3 Mistakes to Avoid When Negotiating a Lease for Your Dental Practice

When finding a new location for your dental practice, you’ll want to ensure that your lease is both beneficial and reasonable.

Approximately 80 percent of healthcare practices (including dental practices) lease their office space.  Finding the right space for your practice is critical to client retention and referrals.  So, with rent being the second highest expense (second only to payroll), how can you avoid making any costly mistakes when negotiating a lease for your dental practice after you’ve found the perfect location?  Keep reading to find out.

Lack of Knowledge

To get the best possible terms on your lease, you should first be familiar with all of the options out there, including the types of leases.  In addition to understanding your lease options, you’ll also want to check with your local commercial real estate broker to learn more about local availability, recently completed transactions, etc. to understand the current market pricing.  This information is not typically publicly available so for dentists looking to open a practice outside of their local area, they may not be aware of that information and should seek out a broker to assist them.  This service is normally provided free of charge.

There are three types of leases out there for dental practices and they are:

• NNN

• Full Service

• Modified Gross

Not all leases will have your best interest in mind and it’s easy to fall prey to leases that lack certain protections.

The NNN Lease

The NNN lease is referred to as the “triple net lease” and this is by far the worst kind of lease you could have.   This type of lease means that you'll be paying your share of every expense that the landlord incurs up to and including replacing the roof, repaving a parking lot, changing a lightbulb, etc. A NNN is the most common and also the worst kind of lease out there.  This doesn't mean you should walk away from your ideal location if it's an NNN lease.  You can always negotiate a lower rent cost or more free rent or tenant improvement dollars.  There are a number of things you can do upfront before signing the lease to help offset some of the cost.

The Full-Service Lease

A full-service lease is the exact opposite of an NNN lease in that you're only paying for your rent and that's it.  With this type of lease, you would not be paying for any common area expenses, utilities (unless specific to your own unit), etc. It is the best kind of lease out there but is also the rarest type.

The Modified Gross Lease

The third type of lease is a Modified Gross Lease which falls between the NNN and full-service leases.  You'll pay for some expenses, but not for all of them.  This option is a good middle ground.

Assuming That You’re Powerless in Negotiations

The current economic client may be in favor of the landlord, or maybe it’s not, but either way you wield some power when it comes to negotiations.  Don’t be fooled into thinking that they’re doing you any favors.  Many tenants seek out three to five-year leases whereas dentists typically seek out something more long term, such as 10-year leases.  Landlords know just how profitable dental practices can be to their property, giving you the power to negotiate.  Don’t be afraid to let them know that you have multiple options on the table and that their property isn’t the end all be all for your practice.

This is yet another situation in which having a well-versed commercial real estate broker can prove beneficial.  They can help you determine what is both fair and favorable to you to help avoid any potential costly mistakes.

Skimming Over Your Lease

There are a few points you’ll want to consider when negotiating your lease such as the death and disability clause, the relocation provision, the rentable versus usable square footage, exclusivity and arguably one of the most important clauses would be the assignment/sublease clause.

While they are not all deal breakers, there is certain language that would not be in the best interest of you or your dental practice that has been included in lease agreements before.  It is important to understand what those clauses mean and what wording would be most beneficial to have in your lease.

As it is one of the more important aspects that is often overlooked, there have been instances where the landlord has included wording that would demand a percentage of the sale, a fine or even that the landlord would be allowed to take back the property should anything happen to you or if you decide to sell you practice.  That alone should be enough to make you want to give your lease another cautious look over before signing.

Bottom Line

Do yourself a favor by doing your homework and allowing for enough time to negotiate your lease.  Don’t leave it to the last minute as it could put you in a more precarious position and the landlord may take advantage of the situation.  The process from start to end may prove to be frustrating but remember that dental leases are typically for around 10 years.  So, you may go for another 9+ years before starting the process all over again.   

Dental B-School is full of information and resources to help you avoid any costly mistakes.  Dig into our free resource section for more information or contact us to schedule your strategy session today.