The process of transferring a practice lease to a new owner can be an intricate and impactful piece of the dental transition.

In the beginning of a dental transition, the initial focus tends to be on a handful of key areas, such as practice price, timing and seller workback. While the lease is not typically the focal point at the starting line, it certainly shouldn’t be left until the end. Most people are familiar with residential leases for an apartment or house, but transferring a practice lease can be more complex and filled with different stipulations. Moving to a new practice space isn’t quite as easy as moving homes.

For the buyer preparing to take over the lease, or for the seller preparing to make the transfer to the buyer, this piece of the transition is about preparing for both the financial implications and the decisions ahead. The rent of a space is often the largest contributor to overhead and can make a big impact on the patient base. Additionally, the lease agreement typically sets the expectations for not just one year but multiple years, so negotiating the proper terms up front while keeping the long-term goals in mind is crucial.

Here are a few significant factors to understand and common negotiated areas when it comes to the lease agreement.

Triple Net vs. Gross Lease

Simply put, the type of lease for the practice determines who pays for future expenses. There are two basic types of leases: triple net and gross.

Triple Net: In a triple net lease, the tenant is responsible for property taxes, insurance, utilities and base rent. Generally, triple net leases are the most common in dental practices.

Gross: A gross lease is where the tenant pays a higher base rent, but they are not responsible for property taxes and insurance (and sometimes not utilities). Those expenses fall on the landlord. This type of lease is less common and is often seen in small practices in rural areas.

Note that there are certainly hybrids of these two leases.

Overall, the key here is to understand what type of lease is being considered when analyzing the practice financials and the proposed lease itself.

Lease Term and Escalations

Understanding the length of the lease is not only about knowing how long the tenant will be at the office, but also recognizing how the following factors will affect both the seller and the buyer (the soon-to-be new tenant) in the short- and long-term.

Lease Term: The lease term is the duration the tenant is expected to stay in the space. This is considered to be when the tenant is “locked in” to the lease. Note that the lease term does not necessarily mean the length in total, but rather the initial duration, as this may not include the years of renewal options.

Renewal Options: Options to renew involve additional years that will extend the total length of the term. Therefore, if the tenant is on a five-year term with three two-year options to renew, that means they have the ability to stay in the space for 11 years total.

Keep in mind that if an outside lender is involved in the practice transition or purchase process, the bank will require the new buyer to have a lease for the length of the financing. This means if a buyer receives a 10-year term for lending, the bank will require the lease length to be 10 years, which includes the initial term and renewals.

Rent Escalations: Rent escalations involve increment increases of the tenant’s rent based on a certain time period or based on the initial term. The rent may increase a small amount each year, or it could be a fixed rate for one or two years and then begin escalating every year thereafter or at the term renewal. The amount of escalation will likely depend on the local market, initial terms and overall transition terms.

Whether it’s the buyer or seller, they should understand their obligations in relation to the term and renewals. For buyers in this situation, they should be mindful of the long-term goals and if the terms are restricting or locking them in for longer than they’d like. If the neighborhood or the office space isn’t amazing, the space doesn’t have room to expand and bring in an associate in the future or if the buyer wants flexibility to relocate in the future, then they may not want to confine themselves to a long initial term lease.

HVAC Repair and Replacement

The heating, ventilation and air conditioning (HVAC) system, is an area of the lease that is often heavily negotiated. The question is who takes on the financial responsibility and execution of repairs and maintenance and who pays for the replacement. Does the responsibility fall on the tenant or the landlord, or are the responsibilities split?

There isn’t necessarily a standard structure for negotiating the HVAC, but there are a few different ways to go about it.

In some instances, the tenant may be responsible for the repair and upkeep, while the replacement is on the landlord since they own the asset and the building. In other instances, the tenant may be required to pay for the repairs up to a certain dollar amount, or maybe the building is shared with multiple tenants, so they’ll need to split the amount.