lease also obliges the tenant to pay strata and property management costs.
The Impact of 1-3
It seems obvious that the rent will have a direct impact upon the profitability of your practice and profit and that profit is one of the primary drivers of a business valuation.
Buyers sometimes pay less attention to the yearly % increase in rent and the additional expenses you will need to pay as part of your lease.
To see if a lease/rent is reasonable, and how the rent will impact upon your profit, these three need to be looked at together.
A high rent may be very reasonable if it has low increments per year and/or is inclusive of outgoings.
THE SECURITY OF TENURE
4. The length of the lease
The length of the lease gives the tenant the security of knowing that they have an exclusive space to run their business in for a period of time, without fear of needing to move.
Most commercial leases that we come across have 3-4 terms of between 3-5 years (for example, 3 terms of 3 would be 3+3+3 or 9 years), where it is the renter’s choice of whether to renew at the end of each term.
5. Relocation or demolition clauses
These clauses are not in most leases. Where they exist, they give the landlord the right to either relocate you to another premises (relocation) or terminate your lease if they are going to redevelop the site (demolition).
These clauses will specify the notice period you will have for relocation and termination, and whether the tenant will get any kind of assistance or compensation for the inconvenience.
The Impact of 4-5
Businesses like dental or vet practices are difficult to move for two reasons:
- the loyalty of patients is often based upon geography, exposure and convenience, and moving a practice can lead to patient attrition.
- Relocations often also include business downtime and interruption, which can also lead to patient attrition.
- Council zoning and complex fit-outs make finding a suitable space for relocation difficult, and doing the relocation expensive and time consuming.
As such, practices that have a higher risk of needing to move in the future are often devalued in the eyes of buyers and the banks that lend to them.
One of the pitfalls that many business owners fall into in their final years in practice is to only negotiate a lease for the duration that they wish to practice. Any buyer of their practice (and the bank lending them money) will need a lease with options for 10 years at the point of sale to feel secure.
6 ABILITY TO ASSIGN
6: Assignment
The vast majority of leases will contain an assignment clause, which compels a landlord to act reasonably if the assignment of an existing lease is requested. As long as the new prospective tenant is someone of good character and sound financial standing, they should meet these criteria.
The Impact of 6
An assignment clause is vitally important if you ever want to sell your business. Without it, there is no obligation on your landlord to assign your lease to the buyer and this puts the sale of your business at the discretion (mercy) of the landlord.
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