W hether you own your own practice or are part of a group, you will likely have to sign a commercial lease at some point in your life. Since this is something physicians don’t have to do very often, and landlords do all the time, the landlord tends to have a distinct advantage. You can level the playing field by having as much knowledge as possible and by working with a good tenant representative. The first thing to remember is that commercial leases are totally different from the residential leases. Because we all have some experience renting an apartment after college, it’s easy to assume the two are similar. Certain rights of a residential tenant are protected by the government even if the person signs an unfavorable lease agreement. This is not the case with a commercial tenant; the landlord is only bound to provide what is stipulated in the lease. Because of this, it’s very important to read and understand the agreement. Here’s a look at some areas to which you need to pay particular attention. Costs Paid by the Lessee Obviously, the first consideration is how much rent is being charged. Commercial space is generally priced by the square foot, per year. When your broker tells you the space you are looking at is priced at $12 per foot, he/she means a 3,000-sq.-ft. office would be $36,000 per year or $3,000 per month. While the per foot cost is the majority of your lease cost, other costs may be hidden in the lease agreement that could substantially effect the actual cost to you. It is important to find out who pays the cost of the building’s taxes, insurance, repairs, cleaning and utilities etc., before you can determine the true cost of the lease. Leases that have these costs paid by the landlord are are called “full-service leases,” and leases where you pay these costs are called “triple-net leases.” As you might imagine, leases can fall somewhere in between. This makes it very difficult to compare cost per square foot without doing some analysis. In addition to the lease cost, you need to consider other concerns that may be even more significant. For example, if the space needs many improvements (called build-outs), you may want to pay a higher lease amount and have the landlord pay for these. Or, if money is tight when starting or moving your practice, you may want to ask for a few months of reduced lease. Your negotiating power on these and other issues depends on whether your local rental market is hot or cold. If plenty of commercial space is available, you can probably win many landlord concessions. If your area’s rental market is tight or you are after a unique space, you’ll have considerably less leverage. Flexibility in the Lease Agreement A common mistake is not allowing for enough flexibility in the lease when signing. As time goes by, your needs may change. Space that was large enough just a few years ago can quickly seem cramped. By obtaining flexibility in the lease, you can allow your practice to expand, downsize or relocate as circumstances dictate. This allows you to avoid the unnecessary headaches and costs associated with relocating. Examples of such important lease clauses include: • Expansion rights. These obligate the landlord to provide the tenant with more space should it become necessary. • Cancellation right. Commonly referred to as a “kick-out” clause, this allows the tenant to break the lease under certain conditions such as when the tenant needs to expand and the landlord cannot provide additional space on the premises. • Lease options. These allow the tenant the right to renew the lease for a set price and period. There can be multiple lease options in the original lease. • Right to sublease. This allows you the flexibility to vacate the space before the end of the lease by being able to rent it to another business. The rent the other business pays you can be less than, equal to or more than you are paying the landlord. Services Provided by the Landlord The most frequent causes of friction between tenants and landlords are what services the landlord will provide and the quality of those services. It is important to recognize that the landlord is not bound to provide services beyond those expressly stipulated in the lease agreement. Consequently, services as insignificant as how often the widows get washed to who sets the heating and cooling temperature can be very frustrating if they’re not spelled out in the lease agreement. You should carefully review the provisions of your lease that specify the services that the landlord will provide. At a minimum, the lease agreement should specify the following services: • the minimum amount of electrical service available to you within your space • the range of temperatures that will be maintained during business and non-business hours • the hours during which you, your employees and your patients will have access to the premises • whether the landlord will maintain the exterior appearance, wash windows, common lobby, hallway areas and restrooms, as well as the structure and roof of the building • that the sidewalks and parking areas will be well maintained, and the landlord will undertake snow and ice removal as needed • the security measures that will be in effect at the building during the lease term • whether the landlord is responsible for janitorial and trash removal obligations within your space (or whether these obligations will be yours) • stipulate whether running water will be provided by the landlord (and, if so, whether that will include hot water, or whether you will be obligated to purchase a hot water heater for your space). Rent Commencement Date We naturally assume the rent will start when the space is ready for us to use. Unfortunately, that is not the way most agreements are drafted. Many new tenants have found that unexpected delays in the planning, permitting and actual remodeling can cause the move-in date to be well after