Latest / Orthodontic Products Podcast / Hidden Office Lease Clauses That Can Cripple Your Orthodontic Practice
Transcript
- Alison Werner (00:05) Hello, welcome to the Orthodontic Products podcast. I'm your host, Alison Werner. In this episode, we're going to talk about how hidden fees, hidden lease provisions on your practice property could be draining your profits and putting your success and financial stability at risk. Many dental professionals unknowingly sign contracts with hidden provisions that restrict practice growth, complicate future sales, and limit strategic business flexibility. Understanding the nuanced language of commercial leases is not just a legal necessity, it's a critical business strategy for long-term success. Joining me to talk about this issue and to get some advice to help protect is David Cohen, an attorney specializing in dental practice leases who has seen practices and DSOs suffer setbacks due to poorly negotiated contracts. Cohen has extensive experience in representing individuals, mid and small sized corporations and partnership and limited liability company law. He regularly counsels clients ranging from start-up ventures in large companies to nonprofit charitable tax exempt organizations and professional corporations. He has expertise in contract negotiation, review and construction. He is chairman of Cohen Property Law Group, which has offices in Miami, Seattle, Philadelphia, Dallas and Beverly Hills. David, thank you for joining me. David Cohen (01:14) Thanks so much for having me. Looking forward to doing this. Alison Werner (01:17) Yeah, okay, so to get started, can you talk about your experience working with dental professionals regarding commercial leasing? David Cohen (01:25) Yeah, so we have a law firm that specializes really in helping dentists in all transactional business capacities, including practice transitions and so forth. And a huge element of a practice transition is the real estate. And most of the time, the real estate is gonna be a lease. From time to time doctors will buy and sell the buildings for the practice, but most often there's a lease involved, whether it's with a third-party landlord that owns the building that's already leasing to the seller of the practice or whether it's a seller that owns the building on their end. But either way, we're dealing with leases quite often. And so that's a huge component for us. We do over 300 transactions nationwide yearly. And I would say, you know, the majority of them, I'd estimate probably 70 % ish, 75 % have leases and are not building sales. So we're seeing leases across the country on a daily basis. And that's why Cohen Property Law Group is essential in the transition because Cohen Property Law Group comes in from a real estate perspective on the transactions and brings its expertise to the deal from a real estate perspective. And we've seen all different types of leases. We've seen the mom and pop lease. We've seen the big institutional landlord lease and a shopping center. And these are all different types of leases that really need to be evaluated by an attorney. And, you know, I say it, you know, to the dentist, you wouldn't want Alison Werner (02:56) Okay. Mm-hmm. David Cohen (03:08) someone working on your mouth, it's not a dentist. And the same thing that you don't want to sign a legal document without having a lawyer review it. And unfortunately, these leases can have significant consequences if not reviewed properly. And we see that all the time, whether it's a doctor coming to us and saying, hey, you know, I signed this lease, didn't get an attorney, but I have this problem. Can you help me? Alison Werner (03:12) you Yeah. David Cohen (03:37) And so we definitely see the mistakes all the time from not getting proper review. And I think the biggest thing that we see with doctors that we tend to see, it's a trend that because the practice is kind of the main event, so to speak, for these doctors, they don't, and I'm not saying everybody, I'm not generalizing, but most of these doctors legitimately, Alison Werner (03:54) Mm-hmm. Yeah. David Cohen (04:03) view the lease as kind of like a throw-in. It's just like the way to, it's just the way to close the loop on getting the deal going forward. But they have to understand that the lease is critical just in the same way. Alison Werner (04:09) Right. Yeah. David Cohen (04:17) that the practice part of the transaction is as well. So that kind of brings it full circle to answer your question, which is, how are we involved in these transactions from a leasing perspective? And we usually come in from the front end and help proactively the doctor avoid problems later on down the road. Alison Werner (04:42) Okay, so what are some of the most common hidden clauses in office lease agreements that orthodontists and other dental professionals overlook? And how