Doctors Q & A
Commercial Leases - A Primer
Q. I have been working with a broker to find a new office location and expect to receive a lease shortly. What legal issues should I consider while I am reviewing the lease?
A. As a physician and business owner, selecting the right office location is one of the most important business decisions you will make.
Many good physicians are prevented from developing or retaining their optimal patient base due to an inconvenient location, inadequate parking, unattractive or unkempt common areas, signage limitations, etc. After you have narrowed the playing field and selected a good location, it is critical that you understand some of the key terms of the lease you will be asked to consider and sign.
Given the serious implications of entering into a commercial lease, you should utilize an experienced broker and attorney. Nevertheless, you should also have a general familiarity with some of the terms that will be negotiated and agreed upon relative to your lease.
Rent
Your rental obligation will vary depending upon the desirability of the location and the competitive environment of your local market. In addition to the base rent, you will probably be required to pay a pro rata share of other expenses such as taxes, association fees and other operating and common area maintenance expenses. Be careful because some landlords will broadly define operating expenses to include things such as the landlord's capital improvements. You should ask the landlord to demonstrate the amount of these expenses historically. You may want to ensure that the lease provides for a ceiling on these expenses, especially if the landlord cannot make an adequate representation regarding past expenses.
Description of Property
The description of the property should be precise enough to remove any possible ambiguity. Also, if you require the right to access or utilize any particular area such as a court yard, conference area or T-1 connection panel, you should ensure that the lease clearly specifies your right. Moreover, if you hope to be able to expand to an adjoining unit, your lease should provide a "right of first refusal" concerning the unit if it becomes available.
Term
Some leases specify a particular calendar day as the commencement date for purposes of occupancy, rent accrual and determining the last day of the term. Other leases (especially new construction) will describe the commencement in terms of its relationship to an event that has not yet happened, such as securing certain municipal approvals. Finally, some leases will specify different dates for the commencement of the term, occupancy and the rent commencement. Therefore, it is important that you carefully read and understand the details concerning the term of the lease and related obligations.
Renewal
You should secure the right to renew your lease since you will not want to relocate at the end of the term if you are happy with your location. You should specify the terms of the renewal and also indicate how many times you are permitted to exercise your renewal right.
Use Limitations
Some commercial leases limit the use of the premises. While such a provision may be sensible in the context of a medical office complex, you may want to remove use limitations for multiple use complexes. If you eventually need to sublet or assign the lease, these use limitations may complicate your task.
Assignment and Subleases
Most leases limit or prohibit a tenant's right to assign or sublet the premises. If you are a new practice intending to establish an entity in the near future or are established but intending to sell your practice during the term, you should ensure that the lease provides an unequivocal right of assignment. Also, if you are forced to break the lease, you will need the ability to sublet or assign the lease to a new tenant. While the landlord will probably require the right to approve of your assignment, the landlord should only be able to make reasonable objections and should be required to make these objections within a few days of receiving notice of the assignment.
Parking
Your parking rights should be clearly delineated. If you have many elderly patients, you may want to ensure that your patients have the exclusive right to park in certain, specified spaces near your front door. Individually numbered spaces may be referenced in the lease or blocks of spaces may be depicted on an attached survey.
Signage
Municipalities are increasingly regulating the use of signage and a landlord may also impose further restrictions on the placement, lighting and size of your signs. If signage is important to your practice, make certain that the lease or local ordinances do not interfere with your plans.
Personal Guarantees
If you practice as a corporation, LLC or the like, you want to avoid personal liability under the lease. If at all possible, you should not agree to be personally responsible for the entity's obligations under the lease.
Default and Notice
The lease will set forth various acts or events, any of which may constitute a material breach and default under the lease. Make certain that you understand this provision and that the landlord is obligated to provide advance written notice of an alleged breach, while providing an adequate time period to cure such breach.
Destruction of Premises
The lease will set forth the parties’ respective obligations and rights in the event that the building is partially or completely destroyed by a hurricane or other cause. Your attorney should carefully review this provision to ensure that your right to abatement is adequate, the landlord's insurance proceeds will be used to rebuild the premises, etc.
Dispute Resolution and Attorney’s Fees
The lease may provide for arbitration or limit your right to choose a particular forum and you should discuss this issue with your attorney. Also, your landlord's proposed lease will probably give the landlord the unilateral right to recover attorney's fees and court costs. At the minimum, you should insist that any entitlement to attorney's fees be mutual, with the loser paying the fees and costs of the prevailing party.
In addition to the foregoing, you should work with your attorney and closely scrutinize provisions addressing maintenance and improvements, insurance requirements and the like. These provisions may also have a significant impact upon your expenses and obligations during the term.
Stephen A. Snyder, Esq.
Vice President/General Counsel
Disclaimer: The information contained within the MTBC® Legal Corner is provided for general educational and informational purposes only and should not be construed as legal advice. The author of the Legal Corner does not represent the Web site user or the individual submitting a particular question. Please seek the advice of legal counsel to address any specific questions you may have regarding your particular facts or circumstances