Renewing your tenant lease is one of the most important matters which physicians and dentists need to correctly tend to in the business of practicing medicine. In working with literally thousands of physicians and dentists over the years, a lot of people ask me what is the biggest mistake which healthcare professionals tend to make when dealing with their lease renewal. The answer is both simple and extremely complex at the same time. It’s simple, because the biggest mistake is waiting for the last minute to deal with the lease renewal; and, complex because the correct focus on what a doctor/dentist should be dealing with at the time the lease rolls over is almost always overlooked.

In order to best understand what I am getting at is to share with you a recent and common situation which occurred with a group of six family physicians who were practicing together under one roof in the Greater Toronto area. Last fall, shortly after my seminar presentations to physicians in the Toronto area on this very subject, I received a phone call from an extremely nice young physician who had recently joined a family practice with five other doctors. He indicated that he really enjoyed my presentation and felt compelled to discuss their group’s current situation as they were not exactly sure as to what they ought to be doing next. I asked to review a copy of their current tenant lease document which he had brought to our lunch meeting the following day. When I first looked at any lease document on the behalf of physicians, I first look for three things:

• first, who is the tenant – in this case, each of the group’s physicians signed the lease personally, both joint and severally;
• second, when does the lease expire – this is not always an easy question to answer, as it can be extremely vague in most circumstances. However, I was able to determine that the lease expired at the end of the year or in about six weeks;
• third, was there option to extend the lease and if so, was it exercised correctly. Upon review, it was determined that there was an option to extend the lease however, the date in which the group could have done this had come and gone some three and a half months earlier.

Before I go on, it is important to point out that exercising an option to renew, is not always the correct choice in any lease renewal negotiation and I would caution any reader who is contemplating exercising their option to renew to first speak with someone who understands their nature, benefits and significant drawbacks. A lot of people are very surprised to find out that I don’t consider having missed their date to extend their lease as a real big deal, however, upon assessing the situation, it is important for me to know when that date is and what has been done about it prior to giving any advice on what they should do next.

Cirrus's service was "top notch" as they provided us with a substantially better lease than what the Landlord wanted us to sign.

Fara Bender, DMD
Lake Worth, FL

OK, enough said. Let’s get back to our group of family physicians in Toronto who have six weeks left on their lease. I proceeded to ask the young doctor a number of important questions like the ages of the physicians in the group in order to determine likely retirement issues, their satisfaction in their existing location as well as who the landlord/property owners are.

Due to my past experience as a landlord, I knew full well this was going to be an uphill renewal negotiation. Almost immediately upon making first contact with the group’s landlord, my suspicions were proven correct. The landlord knowing full well the group had little or no relocation options and was very close to their expiry took the gamble that they would not relocate and therefore demanded a significant increase in rent with an unwillingness to make any changes to the risks we had identified in their existing lease document. Knowing this was going to be the case, I felt the initial best strategy for the group was to convince the landlord to give us a short term extension. In this case, the landlord being exceptionally stubborn responded by not only declining our request for an extension but providing us with a vacant possession letter demanding the return of the space at the end of term unless we agreed to their renewal terms.

Upon meeting with the group of physicians to explain their predicament and the landlord’s responses to my request, it was fair to say the room was filled with anxiety, as they knew their relocation options were minimal and they were unable to afford the demanded rent increases.

Having seen this landlord stonewalling strategy many times in the past, I knew the best way to proceed was to not waste any time with the existing landlord and immediately develop relocation options no matter how farfetched they may be. By sourcing these options to relocate, even if it is extremely unrealistic, would give me hopefully enough leverage to break down the stonewalling strategy of the landlord. I immediately contacted the head of our site selection department in Toronto and advised them to drop everything and go review the group’s existing premises and identify every possible relocation opportunity within a specified geographic region. As it turned out, Lady Luck was on our side. A location was identified in a new strip-type shopping centre just up the street from their existing practice; however, the asking rents in this mall were even higher than that which their existing landlord was proposing. The good news, however, was that the new space we were looking at was about a 1,000 sq.ft. more than what our physicians really needed.

