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Many physicians think office leases are standard and, for the most part, non-negotiable.
Wrong.
Leases come in a myriad of forms and can contain provisions that can have an adverse effect on you and your practice.
DON'T JUMP THE GUN
Would-be tenants are often persuaded to execute an "Offer to Lease," which is supposed to contain the "essential terms" of the lease (ie parties, location, description, term, rent, additional rent) and will often include a provision for the execution of the "Landlord's Standard Form Lease."
The difficulty arises when the Standard Form Lease arrives and it's chock full of many unexpected provisions and the landlord takes the position that you are bound to sign it. It's far easier to deal with these issues in advance of signing an Offer to Lease.
DUE DILIGENCE
Your lawyer will conduct searches for your protection, including title, zoning, work orders, pending lawsuits, judgements and bankruptcies. You want to be sure that you're not only dealing with the right party (yes, people have leased properties that they do not own to unsuspecting tenants), but also that there are no 'warts' on that party or the property.
TIME BOMBS
Your lawyer will also watch for other provisions that can unexpectedly blow up in your face. One example is the "demolition clause," which gives the landlord the right to terminate the lease on notice (and often without compensation), in the event they wish to demolish, redevelop or even just sell the building. Another equally disruptive provision is the "relocation clause," permitting the landlord to relocate you within the building under certain circumstances.
LAND MINES
Another sinister provision allows the landlord to terminate your lease if you seek consent to transfer your lease. This arbitrary 'recapture provision' is very handy for a landlord in escalating leasing markets and can be a real problem if you are planning for a successor to take over your practice.
ADD-ONS
Be careful of general terminology like "Additional Rent" or "Operating Costs." The scope of these can go on for
several pages in the so-called Standard Form Lease.
Management, administration and user fees can be buried
in the document, which can amount to thousands of dollars
in unexpected costs.
STATUTORY
VIOLATIONS
Be very careful that you don't agree to anything that
may contravene the rules of your College, such as percentage
rent provisions based on your revenues, which would
amount to fee splitting. Also watch for provisions requiring
the tenant's name to be approved by the landlord. It
should be sufficient that your practice name be subject
to approval by your College.
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Inducements If you're planning to ask the landlord for any inducements — such as free rent periods (for construction), construction allowances and specific construction to be completed by and/or at the expense of the landlord — make sure you do it before you sign.
Permitted uses Make sure that the intended use of the property — as a medical practice (including ancillary activities) — is permitted under the lease and under municipal zoning by-laws.
Exclusivity clause Some physicians may like to prohibit the landlord from renting any other space in the building to other physicians (or specialists) to limit their competition.
Options to extend Make sure your lease states that you have the option to renew. Whenever possible, also get in writing what the amount of the renewed rent will be and how the rent shall be determined in the event of a renewal. Remember to seek further extension options before exercising your last remaining option, while you still have negotiating leverage.
Assignment and subletting rights Make sure your lease can be transferred, or the premises sub-leased, with the landlord's consent — and that that consent cannot be unreasonably withheld.
Room to grow There's every chance your practice might grow, so consider including a provision that gives you the first right to lease additional space that may become available and even perhaps a first right to purchase the building from the landlord if the building is put on the market.
Avoid personal guarantees If your practice is incorporated, you should have the corporation enter into the lease as tenant, without your personal guarantee wherever possible. This means that if the corporation crashes for any reason, you won't be personally liable for any debts owed to the landlord.
Odds and ends Examples of other points for consideration that can affect value are parking, cleaning, signage, removal of cabinets and trade fixtures, landlord's work and tenant's work, utility charges and hours of operation. Make a list of your requirements and make sure they're in that lease.
John McMillan, LL B is a Toronto corporate/commercial lawyer serving health professionals. He can be reached at 416 364 4771 or johnmcmillan@bellnet.ca.