the rent-free build-out period. This can add to the financial stress of starting or moving a practice. We recommend that tenants propose a clause to the lease that provides for an extension of the lease commencement date if pre-opening delays are encountered that are beyond their control. Know What You’re Paying For You’ll need to know how the landlord has calculated the square footage you are paying for. Is it based on the actual square footage that you have private use of, or does it include space that you share with the other tenants? Is it accurate? Get out the measuring tape and measure it before the furniture is in and make sure you are getting what you are paying for. Personal Guaranty It very common for the landlord to have you as the owner(s) of the practice, make a personnel guaranty of the lease payments. This clause can cause you or other owners of the practice a great deal of heartburn if one or all of you would like to leave the space before the lease is up. It is worth trying to negotiate away this guaranty or have it expire after so many months. The landlord may also allow the guarantee to be limited to a specific dollar amount. Arbitration vs. Litigation Most standard lease agreements have a clause that requires that the landlord will be reimbursed for any cost to enforce the lease, as long as the landlord prevails. Since it is expensive to pay your own legal fees, let alone have the risk of paying the landlord’s, it puts the tenant at a distinct disadvantage regarding any dispute that can’t be resolved. An arbitration clause is a more equitable way to resolve disputes and a lot less expensive for both parties. Consider Your Options There are many points to consider when signing a lease for your practice. Be sure to review the lease carefully and make sure you pay close attention to the areas mentioned above. Don’t rush into signing anything before understanding exactly what you’ll be getting for your money.
What You Need to Know Before You Sign that Lease
W hether you own your own practice or are part of a group, you will likely have to sign a commercial lease at some point in your life. Since this is something physicians don’t have to do very often, and landlords do all the time, the landlord tends to have a distinct advantage. You can level the playing field by having as much knowledge as possible and by working with a good tenant representative. The first thing to remember is that commercial leases are totally different from the residential leases. Because we all have some experience renting an apartment after college, it’s easy to assume the two are similar. Certain rights of a residential tenant are protected by the government even if the person signs an unfavorable lease agreement. This is not the case with a commercial tenant; the landlord is only bound to provide what is stipulated in the lease. Because of this, it’s very important to read and understand the agreement. Here’s a look at some areas to which you need to pay particular attention. Costs Paid by the Lessee Obviously, the first consideration is how much rent is being charged. Commercial space is generally priced by the square foot, per year. When your broker tells you the space you are looking at is priced at $12 per foot, he/she means a 3,000-sq.-ft. office would be $36,000 per year or $3,000 per month. While the per foot cost is the majority of your lease cost, other costs may be hidden in the lease agreement that could substantially effect the actual cost to you. It is important to find out who pays the cost of the building’s taxes, insurance, repairs, cleaning and utilities etc., before you can determine the true cost of the lease. Leases that have these costs paid by the landlord are are called “full-service leases,” and leases where you pay these costs are called “triple-net leases.” As you might imagine, leases can fall somewhere in between. This makes it very difficult to compare cost per square foot without doing some analysis. In addition to the lease cost, you need to consider other concerns that may be even more significant. For example, if the space needs many improvements (called build-outs), you may want to pay a higher lease amount and have the landlord pay for these. Or, if money is tight when starting or moving your practice, you may want to ask for a few months of reduced lease. Your negotiating power on these and other issues depends on whether your local rental market is hot or cold. If plenty of commercial space is available, you can probably win many landlord concessions. If your area’s rental market is tight or you are after a unique space, you’ll have considerably less leverage. Flexibility in the Lease Agreement A common mistake is not allowing for enough flexibility in the lease when signing. As time goes by, your needs may change. Space that was large enough just a few years ago can quickly seem cramped. By obtaining flexibility in the lease, you can allow your practice to expand, downsize or relocate as circumstances dictate. This allows you to avoid the unnecessary headaches and costs associated with relocating. Examples of such important lease clauses include: • Expansion rights. These obligate the landlord to provide the tenant with more space should it become necessary. • Cancellation right. Commonly referred to as a “kick-out” clause, this allows the tenant to break the lease under certain conditions such as when the tenant needs to expand and the landlord cannot provide additional space on the premises. • Lease options. These allow the tenant the right to renew the lease for a set price and period. There can be multiple lease options in the original lease. • Right to sublease. This allows you the flexibility to vacate the space before the end of the lease by being able to rent it to another business. The rent the other business pays you can be less than, equal to or more than you are paying the