How to make the best of a bad
lease
This Toronto group rented fancy
downtown offices and had
big plans. Then the recession hit
By Theo Sands
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SIGN A LEASE THAT MAKES YOU
SMILE
Tips to consider before
signing a lease
- Renewal: A clause
that lets you renew the lease at least twice
for the same time period at no more than a five
to 10% increase
- Expansion rights:
Right of first refusal on any space that comes
up adjacent to yours
- Improvement allowance:
The landlord agrees to pay a certain sum per
square foot toward any improvements that are
made. You retain the right to approve who does
the work
- Personal guarantees: Tie
them to the individual, don't make them �joint
and severally' as this gives the landlord the
right to go after each individual for the full
amount of the lease
- Sublet rights: The
best kind are those that allow you to find a
tenant to take over the lease and then have
them pay the landlord directly and be responsible
for all of the remaining lease. Alternately,
the landlord agrees to a sublet but you collect
and continue to pay the landlord directly
- Late payment of rent:
A clause that restricts any penalties for late
payment to those that occur only after being
late twice and after appropriate written notice.
- Early out: A clause
that will let you out of a lease after, say,
three years of a five-year lease Also include
a clause that lets you out if the landlord fails
to provide the contracted services, lack of
heat in winter or air-conditioning in summer
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Dr David Brown (not his real name)
got taken to the cleaners. In 1999 the Toronto cardiologist,
along with two colleagues, a gastro and an IM, took
a 10-year lease on some hot downtown office space. The
idea was sound. Each of the physicians were in their
40s, their prime earning years, and each had developed
a solid practice largely among rising executives about
their own age; setting up a small group that catered
to corporate clients located in the heart of Canada's
financial district looked like a sure thing. Not only
were they assured of a steady stream of income through
the provincial health program, they'd also be able to
bill directly for a host of services. Companies concerned
with the health of their key employees would willingly
pay for the extra tests, preventative advice and encouragement
offered by the practice.
Dr Brown was the catalyst in forming
the group, choosing the location and negotiating the
lease. The group set up shop in November 1999 and each
doctor had his best year in the following 12 months.
THE
DOWNTURN
Six months later, though, the storm clouds were gathering.
The stock market peaked in March 2000 and then began
to tumble sharply. Practice revenues fell by 30% in
the balance of 2000 and continued to fall in the first
three months of 2001. The lease payments, the group's
largest single expense, didn't. By April, Dr Brown's
partners wanted to bail. Ever optimistic, Dr Brown in
a series of meetings where tempers escalated -- repeatedly
emphasized that the downturn' would soon be over and
revenues would improve. Attention continued to focus
on the lease and the other two eventually agreed to
stay only if their portion of it could be cut in half.
If the lease couldn't be renegotiated, such an arrangement
would personally cost Dr Brown over $70,000 a year.
Was it worth it to keep the group together -- assuming
he could afford it? The cardiologist did what he should
have done before he signed the lease -- he hired a top
real-estate lawyer.
The 50-page document Dr Brown had
signed on behalf of the group tied him up six ways to
Sunday. But the lawyer knew just how soft the real-estate
market had gone -- even in top-rated buildings like
this one. Vacancy rates had almost doubled in the three
years since the lease was signed and now stood at around
17%. The lawyer was able to renegotiate the lease at
a 25% reduction in the square-footage charge and include
a number of the favourable items in the box titled "Sign
a lease that makes you smile", accompanying this article.
The lease reduction -- and further
negotiations with his partners -- meant a saving over
the previous lease of about 15% for Dr Brown and a 30%
cut for each of his partners. Not exactly fair, still
the cardiologist chose to look on the bright side. It
seems to have been the right choice. With the recent
upturn in financial markets, patient loads are on the
increase. It appears as though the practice, which caters
to executives, is going to make it after all.
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