I am a real estate attorney and member of our dental practice group advising dentists on all real estate matters. The most common questions I receive are from dentists wondering whether it is necessary to negotiate a custom lease for their practice. These questions are understandable in light of the fact that landlords and their brokers often argue that the dentist must sign their “standard” lease. Any reference to lease provisions being just “boiler plate” is an effort by the landlord to brush aside important terms that may affect your dental practice. Most leases are drafted to largely benefit and protect the landlord and do not necessarily balance the needs and rights of both landlord and tenant. Here is a list of four items that are often overlooked but must be negotiated for dental tenants.
- Equipment and Trade Fixtures – Most standard office lease forms provide for all improvements to the leased premises to become the property of the landlord upon termination of the lease however it may occur. As a dental tenant, your equipment (including fixtures such as cabinets, chairs, etc. that are attached to the premises) has very significant value and is part of the practice that you need to be able to move or sell in the future. Special care must be made to draft the lease so as to ensure that your valuable equipment and fixtures remain yours in the event of any termination of the lease. These protections must include a clear statement that your equipment and fixtures are your property and will not become part of the premises, limiting the landlord’s remedies, and expanding the landlord’s duty of care toward your equipment and fixtures.
- Hazardous Materials – The dental industry uses hazardous materials. All commercial lease forms prohibit such uses. Dentists who fail to negotiate the hazardous materials provisions of their leases likely breach their lease immediately upon the opening of their practice. Ensuring you are allowed to use materials customary in the dental industry without risk of breach is absolutely necessary. Additionally, all dentists are employers with potential liability toward their employees. If the landlord or the landlord’s prior tenant misused hazardous materials prior to your occupancy, and the exposure to these hazardous materials affects you or your employees, the landlord should be responsible for all related claims and damages. However, acquiring a landlord indemnity must be negotiated as part of the lease.
- Federal and State Law Compliance – Does the landlord’s property comply with federal regulations? The American with Disabilities Act of 1990 and related state laws regulate parking spaces, sprinklers, door and hallway widths, and other matters associated with the leased premises. Failure to comply with these requirements can impair your practice and result in unanticipated costs. These claims and issues can arise from a dentist’s employee, but issues can also result with reimbursement of insurance monies because compliance with the ADA is a condition for Medicare and Medicaid reimbursement. In addition to the ADA, modifications to the lease are needed to insure compliance by the landlord with Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and multiple other federal and state regulations. Failure to secure these provisions may result in regulatory violations caused by the landlord with no rights or remedies to the dentist.
- Lien Subordination – Both the landlord and the tenant will likely have liens. The landlord’s property is probably subject to a deed of trust or mortgage. The tenant’s equipment and fixtures are also typically subject to liens resulting from your loan taken to purchase those assets. Your dental loan likely requires certain subordination and waiver of lien rights from the landlord in regard to the equipment and fixtures financed by the lender. Negotiating for these lien waivers early and securing them in the lease will avoid unnecessary delays and costs with your lender. Similarly, if the landlord were to ever lose the leased premises to the landlord’s lender by foreclosure, there is a risk the landlord’s lender could terminate the lease. This risk can be avoided by obtaining the proper subordination, non-disturbance, and attornment agreement (sometimes called a SNDA) from landlord’s lender.
This checklist addresses some often overlooked provisions; however, it is far from exhaustive. Dental tenants have many other unique needs which need to be properly addressed in their leases. For example, negotiation of option rights, rights of first refusal, assignment, subletting, and other terms are necessary to ensure the long-term health of your practice. Please contact me or another member of our firm’s dental team if you are considering leasing (or renewing) space for your new or existing dental practice.