can those then impact the long-term success of the practice? David Cohen (04:57) Yeah, I mean, think the biggest, the biggest, and I'm just trying to, you know, taking the most extreme approach here to start with, but the biggest hidden provision that doctors don't see, and this can even happen if an attorney does review the document. This is how hidden this, this provision is from time to time. It can actually often be reviewed by an attorney and they just miss it, is Alison Werner (05:02) Yeah. Yeah. Mm. okay. David Cohen (05:25) And that's why it's important to have a real estate specific attorney involved. But language that says the doctor has to share profits from the sale of their business. And we have seen that more and more over the last, I would say, three to four years than ever. And, you know, I think, you know, most of the time that language is in Alison Werner (05:42) Okay. Huh. David Cohen (05:48) like a shopping center lease where they're used to having retail clients. And oftentimes there is a dynamic where the landlord will share in profits of the business with retail clients. But a dental office is not that way. And, you know, I've seen the most extreme example of we had a DSO deal in Hawaii. Alison Werner (05:59) Okay. David Cohen (06:10) And the landlord was asking for over a million dollars. It was a pretty big DSO sale, but they're asking for like one point five million dollars from the sale because the lease had said that the tenant had to share profits from the sale with the landlord. And that actually was a pretty black and white provision. But you can see, you know, Alison Werner (06:17) Mm-hmm. Okay. Huh. David Cohen (06:37) You can see, so first of all, was in black and white, but it's hidden in the sense that you would never expect that to be in a lease. But that language can actually be very tricky and not as black and white, and you can easily gloss over it or not think that they're referring to you selling as a dentist, you you sharing profits. Alison Werner (06:41) Yeah. Right. Yeah. that you're just assuming you're just assuming maybe this was a boilerplate contract and it was just left in. David Cohen (07:09) Well, no, not necessarily. I think it's more in this, well, it's possible, I guess, but maybe it's in there for retail client and they just never took it out. I think that lawyers for big institutional landlords have gotten very savvy at how they can draft the provision. Where it's not obvious that it that it looks like Probably what I should have done is shared the language here visually on on the podcast just so you can kind of see what I'm talking about but that yeah, I mean I think the most extreme example to answer the question of Alison Werner (07:38) Yeah, that's okay. David Cohen (07:43) Hidden lease provision whether it's hidden because you don't expect it or whether it's hidden because it's just not drafted in a way That's obvious is language that says that the tenant has to share profits of their sale their business to the landlord now not only is that a problem from the perspective of No tenant wants to share profits of the business with the landlord nor do they expect to do so at least a dental tenant but it also causes a problem because Alison Werner (08:05) Yeah. Yeah. David Cohen (08:11) The buyer now you're asking as a seller, you're asking the buyer of your practice to take on a lease with the landlord that looks like that and they're not gonna wanna do that. So these types of provisions can really restrict the marketability of the practice. there are some institutional landlords that are kind of like take it or leave it and maybe they have the leverage but... Alison Werner (08:21) huh. Right. David Cohen (08:39) Not always. And also, this is the type of provision that may be able to be negotiated from the beginning just because it's not a retail business. And so, I definitely think, you know, that's the number one, probably, extreme example of what I've seen. And that can cripple a business because it can prohibit a doctor from... It can really make it prohibitive from them selling their practice. And then if they... Not just from an economic standpoint for them, but they have to find someone who's willing to take that lease on, which is not likely to happen. Alison Werner (08:52) Yeah. Absolutely. Right? Yeah. David Cohen (09:11) So, you know, in the example that I gave you from the Hawaii deal, the buyer was a DSO and they had to find a way to renegotiate that lease if they were going to take that on. long story short, that's the most extreme example. Alison Werner (09:27) Okay, what are some of the more common hidden clauses then? David Cohen (09:32) More common hidden clauses would be, you know, language that says that... The tenant, for example, would have to return the premises to what they call white box condition or to its original condition. And so