If you need to sign a lease for your veterinary practice’s location, here are a few tips to help you to successfully negotiate a commercial lease.
Examine the Premises Carefully
This includes the HVAC, plus electrical and plumbing systems, although even careful due diligence won’t reveal hidden defects, such as ineffective heating in August, flawed AC in February or roof leaks during heavy rains. Do not assume that everything the landlord tells you about the premises is 100% accurate.
A typical veterinary practice lease ranges between 10 and 25 years. So, when you find a suitable facility, prepare and invest for a long-term relationship. Ask for options to renew the contract and make sure you’re clear about when you must give notice to renew. (There are also benefits to long-term relationships for your lessor, given the costs associated with finding new leasees and negotiating leases!)
Two Forms of Rent: Base and Additional
Actual rent payments are usually the sum of the two types.
Base rent is what tenants pay to occupy premises and can be determined in multiple ways. Beware of comparing rentals based on dollars per square feet, as “square feet” can be defined in numerous ways. Landlords can quote a dollar/square foot rent using “rentable square feet” but, because only a portion of space is actually usable by the tenant, true rent is higher.
Base rent can be based on a percentage of the tenant’s gross revenues, but this complicates contracts. How will gross revenues be calculated? How will disagreements be resolved?
Leases typically include annual rent increases. If a tenant has a 10-year lease with a $60,000 flat annual rent lease, the cost would be $600,000 over the lease term. With a 3% escalation clause, though, total rent paid will be $ 687,832.76, a difference of approximately $87,833.
Most leases include payment of additional rents (all amounts outside of base rent), such as the security deposit (often one to three months’ rent) and reimbursing the landlord for property taxes, monthly or quarterly.
Maintenance, Repairs and Other Expenses
In multi-tenant facilities, landlords are responsible for common area maintenance (CAM), which includes sidewalks, stairways between tenant premises, parking lots, outdoor maintenance and so forth. There is no commonly accepted definition of CAM, so it’s open to negotiation. A lessor will want to pass on expenses; as leasee, to minimize CAM. As leasee, beware of the phrase “including but not limited to” because the landlord can add new expense categories and tenants cannot typically audit CAM expenses. Single tenant leases, fortunately, are more straightforward with most expenses paid directly by the tenant, although structural repairs are usually listed as a landlord expense.
Tenants must maintain general liability insurance and casualty insurance covering their furnishings, equipment and other property; sometimes, tenants must keep business interruption insurance sufficient to pay the rent for a year (or more). The tenant must also maintain fire and other casualty insurance on the facility itself in single tenant facilities, whereas multiple tenant facility landlords insure themselves and pass costs to tenants via CAM.
Premises Destruction & Condemnation
If premises are destroyed or damaged by fire or other casualty, leases provide that the landlord uses insurance proceeds to repair them within a deadline. If the deadline can’t be met, the lease can be terminated. Critical issue: can the tenant terminate the lease or only the landlord? Negotiate!
General Rule for Tenant Improvements
They typically require the landlord’s prior consent at the tenant’s expense. Critical issue: can the tenant remove improvements when the lease ends? Again, negotiate wisely!
Lease Assignment & Subletting
Most leases state that tenants can’t assign their lease, or sublet space, without landlord consent. Tenants can try to prohibit unreasonable withholding or delaying consent; tenants with foresight will try to get more freedom to assign the lease if they are also selling the practice.
Indemnification & Liability Limits
Leases almost always require tenants to hold landlords harmless from injury or damage suffered from acts and omissions of tenants – or from premises being defective. Savvy tenants (with leverage) will try to stipulate that the disclaimer doesn’t apply when the landlord was negligent.
Breach & Punishment
Commercial leases usually include long provisions defining default triggers, notice requirements and remedies. Important: lease termination and eviction do not suspend the tenant’s obligation to pay rent and CAM for the remaining term of the lease. Tenant obligation is reduced if the landlord re-rents the premises to a new tenant, but the landlord is not required to do so. Tenant negotiation tip: try to insert a general clause requiring the landlord to mitigate damages.
Note about Tenant Owners
Many leases stipulate that a guarantor’s bankruptcy triggers a tenant default under the lease, which then allows landlords to evict tenants. Tenants may want to try to soften this provision.