How the Demolition Clause in Your Dental Office Lease Can Put You Out of Business

Author: Alain Sabbah
Alain Sabbah

Alain Sabbah

Alain Sabbah is a principal at Cirrus Consulting Group, a firm devoted to providing superior office lease negotiation and review services to dentists. Alain is a dynamic, hands-on executive with extensive experience in commercial real estate consulting, and has taught thousands of dentists how to best leverage their office leases to protect their investment and maximize the value of their practices. Contact Cirrus today for a complimentary dental office lease review by visiting www.cirrusconsultinggroup.com/lease. You are welcome to contact Alain with questions about your lease by dialing 1.800.459.3413 x 3256 or by emailing him at

asabbah@cirrusconsultinggroup.com

02.17.16 / 11:39 am

Imagine arriving at your dental practice to find a notice from your landlord stating that the building will be undergoing redevelopment, your office lease is being terminated, and you have 30 days to vacate the premises.

Your first thought is “there’s no way this can be real. My landlord would not, could not, and cannot legally get away with this.” Wrong.

Reality Check

This very real and common scenario is a result of the landlord exercising his/her right to demolish the space as outlined in the “Demolition Clause” in your dental office lease. This clause permits your landlord to relocate you or terminate your lease if they decide to demolish, renovate, or redevelop the building or center in which you are practicing. Often the definitions of “redevelop”, “demolish”, or “alter” in the lease are highly ambiguous.

So, what is the cost associated with relocating and rebuilding your practice from scratch? Hundreds of thousands of dollars in unexpected, financially crippling costs; numbers large enough to demolish not only the building, but your practice’s livelihood and pose as a major inconvenience to your patients.

The Devastating Impact of the Demolition Clause to Your Business

Lease Termination and Eviction: In the event your landlord exercises this clause, terminates your lease, and evicts you, you have very little time to figure out next steps. You have to find a new location, build it out, and move everything within a certain time frame. Expensive, stressful, and very damaging to your patient roster. Every day your dental practice is closed before the new location is open for operations is a significant loss in revenue to your business.

Heavy Relocation Costs: If your landlord exercises the Demolition Clause and chooses to relocate you to a new area in the building or center to make way for renovations, you may be required to pay for the entire move yourself! As you can imagine, the costs associated with moving a dental practice are astronomical, and will include moving dental equipment, movers, renovations and build out costs in the new location, marketing, updating signage, stationery materials, and more. If these fees are your responsibility, the financial impact to your dental practice could easily put you out of business.

Increase in Rent: If your dental practice is relocated to a more visible and desirable location in the center, you could face an increase in rent due to upgraded real estate. In addition, if the new space is larger than your current office you may have to pay for the difference in square footage.

Difficulty Finding a Comparable Location: Contrary to the above, there is no guarantee that the size of your next location will be comparable to the original premises. If it’s smaller, you will have to downsize, reconfigure your practice layout and operatories, and ultimately suffer a loss in patient traffic and production. Your new location may also be in a location with less foot traffic and passersby, leading to a loss in new patient flow.

Competition: If your new location is in close proximity to a competitor (ie another General Dentist) then you could experience a negative impact on your ability to attract and retain dental patients and staff.

Accessibility: It’s important that your new dental office location be accessible to your clients with ample parking and wheelchair accessibility.

Barriers to Selling Your Practice: The presence of a Demolition Clause in your dental office lease can act as a major obstacle when the time comes to sell your dental practice. Potential buyers will be reluctant to purchase the practice due to the risks involved, and financial institutions may also choose not to finance you or a new buyer for the same reasons. The “Demo Clause” essentially eliminates the safety and predictability of the lease term. Banks and financing companies view Demolition Clauses as highly risky and often will not finance a practice acquisition with this clause present.

Negotiating the Demolition Clause in the Dental Office Lease

It is in your best interest to avoid signing a dental office lease with this clause present altogether, or at least attempt to have it removed. If the clause already exists in your lease, or your landlord won’t remove the clause and you still choose to move forward, there are ways to amend it so it works more to your advantage.

