Understanding and Negotiating a Commercial Lease Agreement
Proper preparation and an knowledge of commercial lease negotiotion give new veterinary practice owners peace of mind moving forward with their venture.
Starting a private veterinary practice can be exciting, but undertaking this venture requires careful consideration and tremendous attention to detail, particularly when it comes to commercial lease agreements. Other than payroll, the monthly rent is often one of the most expensive costs in a veterinary office.
This article covers some crucial aspects of commercial lease agreements and negotiation strategies.
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Negotiating Commercial Leases to Meet Business Goals
First and foremost, when shaping a negotiation strategy for a lease, identify the specific goals and needs of your hospital. Primary considerations should include determining long-term goals for the clinic, such as:
- Desired lease term
- Whether the facilities are appropriate for a veterinary practice
- The possibility of expansion to provide additional services (eg, boarding or grooming)
- The number of planned staff members
- The need for looser terms or more flexible agreements with the lessor to accommodate for unforeseen circumstances such as growth spurts in the practice
Understanding and Specifying Lease Terms and Conditions
When meeting potential landlords, be clear about your desired lease terms and conditions. Some of the most essential terms to clarify and negotiate include the following.
Length of lease and renewal options
Determine how long the terms of the lease should be. For new practices, 5- or 10-year leases are fairly commonly because renegotiating every year or 2 is time-consuming and can become costly. Also, make sure that the renewal options and procedures are defined carefully within the agreement and review them with the landlord and/or any real estate agents involved to ensure you understand your options prior to entering into a binding agreement.
Tenant improvement rules
Commercial leases generally require a landlord’s permission before any improvements to the property or structure can be made. When approved, such improvements are often paid for by the tenant, so it’s important to negotiate whether the improvements can be removed after the lease is fulfilled.
Premises condemnation or destruction
If the premises are damaged beyond repair, condemned, or completely destroyed, landlords have a specific time period listed in the lease in which repairs must be made. Explore termination options in case this deadline cannot be met, and be sure that tenants have the right to end the lease in such situations.
Indemnification and liability limits
Pay careful attention to any liability limits within the lease contract. Landlords often demand to be held free of liability for damages or injuries suffered through acts of tenants and occupants—even if the premises are defective. Negotiate this term to ensure the disclaimer does not apply in cases of landlord negligence.
Lease assignment and subletting rules
The majority of leases do not allow the space to be leased to others or reassigned without express permission from the landlord. It’s possible to negotiate leases to prevent landlords from delaying or withholding consent unreasonably.
Breach of contract and punishments
There is often a long list of provisions that define and default triggers, violation notice requirements, and remedies if the contract is breached by the tenant. It’s vital to remember that a landlord terminating a lease or executing an eviction does not suspend the tenant’s obligation to pay rent. Lessors should consider negotiating a clause that encourages landlords to assist with mitigating damages in certain situations, such as sudden lease termination.
Negotiating Repairs, Maintenance, and General Expenses
In some situations, a leased veterinary clinic is located within a shopping center that houses other tenants. Within multiple tenant facilities, the landlord is generally held responsible for maintaining common areas, including parking lots, sidewalks, landscaping, building exteriors, and stairwells between separate tenants’ premises. It’s not uncommon for lessors to want to pass along these expenses to renters, so it’s wise to look out for phrases in this section of a lease similar to “including, but not limited to” or "Triple Net" or "NNN"—where the tenant agrees to pay all real estate taxes, building insurance, and maintenance—as these types of expenses can be added to the monthly rent amount or the total may be due at the end of each year.
To protect the veterinary hospital, staff, and patients, practice owners should maintain general liability and casualty property insurance. This helps prevent business interruptions and protects equipment and the structure in case of unexpected incidents. Many landlords include a lease stipulation requiring tenants to pay for insurance at least a year in advance, so be aware of this within the lease contract and negotiate terms that can be reasonably handled by a new practice.
In addition, many commercial leases may also require the tenant to add the landlord as "additional payee" on the policies. Check with your insurance agent to understand what this term means and if the commercial space may require it.
Review the Lease Before Execution
Once all stipulations and negotiations have been discussed, carefully review the final lease terms with a legal professional or real estate expert to make sure everything reflects what you and the landlord agreed upon. After all parties have signed, make several copies of the agreement and store them in safe places, such as fireproof safes or a safety deposit box.
Mr. Lindahl is a nationally recognized innovator in real estate, marketing, leadership, and community involvement. In 2014, he was Minnesota's #1 real estate agent as ranked by Real Trends. In 2017, the Kris Lindahl Team rose to become one of America's top real estate teams. And in May 2018, he fully embraced his own real estate model to form Kris Lindahl Real Estate.