How Your Dental Lease Affects Selling Your Practice

When you own a practice in leased space, the buyer is paying largely for patients who are used to coming to that door. A Dental Economics article points out that a large portion of goodwill depends on the location, and that a move can jeopardize it. If the right to stay in the space cannot pass to the buyer, or lasts only a short time, the value the buyer is willing to pay can fall, or the deal can end.

The lease also gets read by more people than you might expect. A dental law firm lists inspecting lease agreements as part of buyer due diligence, and notes that the buyer must secure either a lease assignment or a new lease. It flags personal guarantees, hidden costs, restrictions on transfer and a short remaining term, which can affect financing and valuation.

An assignment transfers your lease to someone else. Many leases require the landlord's consent, so the wording of that clause matters a great deal. Three provisions deserve particular attention.

• Consent. Does the clause set any standard for the landlord's decision, or can it refuse outright? A Henry Schein article notes it is not uncommon for a landlord to be able to deny a transfer or the proposed transferee. Ask for language saying consent will not be unreasonably withheld, plus objective tests for a qualified buyer, such as a licensed dentist with a defined financial position.
• Recapture. A dental law article warns of clauses allowing the landlord to terminate your lease when you ask for an assignment or sublease. That can leave a practice with a buyer and no home. Try to delete recapture, or to exclude a sale of the practice from it.
• Transfer premiums. Some leases give the landlord a percentage of what you receive when you transfer. Try to limit that language to subleases, or at least make sure it does not reach the price of your practice, and keep any fees to reasonable legal costs.

Deal structure matters too. In an asset sale, the lease generally needs to be assigned. In a stock or membership interest sale, the buyer takes over the entity and its contracts, but a Boston law firm's guide warns that some leases define any change in ownership as an assignment, even a partial buy-in. Read your definition before you decide how to structure a sale, and have your attorney confirm how it applies.

A buyer needs time at the location to pay off the loan and earn a return. So term remaining is one of the first things a buyer or lender asks about.

Lenders usually want the lease to run at least as long as the loan, as one dental attorney notes in Dental Economics. SBA-backed loans are a common example. A Starfield & Smith article on SBA lease requirements describes procedures under which a lender should obtain a lease with a term, including renewal options exercisable only by the borrower, that equals or exceeds the loan term for 7(a) loans, with an assignment of lease and landlord's waiver also expected. SBA revises these procedures from time to time, so ask the buyer's lender what applies now.

• Options that are personal to you may disappear on assignment, which is why a dental law article warns they can be useless to a buyer. Ask that options pass to any permitted assignee.
• A few remaining years are not necessarily fatal. A buyer who commits to stay longer may be able to obtain better terms or an extension, but that puts the landlord in a strong position at the time you can least afford a delay.
• If you are approaching a sale, consider extending before you go to market, so a buyer is not left to do it on a closing deadline.

Many sellers are surprised by this one. Assigning a lease does not automatically end your liability. A dental law article warns that you can remain on the hook for the rest of the term, including option periods. Henry Schein notes that if the new tenant defaults, the landlord could pursue you for payment.

Ask for release when you first sign, if you can. Dental Economics notes that it can be extremely valuable for the landlord to agree in advance to release the assigning tenant and any guarantee on completion of a sale. If a full release is not possible, try a time limit after assignment, a cap, or a replacement guarantee from the buyer. At the sale itself, ask that the landlord's consent document include the release, and do not close on a promise alone.

A release belongs in the landlord's signed consent. Your purchase agreement with the buyer does not bind the landlord, so an indemnity from the buyer is a fallback and not a substitute.

Some provisions never come up in day-to-day practice, but they can lower a buyer's offer.

• ✓Does the surrender clause require returning the space to shell condition, leaving the buyer with a future demolition cost?
• ✓Does the use clause limit services or adding associates, which a buyer may want to change?
• ✓Can the landlord relocate the practice within the complex?
• ✓Is the tenant name on the lease correct, and does it match the entity being sold?
• ✓Is there an exclusive against competing dentists, and does it pass to the buyer?
• ✓Are there unpaid charges, unapproved alterations or defaults a landlord might raise when asked to consent?
• ✓Is there a signage restriction that would stop the buyer from using a new name?
• ✓If you own the building through a separate entity, is there a written lease on terms a buyer would accept?

The lease is much easier to fix before there is a buyer waiting. Think of this as part of getting ready to sell, along with clean books and records.

1. Have your attorney summarize the lease now: expiration, options, assignment, guarantee, restoration and any landlord termination rights.
2. Fix what you can at your next natural opening, such as a renewal or an option exercise, when you have something to trade.
3. As a sale approaches, ask your transition advisor what term buyers and lenders in your area will expect.
4. Check whether the landlord needs to see the buyer's financial information, and how long it has to respond.
5. Make the landlord's consent, release and any estoppel certificate closing conditions.
6. Keep the buyer's attorney and lender informed, since they often have their own lease requirements.

TAG represents tenants and buyers, not landlords. For a dentist planning ahead, we can help renegotiate lease terms before a sale, including during a renewal, and we work alongside your transition attorney, who handles the sale documents.