let's say that the lease ends and the tenant doctor wants to leave, then they would be required to return the business or the premises to its original condition. That can be very costly and very expensive. Alison Werner (09:47) yeah, okay. David Cohen (10:05) for a doctor and so that's one you want to look out for and try to negotiate on the front end so you don't have that type of cost because if you're going to move if you're going to move to another premises it's already probably going to be costing some money. don't you know whether you're doing a startup and a build out or whether you're buying another location whatever it is there's going to be a cost to that and you have to write underwrite into it what the cost would be to Alison Werner (10:19) Mm-hmm. David Cohen (10:30) return the premises back to its original condition. So that's an example of one. Another example of one that's important for doctors to understand, and this also can be written, this is kind of like a blatant one in a lot of cases, but from time to time it is not that obvious. It's assignment language. know, assignment is... Alison Werner (10:45) Mm-hmm. Okay. David Cohen (10:55) probably the most important aspect of a lease for a doctor because it's what allows them to sell their practice essentially. As long as there's no other crazy clauses in there like sharing the profits of the business upon sale, really the assignment language is the vehicle that's gonna allow the doctor to sell the practice because when a doctor sells the practice, they are gonna wanna assign the current lease over to the buyer. Alison Werner (11:25) Right. David Cohen (11:25) what does the language say for assignment? Now lot of times it's very obvious. I wouldn't call it hidden, but other times it's not as obvious and it's a little more murky in terms of under what circumstances the doctor can assign the lease. Now the provision is typically going to say assignment or assignment and subletting. Alison Werner (11:31) Mm-hmm. Mm-hmm. David Cohen (11:49) But, so that's obvious, but it's the language that's in there that can often be complicated and, you know, hidden things can be in there that can restrict a doctor from being able to assign. Now, all doctors would love for leases to say that the doctor can assign the lease at any time without the landlord's consent, but that's not realistic. I mean, realistically, the landlord's going to need to consent to the assignment of lease, just like if... Alison Werner (12:09) Mm-hmm. Right. Yeah. David Cohen (12:16) you doctor were a, you know, out there was a landlord, you would want to know who's coming into your premises and approve of it and that they have the credit to pay the rent and all that kind of stuff. But what you can have is language that says that the landlord can't unreasonably withhold or delay their consent. And that's really important and powerful language that I think is highly recommended to be in there. But there are other Alison Werner (12:22) Mm-hmm. Mm-hmm. Right. David Cohen (12:44) more complicated assignment provisions where it may say that the landlord will allow the assignment but for instance the tenant has to be at least equal to or a better credit than the doctor that's in there to begin with which is not really that fair of a provision because I mean it could be that the doctor credit that's in there is like Alison Werner (13:00) Okay. David Cohen (13:11) far beyond what the landlord would need to be sufficient. And maybe you have a younger buyer that just there's no way they're going to have that type of credit that the selling doctor is going to have. And in fact, most of the time they don't. And then they might not qualify. So usually you can get around that by the seller just continuing to guarantee the lease, which they're not going to want to do. And then you get indemnification from the buyer. Alison Werner (13:14) Right. Right. Yeah. Right. David Cohen (13:36) But yeah, mean, there is some hidden language in the assignment clauses that can impact the doctor's ability to sell the practice. So that would be another one. The other one that I wanted to bring up that I think is really important is from time to time, we will see relocation clauses in leases where... Alison Werner (13:48) Yeah. Yeah. Okay. David Cohen (14:00) Usually these are more institutional type of landlords with maybe a shopping center type of lease but we will often if we see the language will often see language that says that the the landlord can relocate the tenant to another premises, you know and Alison Werner (14:20) within the complex. David Cohen (14:23) It could be within the complex, could be not in the complex. Usually it typically would be in the complex, but so we've seen that and that can be very difficult for dental practice. The dental practice is just not set up or made to be moved. And not just