Lease agreements can run from six pages to sixty pages, and rest assured that they are written to always favor the landlord. There are numerous provisions that you should be careful about. Often the landlord will remove or modify many of these provisions if you request. These provisions are designed to benefit the landlord not the tenant. These are important provisions and can affect your rights in the business.
1)
Lien on your business assets: In today’s environment a new clause is being used by landlords. This is a secured blanket lien on all your assets, equipment and accounts receivable to insure you pay all your rent during the lease. The landlord also has the right to file a UCC public filing on your business. This is a public document noticing a lien on your assets. This provision may prevent you from obtaining a loan on your business at any time during the lease term. This includes loans for remodeling, expansion or financing equipment purchases. A lender will require a first position lien on the assets if they loan you money and will require the landlord to subordinate their position. Make sure the landlord doesn’t have a right to do this otherwise you become beholden to the landlord.
2)
Usage defined: The type of business is usually defined in the lease. The landlord always wants this to be as specific as possible, but a tenant will benefit from the broadest possible description. A specific usage could prevent you from expanding services or products in the future, but a broader usage allows you to sublet if you decide to move. A sublet is also valuable if you are paying below-market rents.
3)
Option to renew: Often these require 90 to 180 days advance written notice, otherwise they are invalid. Some specify that you can only elect the option within a range of days (i.e. between 180 to 90 before the lease ends). This can hurt if you have an option with a specific rent below market and miss the deadline. Check the lease termination and make sure you schedule a calendar action item when appropriate. Send the notice
in writing with a return receipt. Since leases last 3 to 10 years, it is easy to forget this requirement. Lease options are “personal” to the tenant (you). That means if you assign the lease when you sell the business, the landlord is not required to include the lease option renewal. A way around this is to include language that the option “runs with the lease.”
4)
Attorney provisions: Landlords sometime include a provision that if they sue you for any default, you are responsible for the legal fees. It may also state that the prevailing party in a lawsuit gets their attorney fees back. The second clause is great, but the first one allows the landlord to charge you legal fees even before they have won. Why should you pay their fees upfront before they win their case?
5)
Property taxes: Leases often include CAM (common area maintenance) charges on top of the base rent. Sometimes there is also a provision that allows the property tax to be adjusted and increased if the building is sold. This could increase the CAM charges significantly, especially if the building has been under the same ownership for years. Try to see if you can put a maximum cap on any increase (like 10%). Most landlords are reluctant to change this provision. Your best bet is to determine if the landlord intends on flipping (selling the building) or keeping it long term. The property tax will only increase if they sell the building at a much higher price, so this may not be an issue that’s worth fighting about.
6)
Assignments: Some leases have language that any goodwill value in the sale or transfer of the business will stay with the landlord -and must be paid to them. This provision is included to prevent a tenant from selling a lease which is well below market value. Landlord’s believe that the goodwill is also a function of the location – which is owned by them. For a professional practice this could eliminate all of your proceeds from a normal sale when you retire. Allow the landlord to receive any increases in rent you receive with a sublease, but don’t let them keep the goodwill when you sell the practice.
7)
More on assignments: Check the language to see if you are allowed to assign the lease. There should be a provision that states: “the landlord will not unreasonably withhold the approval of an assignment." Other provisions might include a requirement that the assignee have a net worth or experience equal to or greater than the current tenant. The bottom line is that you should be reasonably allowed to assign the lease if you sell the practice. Of course, try to remove yourself as a guarantor – but that’s not always possible.
8)
Tenant improvement allowance: A low rent will have no tenant improvement allowance and a higher rent will “build in” some money for you. Essentially, the landlord is financing your improvements. But remember that nothing is free and if you have difficulty getting a loan, a higher rent with a tenant improvement allowance may be the better solution.
9)
Annual rental increases: Typically these are tied to CPI (consumer price indexes). They also have minimum and maximum amounts and annual increases can range from 3% to 5% per year. Many landlords in prime locations will not do a flat, multi-year lease.
10)
Your best deal: You pay for the location. The better the location, the less a landlord is willing to compromise on terms. Additionally, better locations demand higher rents.
11)
Do your homework: Before starting any negotiation check online services like
loopnet.com and find out rents in the area for other like-kind properties. Visit them and make notes of the pros and cons compared to your office rent. Determine the number of vacancies in your building. But be careful: some landlords get upset if they discover you speaking to other tenants in the building – so be discrete!
There are infinite ways a lease can be altered to fit your needs. These include both price and non-pricing elements, hours of business, reserved parking spaces, signage rights, options to purchase, and exclusivity clauses. It’s always good to have a professional review a lease before it’s signed and when it’s time to renew an existing lease, it’s good to dust off the old one, review it, and negotiate any new provisions in addition to the proposed rent.
Alissa Wald,
OD, a successful practice owner along with her husband with Scott
Daniels, combine the hands-on skills of practice ownership with hundreds
of successful transitions. They have over twenty years experience and
have completed hundreds of successful transitions and helped scores of
owners. Their company Practice Concepts is the only brokerage company
offering this winning combination of business and practice expertise.
Services include, seller and buyer representation, partner buy-in
services, exit planning, appraisals and coaching. Their recently
introduced iCoach program inspires and helps increase profits, improves
management systems and puts the fun and profit back into ownership.
Contact them at (877) 778-2020 or www.PracticeConcepts.com or by email at
Scott@PracticeConcepts.com.
