Planting the seeds for success
Ian D. Toms, B.Sc.
Every tenant needs to make many decisions concerning their lease. Deciding who will complete any negotiation is a primary decision.
Tenants often consider completing the negotiation themselves. Occasionally they retain someone who completes a few lease negotiations each year as an ancillary portion of their main focus. The third alternative is to retain a professional who specializes in lease negotiation.
Tenants choose their representative based on a perception of value:
- Is the effort required and fees charged by an advisor greater than rental savings? I don’t want to waste money by retaining a professional.
- I don’t want to spend the time and money on a professional because there’s probably not anything in my lease that isn’t “normal”. If something does come up I’ll deal with it then.
Ignorance is bliss. Choosing inappropriate representation can result in very expensive lease problems that may not surface for many years – when it’s too late to do anything about them. Properly done, a professionally negotiated lease will save the tenant initial rent payments, but equally or more important, the negotiation will plant many seeds for very significant savings years after the initial negotiation.
I have included two examples to illustrate my point.
Renewal
Most (not all) leases include renewal options of some form or another which must be properly written and administered to protect lease terms and conditions, since these lease terms and conditions in large part determine the value of the practice and eventually the operators retirement fund. In short, flawed or missing renewal options can eliminate your retirement fund.
Recently I completed a term renewal negotiation. The lease was well written and negotiated several years ago. The practice had flourished and the dentist was looking forward to selling his practice – in fact he had an interested party working as an associate. The lease term had to be extended on the same terms and conditions as the current term in order for the operator to sell his practice and retire. I became involved when tenant, who was administering lease issues himself, became frustrated by landlords slow response. It became immediately apparent that landlord was intentionally delaying the renewal negotiation process hoping that tenant would allow the renewal option to expire because landlord was intent on introducing an early termination provision to the lease.
I administered the renewal option and forced the landlord to extend the lease term without adding the option to terminate the lease, which enabled the sale, and therefore retirement, to proceed. A few months later the client contacted me to confirm that in fact the buyer had purchased his practice. The net effect is that by investing in professional representation, both during the initial lease negotiation and during the term renewal negotiation, this tenant saved net of fees, approximately $300,000 in leasehold improvement costs associated with a forced relocation, and was able to retire!
Relocation
Some leases contain a provision which enables landlord on short notice to force tenant to move to alternate premises, often with landlord only paying for a portion of the expense. If triggered, the result is that the clinic will be closed during the move, and tenant has to pay part or all of the cost of overhead, equipment, fixtures and leasehold improvements, and move to less attractive or productive premises.
I negotiated a lease for a relatively large practice which was relocating a number of years ago. In addition to negotiating a “good deal”, many terms and conditions, including the relocation provision, were adjusted in tenants favour.
Recently, tenant was advised that landlord required the tenant to relocate to alternate premises within the plaza. The space was inferior in many respects, and landlord’s initial position was that tenant would need to pay for a significant portion of the cost of the relocation. The exact mechanism to create and manage tenants leverage position were negotiated into the lease during the initial lease negotiation, and again, by retaining an experienced professional, tenant will save, instead of spending many thousands of dollars on indirect costs and replacement of equipment, fixtures, and leasehold improvements. The net effect is that by investing in professional representation both during the initial lease negotiation, and during the relocation negotiation, this tenant saved, net of fees, approximately $375,000.00!
Invest in your future. Plant the seeds for success by retaining a qualified professional to administer your lease affairs.