because of the build out scenario, but also there's no way to transition the practice where Alison Werner (14:26) Okay. Yeah. Yeah. Yeah. David Cohen (14:50) I shouldn't say no way. It's unlikely to be able to transition the practice to where you cannot lose any production and just go from point A to point B and just be off and running, right? So there's going to be some loss of production during that time and that can be very, very difficult. And even more so, we see some of these clauses either sometimes say that the landlord will not pay for the relocation cost or Alison Werner (14:56) Right. Mm-hmm. Yeah. Yeah. David Cohen (15:18) that they will pay for the relocation costs, but you really come to find out after running numbers and all that, that whatever they're offering is not nearly gonna pay for what would be required in relocating. So what you don't want as a doctor is to be in a lease where the landlord has the relocation right and they can relocate you. You then have the... Alison Werner (15:43) . David Cohen (15:45) the burden of just the pain that that is gonna entail, but also you're gonna lose money probably production-wise during those days or during that transition. And you might be stuck with the cost of relocating or at least some of the costs of relocating and that can be very problematic as well. So I think the hidden part of that, if we're talking about what's hidden, is that sometimes you'll see, okay, well, they could relocate me, but they're gonna pay for it all. Alison Werner (15:48) Yeah. Mm-hmm. Yeah. David Cohen (16:14) or they're going to pay the cost, right? But you don't realize that actually what they're offering to pay is not enough. And so that's something to look out for as well. So those are just kind of some examples of things that we're seeing in leases. And just to kind of like shout out for the mountaintops here to all the doctor listeners. Alison Werner (16:16) Right. Yeah. Yeah. David Cohen (16:35) You know, these are things that can just make or break your practice. I mean, you would not think that, you you always think of the clinical side or the business side of like buying or selling a practice, but the lease, the real estate and the lease are just incredibly important in these deals. so it's just really important. just gave you a few examples. Alison Werner (16:40) Yeah. Mm-hmm. Mm-hmm. David Cohen (17:04) of many that are really could cripple a practice. Alison Werner (17:06) Yeah. Well, I wanted to ask you because at least we'll often include like maintenance, repair, replacement obligations that can also burden a tenant. So how can an orthodontist ensure that they're not taking kind of these excessive responsibilities for like a building's upkeep as well? David Cohen (17:24) Yeah, I mean, that's a great question. And I think that the answer to that is that negotiating the maintenance, repairs, insurance, replacements, all that, taxes, that's all typically part of the negotiation. And what I will say is that Before entering a lease particularly like for a startup where it's like an institutional lease It's really important to have a letter of intent. That's very thorough that really is Negotiated and that you're not just handing to the lawyer signed And where now their lawyers hands are tied it's really important to have that because these are the types of things that get negotiated in the deal and You know even in a triple net lease Which is the triple net lease is where the tenant is responsible to pay for those things, repairs, maintenance, taxes, insurance, and all that. There are certain areas that can still be negotiated where it doesn't have to necessarily be the most traditional of triple net leases that's out there, right? Like you can negotiate... if you're a tenant on let's say the HVAC. The HVAC replacement or repair can be significantly expensive, particularly the replacement. You know, it can be 10 to 20K. So, you know, as a doctor, if you are able, even in a triple net lease, if you can negotiate the HVAC and say, you know, hey, landlord. Alison Werner (18:39) Mm-hmm. Yeah. David Cohen (18:54) maintain it, but if it needs to be replaced, you have to replace it. You know, you own the place and I haven't even necessarily been in this premises for the useful life of it. And then, you know, if they say no, then maybe you can negotiate the useful life and say, you'll pay for the proportion of the useful life based on how long you've been in the premises. Alison Werner (19:03) Right. Yeah. David Cohen (19:17) so that you're not getting killed on that. So like these are just sort of like strategies that you would go through as a negotiation with your attorney on some of these expenses for maintenance and repairs and replacements and so forth. Alison Werner (19:31) Okay. What if an orthodontist is already locked into an unfavorable lease? What steps can they