New Strategies to Protect Yourself when Negotiating or Renewing Your Dental Office Lease-Part 3

Sep 30, 2019 | Legal

New Strategies to Protect Yourself when Negotiating or Renewing Your Dental Office Lease-Part 3
by Law Offices of Barry H. Josselson, The Josselson Law Corporation*
(This is the last of a three part series)

All office leases deal with issues such as (i) annual rent increases, (ii) the right to sublease or assign your dental office lease to another dentist who purchases your practice, (iii) the right to exercise an option to renew to remain in your premises at your election, (iv) the allocation of responsibility between you and the landlord for making and paying for repairs, and (v) the landlord's right to recapture or take back your premises should you decide to sell your dental practice.

You or your dental real estate attorney's discovering these hidden provisions in the lease, negotiating fairly these critical terms of your lease with the landlord, and being proactive in structuring your lease to address your long term professional and financial needs are a prerequisite for securing a fair lease and establishing a satisfactory landlord – tenant relationship.

5. Annual rent increases. Your rent payments have a diminished value each year to the landlord because of the eroding effects of inflation. Consequently, landlords provide for annual rent increases to maintain the original dollar value of their rent when the office lease commenced. Request, therefore, that your annual rent increase by the consumer price index and not by any fixed amount which exceeds the consumer price index. Many landlords increase rent by an amount that exceeds the inflation rate; however, if your lease provides that repairs and maintenance to your building are passed through to you and the other tenants, there is no compelling reason for the landlord to seek an annual increase over and above the annual inflation rate.

Be careful, also, of rent increase clauses which state that the annual increase shall be tied to inflation with a certain minimum guaranteed increase (e.g., 3%) and without a certain maximum cap beyond which the rent shall not increase (e.g., 6%). Also, some landlords discreetly provide that the "cumulative" annual increases shall not be less than the minimum or greater than the maximum amounts listed in the lease. The word "cumulative" permits the landlord to add up and average all of the annual increases and, therefore, the maximum number stated in your lease does not provide you as much protection as you might think. For example, let's say your lease prohibits increases above 6% per year. In year 1, inflation is 2%; year 2, inflation is 2%; and in year 3, inflation explodes to 8%. You might think that your 6% ceiling would protect you; however, because the "cumulative" sum of the 3 years of inflation equals 12% (2% + 2% + 8%), the landlord could still increase your rent by 8% because the "cumulative" sum in the lease has averaged less than 6% per year (a total "cumulative" increase of 18% for the 3 year period in question is permitted). Review carefully your annual rent increase provisions.

All of the recommendations in this three-part series should be employed to make your lease more fair. All leases are drafted in favor of the landlord because they have been prepared by the landlord, the landlord’s real estate broker or the landlord's attorney. Really, the only question is whether such lease has been prepared slightly, moderately, or extremely in favor of the landlord. Your dental real estate attorney's and your responsibility is to make it equitable for both you and the landlord.

*Barry H. Josselson’s law firm is devoted exclusively to the representation of dentists and advises more than 3,200 dentists regarding their dental legal and business matters with offices are located in Orange, San Diego, Walnut Creek, and Sacramento, California. He serves as an instructor in the UCLA School of Dentistry Graduate Practice Residency program and guest lectures at the UCSF, USC, and Loma Linda Schools of Dentistry and the UNLV School of Dental Medicine.  He may be reached at 800-300-3525, via e-mail at bhjlaw@sbcglobal.net, or via website at www.josselson.com or www.dentallawfirm.com.