Handling Your Office Lease – And Protecting Yourself From Liability - When Selling Your Dental Practice
If you are considering selling your dental practice, you likely want the conclusion of the transaction to be precisely that – conclusive. That is, when the documents are signed and the money changes hands, you want to be able to walk away feeling that nothing will come back to bite you; that all potential claims and liabilities have been accounted for, resolved, or shifted to the purchaser. But if the sale of your practice includes an assignment of your office’s lease, that may be easier said than done.
A lease assignment involves transferring the obligations and benefits of the lease from you (the assignor) to the purchaser of your practice (the assignee). There are many complexities to a lease assignment as part of a dental practice sale. Some of those issues may throw a wrench into the sale and prevent its smooth consummation. Others could lead to unwanted or unintended risks after the completion of the deal if not addressed with both the landlord and the lease assignee during the transaction.
Here is what dental practice owners who lease rather than own their offices should be cognizant of when assigning their lease during the sale of their practice.
What Does The Lease Say About Assignment?
As with every other matter pertaining to the landlord-tenant relationship, your rights and limitations as to assignment are governed by the express provisions of the lease. Almost all commercial leases contain a clause that accounts for the possibility that the tenant will want or need to assign their lease to another party during the lease term.
Some leases – hopefully not yours - explicitly prohibit assignment. However, it is far more common for a lease to allow for assignment so long as certain conditions are met. Those conditions usually involve obtaining the lessor’s consent to the assignment. How freely that consent will be given depends both on lease terms that may define how and why the landlord may approve or deny the proposed assignment as well as the finesse with which the tenant and their assignee approach the landlord during negotiations.
Obtaining The Landlord’s Consent to Assignment
If the lease requires your landlord’s approval for assignment, how your putative assignee handles this aspect of the process can make or break your practice sale.
Since the purchaser will be using the space in the same manner and for the same purposes as your practice did, the landlord’s primary, if not exclusive, concern is ensuring that the new tenant will be able to meet all of its obligations under the lease. Since no obligation means more to the landlord than getting their rent payments, reassuring them that the lessee has the financial wherewithal to do so consistently and throughout the lease term is critical.
To expedite this process, you should work with the purchaser to gather the information, documents, statements, business plans, and references that can provide a clear financial history and strong business case for the assignee’s assumption of the lease. Doing so transparently and affirmatively can help reassure the landlord and potentially smooth over any concerns they may have.
During negotiations, the landlord may ask for changes to the lease or additional guarantees. For example, the landlord may require a personal guarantee from the assignee or request changes in rent rates or other lease terms. These negotiations are a normal part of the process, but they can lead to delays or complications if not handled properly.
The Landlord Isn’t The Only One Who Cares About The Assignee’s Finances
You have just as much interest in the purchaser’s ability to meet its lease obligations as your landlord does. Assigning a lease to a financially unstable buyer could lead to complications down the line, especially if you remain liable for breaches of the lease after the assignment.
And there is a good chance that you will, in fact, still be on the hook for any failure of the purchaser to fulfill the lease terms. While you should attempt to negotiate for and obtain a release of liability from the landlord, they may not be amenable to providing you with one. In such a situation, you essentially become the purchaser’s surety and guarantor as to the lease, an undesirable arrangement, to say the least.
There are a couple of ways you can protect yourself in the event that the landlord will not release you from liability. You could make the sale of your practice contingent on obtaining a release, but if you do so, you are essentially giving your landlord the ability to scuttle your exit plans. Alternatively, you can make sure that your sale agreement contains a strong indemnification provision such that you can recover from the purchaser any amounts you may have to pay to the landlord due to the purchaser’s breach of the lease, including any attorney’s fees you may incur.
Timing and Closing the Transaction
The timing of the lease assignment is also critical. The lease should be assigned at the time the practice sale is completed, but the process of obtaining landlord approval and negotiating lease terms can take several weeks or even months. Both the buyer and seller should plan for these delays and ensure that the sale agreement takes the lease assignment timeline into account.
Finalizing the lease assignment at the same time as the practice sale ensures a smooth transition and avoids disruptions in operations and patient care. The lease should be legally assigned, and all required documents should be signed and executed before the sale is officially closed.
To discuss the potential sale of your dental practice, including any issues related to an assignment of your lease, please contact Grogan Hesse & Uditsky today at (630) 833-5533 or contact us online to arrange for your free initial consultation.
We focus a substantial part of our practice on providing exceptional legal services for dentists and dental practices, as well as orthodontists, periodontists, endodontists, pediatric dentists, and oral surgeons. We bring unique insights and deep commitment to protecting the interests of dental professionals and their practices and welcome the opportunity to work with you.
Jordan Uditsky, an accomplished businessman and seasoned attorney, combines his experience as a legal counselor and successful entrepreneur to advise dentists and other business owners in the Chicago area. Jordan grew up in a dental family, with his father, grandfather, and sister each owning their own dental practices, and this blend of legal, business, and personal experience provides Jordan with unique insight into his clients’ needs, concerns, and goals.
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