take to renegotiate or mitigate some of those risks associated with these restrictive or kind costly clauses? David Cohen (19:46) Yeah, so it's really difficult to negotiate a lease once it's signed. You know, your best, and that's why it's so important to have legal counsel in on the front end so that you're not tied into something because if the landlord's gonna change a lease, Just like for you as doctors, if you have a great lease, you don't want the landlord being able to just change that on you, right? So the best way to negotiate the lease is leverage. And leverage is options. And understanding in the negotiation what the options are is a matter of sort of like probing and finding out how to get the landlord more of what they want. And if you can do that, then you may incentivize the landlord to be willing to change some things. For instance, if you are near a renewal of your lease, if you're already in it, but you have a renewal coming up and let's say it's not the most marketable of properties where they don't have 10 people lined up that'll just take the property if it's not you. You may be able to negotiate and say, landlord, you know, we got this renewal coming up. I'll renew and give you more stability here with the tenant long-term in exchange for that. Here's some things that I want to renegotiate or want to negotiate. So that would be one example, but that example would only be applicable in a scenario where the landlord through your probing and trying to understand what how to get the landlord more of what they want is if you understand that they want someone more long term. If the landlord doesn't have to have you and they can easily lease it up in a second, then... It doesn't necessarily give them more of what they want to get them more time. You'll have to look for something else. But the way to find out something else is probing and better understanding and listening to what is going to be important for the landlord. And you typically would do that through your lawyers. But it's finding out how to get more leverage, how to incentivize the landlord to want to... agree to change some things in exchange for something else. So that would be one example that I just gave, which would be giving them more time on the lease in exchange for maybe being able to negotiate some things. Alison Werner (22:02) Yeah. Yeah. Okay. So what's your takeaway advice for someone who is looking at signing a lease? When should they be pulling a lawyer in? What should they be looking for? What's kind of your takeaway advice here? David Cohen (22:24) I think the takeaway advice is to get legal counsel involved as soon as you possibly can, you know, once you've identified the property. And whether that means if you're in a startup, you know, before the letter of intent phase, which I mentioned is really important, or if you're like buying a practice, then... You know, it's just organically going to be part of the process, but it's important to put as much weight and importance in that lease portion as you do the practice. You know, from time to time, we'll get clients that say, hey, you know, help us with the practice side, but, you know, we're not going to worry about the lease. you know, my, I have a lot of, you know, or my, I have a broker that, you know, is helping me, which I'm not putting down brokers. Brokers are very important. Brokers aren't lawyers. And so, it's a different type of review. And that's why it's important to have an attorney involved there as well. So I think the earlier you can get an attorney involved the better and You for us we charge flat fees. So we're not just trying to run a bill on a doctor I know there's some other law firms that do that as well, too. So You know, I'm not just saying this so we can run bills for a longer period of time. This is not how we operate I'm just saying it because our hands are tied if a doctor signs a letter of intent and Alison Werner (23:18) Okay. Mm-hmm. Yeah. Yeah. Right. Yeah. David Cohen (23:46) Now there's not much we can do. Alison Werner (23:48) Right, exactly, exactly. Well, David, thank you so much for joining me. It's been a pleasure. If someone wants to get in contact with you, what's the best way to find out more information about your property, your law firm, sorry. David Cohen (24:01) Yeah, that's great. Best way to get in touch would be via email and my email is David at CohenPropertyLaw.com. So David at COHENLAWPROPERTY That's kind of the email we use if it's at least related for the property. But then for the practice sale, we use the other email typically, which is david@coandlawfirmpllc.com. Alison Werner (24:33) Great, well thank you again. It's been a pleasure to talk to you and I really appreciate your expertise. David Cohen (24:37) Yeah, it's been a pleasure to be here. I really appreciate you having me. Alison Werner (24:40) Great, thanks.