Leasing premises – do you know what you’re letting yourself in for?
Many dental practitioners struggle with the decision of whether to purchase their practice premises or take a lease from a landlord. A well negotiated lease can leave dentists with a greater degree of flexibility when considering retirement or the sale of their practice.
However, a badly negotiated lease can cause a large number of (often very expensive) problems. Dentists might take a lease for 15 years or more without fully realising what implications this will have for both their practice and the dentist in her or his individual capacity.
So what should you take into account if you are considering leasing your premises? Below I list three of the most important things to consider:
1) Repair obligations
What is it:
A repair clause in the lease determines who is responsible for carrying out repairs at the property. This will usually be the tenant’s responsibility.
Beware:
An obligation to ‘keep the property in good repair and condition’.
In order to keep a property in good repair and condition, the tenant must first put the property in good repair and condition. You will therefore be required to improve any disrepair present at the property when you move in. This could range from a few scratches on a skirting-board to significant ‘hidden’ issues which only a detailed survey would pick up. The latter could lead to a repair liability of many thousands of pounds following completion of the lease.
Possible solutions:
Limit your repair liability by attaching a photographic Schedule of Condition to the lease.
You will then only have to keep the property in the same state of repair and condition as evidenced by the Schedule. This would ideally be a full survey but even photographs taken from a phone should assist in limiting your repair liability to some extent.
2) Flexibility to end the lease
What is it:
Many leases will include provisions relating to break rights (bringing the lease to an early end). These provisions need to be carefully considered by the tenant to ensure it has flexibility in the event it wishes to sell the practice or retire.
Beware:
Break conditions which are overly onerous for the tenant.
A break clause condition which requires “vacant possession” to be given to the landlord before the lease can be ended early is particularly onerous for the tenant. A requirement for vacant possession to be given means the landlord might be able to refuse to allow a tenant to exercise its break clause if the tenant leaves anything at the property. In a 2011 Court of Appeal case, two workers and a security guard employed by the tenant had remained at the property following the break date to finish off outstanding repairs and to stop the property from being vandalised. Although this was in the Landlord’s interest, it meant the tenant had not provided vacant possession and so it was not able to trigger its break clause.
Possible solution:
Negotiate any conditions.
If you can, try and remove the break conditions altogether. However, a possible compromise would be to replace the requirement for ‘vacant possession’ with a requirement only to give up occupation, which is far easier to achieve. Make sure you have received legal advice to ensure you are content with the flexibility you have in the lease.
3) “Hidden” costs
What is it:
A tenant will expect to pay rent, insurance costs, perhaps a service charge if it shares communal areas with other tenants, and a number of other costs such as utilities and rates. However, there can be other costs which are less
obvious on the face of the lease.
Beware:
Removal costs at the end of the term, rent reviews, Stamp Duty Land Tax and VAT.
The tenant is likely to be required to remove any additions or alterations it makes to the property when the lease comes to an end. Such removals could cost a significant amount and a well advised tenant should always be mindful of this.
Likewise, consider rent reviews – if the lease contains an open market rent review every few years, the rent could be significantly higher for the last few years of the lease than it is at the start.
Stamp Duty Land Tax could be payable on completion of the lease and VAT might be payable on top of the rent and other costs in the lease.
Potential solution:
You might not be able to avoid these costs but you can at least be aware of them from the outset and factor them into your financial calculations when agreeing your headline rent for the premises with your landlord.
Leases can be a cost effective way for dentists to run their practices and they allow a large degree of flexibility when considering retirement or the sale of a practice. However, it is crucial that dentists are aware of the potential pitfalls before entering into a lease which will typically impose long term and costly obligations on the tenant. Receiving appropriate legal advice before entering into any lease is the best way of ensuring your interests are suitably protected.
Continue reading other articles:
Introduction to Hempsons’ Dental Newsletter; 24 hour NHS retirement – piece of cake, right?; Is your dental practice ready for GDPR; Selling or buying a dental practice; The delicate balance – ill heath dismissals.