This got me thinking to perhaps cutting the new location into two units, one for the physicians on the square footage that they required with the balance, a 1,000 sq. ft. or so, to be used by perhaps a pharmacy which would clearly benefit from being next to a group of six family physicians. Knowing that a pharmacy would be fairly anxious to be next to a group of family physicians, I contacted a local pharmacy chain and advised them of our situation and asked the type of rents they would be prepared to pay in order to be next to this group. To no surprise, they indicated they would pay considerably higher than the landlord’s asking rents to be next to this group which meant that the landlord could justify giving the doctors a much lower than their asking rent as the difference would be made up through the pharmacy’s higher than normal rent payments. Now, all we had to do was to put a deal together with the landlord, have the landlord put a deal together with the pharmacy then spend a considerable amount of time reviewing and negotiating the governing lease documents to insure the physicians don’t end up in a similar situation in a few years from now, develop construction drawings, get contractor quotes and actually build the space out, all of which ordinarily take between four and eight months whereby we only had about five weeks left.

We decided to proceed with papering a proposal with the new landlord to give me the leverage I needed with their existing landlord, however, an interesting thing happened. The group of physicians actually preferred the new location much more over their existing one and wanted to make every effort to relocate. It was then decided within the following week that the group of physicians had no interest in renewing their existing lease where they were at but merely to extend it for a sufficient period of time in order that they can relocate without interrupting their operations. With the situation changing so dramatically, in such a short period of time, I became increasingly uncertain as to what the end result would be. Would our clients be out on the streets for three months while they build up their new practice? Would the landlord in their existing location be prepared to now negotiate because the physicians were prepared to move? How was I to extend their existing lease if their existing landlord knew they were going to be leaving in any event?

After considerable pacing back and forth, in my office, I decided upon a strategy with their existing landlord to advise them that we would be vacating the existing premises as per their vacant possession request letter I had received a couple of weeks prior and await the landlord’s response. Well, what felt like an eternity, but was only in reality a day, the landlord called me and wanted to know how he could get things back on track. My response, at that point in time, was to indicate that I would go back to the physicians and inquire as to whether or not they would be prepared to stay but I was not going to do that unless I had a short term extension on their existing lease thus allowing us to negotiate to hopefully some amicable resolution. The landlord quickly agreed and extended the lease for an additional 90 days at their current rental rate. Well, this was a huge victory for us and gave us sufficient time to clear our deal and relocation to the new premises. However, I also wanted to continue to negotiate with the existing landlord to see what type of deal could be brought to fruition under the threat of their relocation. The end result was astonishing, their existing landlord had agreed to not only back off their demands for increased rent and make changes to their existing lease document to satisfy our concerns but to also pay for a renovation of the existing premises as well as reduce their rent by some twenty percent. However, the physicians were set on relocating to the new premises which they felt would be much more appropriate to their group for numerous reasons which are not relevant to this case study. And so, the physicians did relocate and did not have to have any down time whatsoever, a very happy ending to what could have been a disaster.

Had a new location not been uncovered, and the pharmacy group not be prepared to work with the landlord to keep the physicians’ rent down, the end result could very easily have been disastrous. However, I am of the opinion that this entire state of affairs could have so easily been avoided had they considered dealing with their lease renewal well in advance.

So what is the correct time to renew your lease? I like to think of a lease renewal not as a physical act of executing a lease extension agreement but rather a process which every dentist/doctor who has a tenant lease should follow when they’re approximately eighteen months prior to expiry. The first part of the process requires a correct review of their existing lease document to first determine the critical dates: when does the lease expire, is there an option to renew and what is the date that the tenant can exercise that option up until. This would also be followed by a review of the existing lease document to determine the tenant’s risks to the landlord, which may be numerous, as well as to ascertain what type of benefits you would like to have in any future extended lease term. For example, when do the healcare practitioner or practitioners plan to retire and how should the construct of the new lease term and structure be designed to facilitate the retirement of members of a group practice who may chose to retire at very different times. I refer to all of these matters as internal considerations. This should then be followed by a thorough review of the relocation opportunities which may or may not be available to the practice should a relocation be required. It’s important to understand and recognize that unless you signed a lifetime lease, the possibility of a relocation will at some day be upon you and therefore it’s best to be prepared for that eventuality prior to opening up any negotiations with the landlord as well as prior to exercising any options to extend the lease. I refer to this part of the process as the external considerations. Other external considerations may be the cost of the relocation, new equipment, etc.

Once you have reviewed the internal and external considerations surrounding your existing lease, you are in a much better position to correctly open up negotiations with the landlord well in advance of when you have to decide as to whether or not you should be exercising an option to extend your lease. The key point for this discussion is to ensure that you consider your renewal well in advance thus affording you the benefits of having leverage and other options in the event the landlord is going to be tough.