Picture this – after a few years in your new dental office location, you have developed a solid practice culture with staff and patients that you truly enjoy. Your loans are slowly but surely being repaid and you are building up an enviable patient roster in the process. Your home, your children’s school are all within a three-mile radius of your practice. Life is good, and improving. Then, out of the blue, you receive a notice that your lease is being terminated due to a redevelopment of the property. Can the landlord do this? What happens now?
What is a “redevelopment” or “demolition” clause?
The “Redevelopment” or “Demolition” clause is an increasingly common feature of dental office lease agreements, particularly in high-density, metropolitan real estate markets. This clause gives your landlord the right to terminate your lease if they decide to demolish, renovate, or redevelop the building or center you are practicing in. Often, the definitions of “redevelop”, “demolish”, or “alter” in the lease are highly ambiguous.
The particulars of this redevelopment or demolition – the who, what, when, why and where – will invariably differ from lease to lease and from landlord to landlord.
For example, a given dental office lease might allow the landlord to terminate your tenancy if they decide to build a condominium building on the land. Another lease might permit the landlord to permanently relocate you to another part of the property, or to another property altogether, if renovations are to be carried out.
The struggle is particularly relevant to dentists, as they invest heavily in leasehold improvements and can’t simply pick up and relocate without considerable expense. Sound familiar? That’s because the average dentist spends $200,000 constructing a dental office. As such, the “redevelopment/demolition” clause could be highly problematic if it is not negotiated with your investment and best interests in mind.
How this clause impacts dental tenants
So maybe your practice is in a building that could use a facelift. What’s wrong with a little rejuvenation on the landlord’s dime?
The redevelopment clause may enable your landlord to evict you from your office with little or no notice. When this nightmarish scenario comes to life, it leaves dentists scrambling to find new homes for their businesses with very little transition time. It will also require you to construct yet another dental office from scratch. Remember the time and money it took to find, secure and build the location from which you are being evicted? It’s back to square one again, only it’s a potentially disastrous proposition this time, given that many dentists will not yet have repaid the investment required to build the original practice.
If you are left without a dental office to practice from, you can also expect heavy income losses and significant attrition, as patients defect to practices that have their doors open and can reliably meet immediate needs.
While relocation might appear as a less nefarious alternative, it may in fact be riskier than lease termination. Depending on how the relocation provision in the lease has been drafted, there may be very little certainty as to what the new space will offer in terms of square footage, visibility, accessibility, or exposure. Another very significant bone of contention tends to arise where practice build out costs are concerned. The lease states that the landlord will cover “relocation expenses”, but what does that include, specifically? Is it just furniture relocation? What about your custom, built-in dental cabinetry? Who will pay to disconnect and reinstall your costly dental equipment? Who will perform the move and when? Who pays for the move, you or your landlord? What about disruption to your business and potential practice down time? And so the logistical horrors begin, with few guarantees as to how the new space will compare to the one that you originally contracted for, and have so heavily invested in.
Options at lease negotiation time
In the competitive landscape of dental office leasing, simply refusing to sign a dental office lease with a “redevelopment/demolition” clause may prove to be a regrettable decision, particularly when the location is otherwise desirable.
The good news is that there is much negotiation work that can be done to add long-term stability and visibility back into the equation. With a carefully structured negotiation plan, your professional dental office lease negotiator should be able to amend the redevelopment clause in some of the following critical ways:
There is little meaningful influence a dental tenant will be able to exert once the landlord’s redevelopment plans are in play. The surest and most effective way to protect your investment against the redevelopment/demolition clause is to negotiate its finer points in your lease before you become a tenant – namely, at the lease negotiation stage.
Author: Sabrina Ladak, J.D., Lawyer and Lease Negotiator at Cirrus Consulting Group
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