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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Sweeten your lease
with these provisions
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.
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