landlord. Services Provided by the Landlord The most frequent causes of friction between tenants and landlords are what services the landlord will provide and the quality of those services. It is important to recognize that the landlord is not bound to provide services beyond those expressly stipulated in the lease agreement. Consequently, services as insignificant as how often the widows get washed to who sets the heating and cooling temperature can be very frustrating if they’re not spelled out in the lease agreement. You should carefully review the provisions of your lease that specify the services that the landlord will provide. At a minimum, the lease agreement should specify the following services: • the minimum amount of electrical service available to you within your space • the range of temperatures that will be maintained during business and non-business hours • the hours during which you, your employees and your patients will have access to the premises • whether the landlord will maintain the exterior appearance, wash windows, common lobby, hallway areas and restrooms, as well as the structure and roof of the building • that the sidewalks and parking areas will be well maintained, and the landlord will undertake snow and ice removal as needed • the security measures that will be in effect at the building during the lease term • whether the landlord is responsible for janitorial and trash removal obligations within your space (or whether these obligations will be yours) • stipulate whether running water will be provided by the landlord (and, if so, whether that will include hot water, or whether you will be obligated to purchase a hot water heater for your space). Rent Commencement Date We naturally assume the rent will start when the space is ready for us to use. Unfortunately, that is not the way most agreements are drafted. Many new tenants have found that unexpected delays in the planning, permitting and actual remodeling can cause the move-in date to be well after the rent-free build-out period. This can add to the financial stress of starting or moving a practice. We recommend that tenants propose a clause to the lease that provides for an extension of the lease commencement date if pre-opening delays are encountered that are beyond their control. Know What You’re Paying For You’ll need to know how the landlord has calculated the square footage you are paying for. Is it based on the actual square footage that you have private use of, or does it include space that you share with the other tenants? Is it accurate? Get out the measuring tape and measure it before the furniture is in and make sure you are getting what you are paying for. Personal Guaranty It very common for the landlord to have you as the owner(s) of the practice, make a personnel guaranty of the lease payments. This clause can cause you or other owners of the practice a great deal of heartburn if one or all of you would like to leave the space before the lease is up. It is worth trying to negotiate away this guaranty or have it expire after so many months. The landlord may also allow the guarantee to be limited to a specific dollar amount. Arbitration vs. Litigation Most standard lease agreements have a clause that requires that the landlord will be reimbursed for any cost to enforce the lease, as long as the landlord prevails. Since it is expensive to pay your own legal fees, let alone have the risk of paying the landlord’s, it puts the tenant at a distinct disadvantage regarding any dispute that can’t be resolved. An arbitration clause is a more equitable way to resolve disputes and a lot less expensive for both parties. Consider Your Options There are many points to consider when signing a lease for your practice. Be sure to review the lease carefully and make sure you pay close attention to the areas mentioned above. Don’t rush into signing anything before understanding exactly what you’ll be getting for your money.
W hether you own your own practice or are part of a group, you will likely have to sign a commercial lease at some point in your life. Since this is something physicians don’t have to do very often, and landlords do all the time, the landlord tends to have a distinct advantage. You can level the playing field by having as much knowledge as possible and by working with a good tenant representative. The first thing to remember is that commercial leases are totally different from the residential leases. Because we all have some experience renting an apartment after college, it’s easy to assume the two are similar. Certain rights of a residential tenant are protected by the government even if the person signs an unfavorable lease agreement. This is not the case with a commercial tenant; the landlord is only bound to provide what is stipulated in the lease. Because of this, it’s very important to read and understand the agreement. Here’s a look at some areas to which you need to pay particular attention. Costs Paid by the Lessee Obviously, the first consideration is how much rent is being charged. Commercial space is generally priced by the square foot, per year. When your broker tells you the space you are looking at is priced at $12 per foot, he/she means a 3,000-sq.