When looking at a new space, a lot of potential tenants will have a list of “must haves” that they have been told every medical lease should contain. However, not all of these are valid. Aside from things like how to negotiate free rent, a free fixturing period, reduced operating expense and real estate pass-throughs, here are a list of 3 key topics that can leave many healthcare tenant scratching their heads as they read through the lease.
Guaranty: For most practices other than large corporation/multi-practices that can show robust financials, the typical small practice tenant will generally be required to personally guaranty the lease. We fight guaranties often, arguing that: 1) the potential tenant entity’s financials are strong enough to support the lease; or 2) the practice is a low-risk business or otherwise has a previous history of timely payment based on the previous tenant (for practice acquisitions); or 3) the security deposit is robust; or 4) the lease term does not necessitate a guaranty (i.e., a short term lease). Irrespective of the soundness of our arguments, a lot of landlords are wholly risk adverse and grow concerned at the thought of a new tenant taking over or even a new tenant taking on space. The thought may not be logical, especially when the space has been untenanted for years, but it is still a hurdle that we often have to overcome if our client wants the space. Is it unusual for a landlord to demand a personally guaranty for a lease? Unfortunately, no. In fact, this is common place for a small practice. Is it uncommon for the landlord to require a spousal guaranty? Unfortunately, no because landlords have wisened to the prospect that the tenant guarantor can transfer all of his/her assets to his spouse and leave their guaranty worthless. What is a small practice owner to do?
Tips:
Look to a corporate guaranty (best option for multi-practice owners).
Seek to minimize the personal guaranty, prioritizing the spousal guaranty, first.
Increase the security deposit, if possible, in return for no guaranty.
Seek to have the lease and guaranty fully terminate in case of death/disability of the principal. Note that for many of our in-demand specialities like dentistry, this isn’t always an ideal situation since they can list and sell the office. It’s not a bad option to have so far as the tenant’s estate is the one that can exercise this right within a reasonable period of time (preferably, after a few months of trying to sell the office without success).
2. Relocation: In most larger settings like retail centers, Landlords generally want to reserve the right to relocate the tenant. For most veterinarians and dentists who tend to be retail tenants, this is a big “no” due to hefty construction costs, equipment installation, signage, access, location, etc. How should you address this?
Tips:
If relocation is an absolute deal breaker and you have discovered this during the Letter of Intent stage, then stop all negotiations and move on.
Limit relocation until after the first 5 or 10 years.
Allow relocation only if the landlord pays all build-out costs, relocation, installation, and marketing costs. Your goal will be to close the doors and come back in 2 weeks to your new suite.
3. Assignment/Subletting: some leases will have a hidden clause that says that in case of an assignment or subletting, the tenant will have to pay the landlord all proceeds and sums received in excess of the rental amount. This could arguably include the purchase price resulting from the sale of your practice.
Tip:
Redline the lease before signing to make sure that in case of a sale of the business, any non-rental proceeds received as a result of sale will strictly belong to the tenant.
Carve out a provision that allows you to grant a license to use the premises to another related professional to avoid triggering an assignment or sublease and allow you to charge for office sharing.