Your Dental Practice May Be Put On Hold After Your Death or Disability, But Your Lease Obligations May Not

Jordan Uditsky • March 8, 2021
Many smaller dental practices are inseparable from the dentists themselves. The practice may be (and should be) a separate legal entity with its own license, but if the primary dentist ceases to practice, the practice will cease to be. This situation is fine if it is part of a planned and thoughtful transition or retirement. But it can be a catastrophe if the dentist becomes disabled or passes away unexpectedly. 

Because even though the practice comes to a grinding halt, any obligations the dentist and practice have under a commercial lease will continue – unless the dentist prepared for such a possibility when negotiating the lease. 

Standard Leases Don’t Care About Your Death or Disability

Most standard commercial leases, including those for professional practices, do not release the lessee from their rent or other ongoing obligations if they temporarily or permanently shut their doors due to the primary revenue generator's death or disability. This means that while a dentist is dealing with a life-changing medical crisis, or their family is mourning their loss, they will also face a landlord seeking its rent money for the remainder of the lease term.

The landlord won’t only look to the practice entity for its money. If the dentist signed a personal guarantee for the lease, the lessor could file a claim against the dentist’s estate seeking any remaining rental payments. This is money that the landlord is effectively taking out of the pockets of the dentist’s heirs.

Death and Disability Clauses 

That is why many dentists request the inclusion of a death and disability clause when negotiating the terms of their lease. Such a provision allows the practice to be released from its obligations if the primary practitioner passes away or becomes disabled, even if there are months or years remaining on the lease term.

While commercial landlords are generally averse to such clauses, they are not uncommon in leases with professional service providers like dentists, who are the sole reason the practice is able to generate revenue and pay rent. 
Often, a negotiated death or disability clause will still include a penalty of several months rent in the event the clause is triggered and the dentist or their estate elects to terminate the lease. This is usually preferable to the alternative if there is a long term left on the lease. Sometimes, the provision may allow a disabled dentist or the dentist’s estate to sell the practice and assign the lease agreement to the purchaser.

What If The Landlord Won’t Budge? 

No matter how reasonable the request for a death and disability clause may be, there will always be landlords who won’t entertain the concept. This can be the case in lease arrangements where that landlord provides a significant tenant improvement allowance or performs costly and unique improvements to the leased space, a frequent occurrence in dental leases. 

In such circumstances, the dentist should consider obtaining a “key person” or “key man” life insurance policy. The tenant would be the beneficiary under the policy and could use the proceeds to satisfy any outstanding obligations under the lease. Alternatively, the landlord may demand that the dentist add the landlord as an additional insured under the dentist’s death or disability insurance policy in an effort to mitigate its losses. 

It is never fun to think about your own death or disability, whether you are engaged in estate planning or negotiating a lease for your dental practice. But in both cases, doing so can spare yourself, your family, and your practice from unnecessary and costly burdens during an already difficult time. Always consult with an experienced dental practice attorney before negotiating or entering into any lease for your practice.

We Focus on You So You Can Focus on Your Patients

At Grogan Hesse & Uditsky, P.C., 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.

Please call us at (630) 833-5533 or contact us online to arrange for your free initial consultation.

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. This blend of legal, business, and personal experience provides Jordan with unique insight into his clients’ needs, concerns, and goals.  

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Whether you are the associate or the practice owner in such an anticipated transaction, you should consult with an experienced dental practice attorney to understand your options and determine which structure provides you with the most value. Your discussions with your attorney will likely include some or all of these common dental associate buy-in arrangements: Cash Purchase A cash purchase is the most straightforward buy-in model. With either cash on hand or through financing (the more likely scenario), the associate purchases an agreed-upon percentage of the practice (for example, 25% or 50%) for a lump sum based on the appraised value of the practice. That appraisal will likely use metrics such as collections, earnings before interest and taxes (EBIT), or a percentage of annual gross revenue. The main advantage of a cash purchase is its simplicity and immediacy. The associate becomes an owner right away, while the practice owner receives a clean and full payout for the equity sold. However, obtaining the needed financing may be easier said than done for an associate dentist, and a large cash payout may also come with unwanted tax ramifications for the owner. Buy-in documents for a cash purchase should address governance rights, profit distribution, and exit mechanisms. They should also define what happens if an associate departs, how future buyouts are valued, and whether non-compete or non-solicitation covenants apply. Installment Sale An installment sale allows the associate to purchase equity over time, making periodic payments instead of an upfront lump-sum payment. After the practice value is determined, the associate agrees to buy a certain percentage of ownership through regular payments (e.g., monthly or quarterly) over several years. Payments may include interest, and ownership may be transferred incrementally or upon full payment. 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This structure enables talented but liquidity-challenged associates to become owners without initial financial strain. It also incentivizes them to grow the practice and stay long-term. Shadow Account (a/k/a Phantom Equity) As I discussed in detail in this post , a shadow account (also known as a phantom equity plan) is an increasingly popular buy-in model, especially when the owner is not yet ready to transfer real equity but wants to reward the associate as if they were an owner. In this model, the associate receives the right to cash payments equal to the value of the shares at a specified later date or distribution event. That value can be established through an appraisal or an agreed-upon formula. The selected events that give an associate a right to a payout can include such things as achieving performance goals, termination, or retirement. There are two types of shadow account/phantom stock plans. In an "appreciation only” plan, the cash payout upon vesting does not include the value of the underlying shares, only the increase in value of that stock since it was granted. In a “full value” plan, the practice pays both the underlying value of the stock and the amount the stock has appreciated while held by the associate. Like actual stock, phantom stock has a defined value and tracks the practice’s performance, but an associate holding phantom stock typically does not have either minority shareholder rights or voting rights in the practice. This makes phantom stock plans attractive for owners who want to provide associates with a sense of equity ownership without giving up any actual control. The practice has broad discretion and flexibility in designing the plan, including valuation formulas and vesting conditions, and the administrative burdens are less than for traditional stock option plans. As noted, the “best” buy-in structure depends on the unique goals of both parties. No matter which model is ultimately adopted, well-crafted documentation, preceded by careful consideration and consultation with counsel, is essential. That is because these deals do more than just transfer ownership - they can lay the foundation for a stable, profitable partnership that preserves the practice’s legacy and rewards everyone’s investment, financial or otherwise. We Focus on You So You Can Focus on Your Patients At Grogan Hesse & Uditsky, P.C., 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. Please call us at (630) 833-5533 or contact us online to arrange for your free initial consultation. 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. This blend of legal, business, and personal experience provides Jordan with unique insight into his clients’ needs, concerns, and goals.
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