-ft. office would be $36,000 per year or $3,000 per month. While the per foot cost is the majority of your lease cost, other costs may be hidden in the lease agreement that could substantially effect the actual cost to you. It is important to find out who pays the cost of the building’s taxes, insurance, repairs, cleaning and utilities etc., before you can determine the true cost of the lease. Leases that have these costs paid by the landlord are are called “full-service leases,” and leases where you pay these costs are called “triple-net leases.” As you might imagine, leases can fall somewhere in between. This makes it very difficult to compare cost per square foot without doing some analysis. In addition to the lease cost, you need to consider other concerns that may be even more significant. For example, if the space needs many improvements (called build-outs), you may want to pay a higher lease amount and have the landlord pay for these. Or, if money is tight when starting or moving your practice, you may want to ask for a few months of reduced lease. Your negotiating power on these and other issues depends on whether your local rental market is hot or cold. If plenty of commercial space is available, you can probably win many landlord concessions. If your area’s rental market is tight or you are after a unique space, you’ll have considerably less leverage. Flexibility in the Lease Agreement A common mistake is not allowing for enough flexibility in the lease when signing. As time goes by, your needs may change. Space that was large enough just a few years ago can quickly seem cramped. By obtaining flexibility in the lease, you can allow your practice to expand, downsize or relocate as circumstances dictate. This allows you to avoid the unnecessary headaches and costs associated with relocating. Examples of such important lease clauses include: • Expansion rights. These obligate the landlord to provide the tenant with more space should it become necessary. • Cancellation right. Commonly referred to as a “kick-out” clause, this allows the tenant to break the lease under certain conditions such as when the tenant needs to expand and the landlord cannot provide additional space on the premises. • Lease options. These allow the tenant the right to renew the lease for a set price and period. There can be multiple lease options in the original lease. • Right to sublease. This allows you the flexibility to vacate the space before the end of the lease by being able to rent it to another business. The rent the other business pays you can be less than, equal to or more than you are paying the landlord. Services Provided by the Landlord The most frequent causes of friction between tenants and landlords are what services the landlord will provide and the quality of those services. It is important to recognize that the landlord is not bound to provide services beyond those expressly stipulated in the lease agreement. Consequently, services as insignificant as how often the widows get washed to who sets the heating and cooling temperature can be very frustrating if they’re not spelled out in the lease agreement. You should carefully review the provisions of your lease that specify the services that the landlord will provide. At a minimum, the lease agreement should specify the following services: • the minimum amount of electrical service available to you within your space • the range of temperatures that will be maintained during business and non-business hours • the hours during which you, your employees and your patients will have access to the premises • whether the landlord will maintain the exterior appearance, wash windows, common lobby, hallway areas and restrooms, as well as the structure and roof of the building • that the sidewalks and parking areas will be well maintained, and the landlord will undertake snow and ice removal as needed • the security measures that will be in effect at the building during the lease term • whether the landlord is responsible for janitorial and trash removal obligations within your space (or whether these obligations will be yours) • stipulate whether running water will be provided by the landlord (and, if so, whether that will include hot water, or whether you will be obligated to purchase a hot water heater for your space). Rent Commencement Date We naturally assume the rent will start when the space is ready for us to use. Unfortunately, that is not the way most agreements are drafted. Many new tenants have found that unexpected delays in the planning, permitting and actual remodeling can cause the move-in date to be well after the rent-free build-out period. This can add to the financial stress of starting or moving a practice. We recommend that tenants propose a clause to the lease that provides for an extension of the lease commencement date if pre-opening delays are encountered that are beyond their control. Know What You’re Paying For You’ll need to know how the landlord has calculated the square footage you are paying for. Is it based on the actual square footage that you have private use of, or does it include space that you share with the other tenants? Is it accurate? Get out the measuring tape and measure it before the furniture is in and make sure you are getting what you are paying for. Personal Guaranty It very common for the landlord to have you as the owner(s) of the practice, make a personnel guaranty of the lease payments. This clause can cause you or other owners of the practice a great deal of heartburn if one or all of you would like to leave the space before the lease is up. It is worth trying to negotiate away this guaranty or have it expire after so many months. The landlord may also allow the guarantee to be limited to a specific dollar amount. Arbitration vs. Litigation Most standard lease agreements have a clause that requires that the landlord will be reimbursed for any cost to enforce the lease, as long as the landlord prevails. Since it is expensive to pay your own legal fees, let alone have the risk of paying the landlord’s, it puts the tenant at a distinct disadvantage regarding any dispute that can’t be resolved. An arbitration clause is a more equitable way to resolve disputes and a lot less expensive for both parties. Consider Your Options There are many points to consider when signing a lease for your practice. Be sure to review the lease carefully and make sure you pay close attention to the areas mentioned above. Don’t rush into signing anything before understanding exactly what you’ll be getting for your money.