Landlord Pays for Relocation Costs: If the landlord chooses to relocate you, put the onus on the landlord to pay for all costs associated with the move or the demolition of your office space, including covering demolition/construction costs, real estate fees, moving expenses, marketing, and other costs.

Time Constraints: Try to negotiate time constraints that apply to the landlord for activating the Demolition Clause; the later the better. For example, maybe the clause can only be exercised five years or 10 years into the lease.

Increasing Notice Terms: How much advanced notice will you be given to exit the space? Consider the amount of time required to relocate or rebuild your practice without having to rush into a new space that is not ideal. There is a big difference between having 30 days to vacate and nine months to a year to vacate. Having time on your side before you are required to exit equals more time to find an ideal location and rebuild your practice.

Terms of Activation: Ask your landlord how much of the building will need to be renovated or redeveloped to activate the Demolition Clause. For example, perhaps it can only be invoked if more than half of the property is affected by the rebuild.

Proof of Demolition: What proof should your landlord be required to provide you with upon the activation of the Demolition Clause? You want to ensure that the reason for eviction is because your landlord is rebuilding or demolishing the building. Common examples of proof include architectural drawings and building permits. This evidence ensures that your landlord is honest and is not evicting you needlessly, or for a reason other than a planned demolition or rebuild.

Lease Termination Rights: In the event you are relocated and you do not like the space to which you are being relocated, you should have the right written in to terminate the lease.

Compensation: If the landlord invokes the right to terminate your dental office lease based on a redevelopment, they should be legally obligated to either pay to move you, or to pay for your unamortized leaseholds.

Huge Risk and No Reward for Your Dental Practice

The disruption to your practice, loss of business, and moving expenses associated with the Demolition Clause can easily make or break a flourishing practice. Due to the grave costs and risks involved, it is in your best interest to avoid signing a lease with a Demolition Clause in it. If this isn’t possible, try renegotiating the clause so that the onus is on the landlord to pay for any related expenses.

Don’t jeopardize your practice’s future by putting yourself at the mercy of the Demolition Clause. Ensure you carefully review the details of your dental office lease before renewal or opening a practice to ensure your business is protected now and in the future from this clause.

Alain Sabbah

Alain Sabbah

Alain Sabbah is a principal at Cirrus Consulting Group, a firm devoted to providing superior office lease negotiation and review services to dentists. Alain is a dynamic, hands-on executive with extensive experience in commercial real estate consulting, and has taught thousands of dentists how to best leverage their office leases to protect their investment and maximize the value of their practices. Contact Cirrus today for a complimentary dental office lease review by visiting www.cirrusconsultinggroup.com/lease. You are welcome to contact Alain with questions about your lease by dialing 1.800.459.3413 x 3256 or by emailing him at

asabbah@cirrusconsultinggroup.com

6 responses to “How the Demolition Clause in Your Dental Office Lease Can Put You Out of Business”

  1. If you don’t follow the rules of government then it may cause demolition. It may happen in metro city area which is full of population. So select the venue where population are not high.

  2. Dr. Wadhwa,

    Landlord terminaton rights (ie Demolition Clauses) are becoming increasingly prevalent in metropolitan/urban areas. That being said, there are ways to reduce a tenants risk and exposude accordingly.

  3. This is every dentist’s (and business owners) worst nightmare… Often the upfront costs of creating your start-up business and building from the ground up is the most secure way to protect our practices. Sometimes leasing in areas that are in high-demand and in cities that are growing quickly can be the worst thing for your business.

  4. Ensuring you have the correct information on any lease you take out is of paramount importance. Interesting read.

  5. It is of paramount importance to ensure all fine print is read and understood in any contract. Investing in the most appropriate style of finance will ensure you can continue to grow your business, without affecting your cash flow.

Leave a Reply

Your email address will not be published. Required fields are marked *

WordPress Anti-Spam by WP-SpamShield