There are a lot of misconceptions out there among dentists who are buying practices, about the moving parts in a dental premises lease. What is and isn’t negotiable? What is attractive to a landlord? What should and shouldn’t they ask for? Here are some answers to some frequently asked questions.
Q1. When comparing commercial rent in an area, should you do so on a per square meters basis?
A. The rental rate per square metre can vary greatly, even within a small geographic area. A premium can be paid for the attributes including, but not limited, to:
- Inclusions (e.g., parking or signage rights)
- Exposure (a high-exposure spot commands a higher rent per square metre)
- Aspect (good natural light, a view)
- Quality of the building (e.g., new vs old)
- Position within the building (closer to entrance in a Shopping Centre, proximity to a desirable neighbour, etc.)
Q2. Are dental practices attractive tenants to landlords?
A Absolutely, healthcare tenants are extremely attractive to landlords for the following reasons:
- Firstly, their professional and financial standing, in addition to the investment they make to the subject premises, make Dentists extremely desirable and secure tenants.
- Secondly, and perhaps most importantly, a tenant who is a dentist tenant adds value to the landlord’s asset. The value of a commercial premises is directly attributed not only to the rental yield, but also to the strength of the tenant. For example, if two identical properties received the same rent, with one being rented to a kebab shop and the other being a dentist, the site with the dentist would achieve a higher valuation, as they are seen as a stronger and more secure tenant
Q3. Do dental practice buyers have much scope to renegotiate a lease that is currently in place when they buy a practice?
A. There seems to be a common misconception out there that practice owners have just as much power to negotiate premises leases at any stage of the practice’s existence at the site. This just isn’t the case. A tenant will usually have the strongest negotiating position in lease negotiations when:
- A landlord has a vacant site to lease out; a vacant site can often place the landlord under financial stress, which may in turn lead to a stronger negotiating position. As mentioned above, Dentists are highly sought-after tenants (see A2) and a landlord should be considerably more negotiable to secure a dentist, as opposed to another tenant.
- When the seller of the business is also the owner of the real estate. It is extremely important for a tenant to use this strong negotiating position to get a lease with favourable terms, pricing and incentives (in that order). A tenant will have less strength in negotiations when:
- There is already a successful dental practice tenant in the facility near the end of lease term. While the tenant can threaten to relocate, the landlord is likely to know the significant cost of having to refit a new site and the difficulty in relocating in general. A tenant will have the weakest negotiating position in lease negotiations when:
- There is already a successful dental practice tenanted to the premises and the lease term has a few more years remaining. In this scenario, whilst the landlord should generally be happy to assign in line with the lease terms, they will be much less likely to want to renegotiate the terms of that lease unless they are able to achieve a better outcome.
- There is already a successful dental practice tenanted to the premises and the lease term has a few more years remaining. In this scenario, whilst the landlord should generally be happy to assign in line with the lease terms, they will be much less likely to want to renegotiate the terms of that lease unless they are able to achieve a better outcome.
Q4. Do the landlords need to accept the new tenants when a practice is sold?
A. The vast majority of leases will contain an assignment clause, which compels a landlord to act reasonably if the assignment of an existing lease is requested. As long as the new prospective tenant is someone of good character and sound financial standing, they should meet this criteria; however, judging character and financial standing is subjective and the landlord does have some discretion with how they measure this (references, bond, statement of assets and liabilities and a business plan all could be employed to qualify a prospective tenant).
Simon Palmer is the Managing Director of Practice Sale Search, Australia’s largest dental practice brokerage. If you’d like more information on practice sales or want to have a confidential discussion about your practice’s circumstances, email Simon Palmer at info@practicesalesearch.com.au or call 1300 282 042.
Tal Eloss is the founder and director of 1Group Property Advisory. Tal and 1Group Property Advisory have extensive experience assisting and representing dental and medical professionals with their property and practice premises-related acquisitions.
If you’d like to get in touch you can reach out via our contact page.
This article also appears in the Australasian Dentist Magazine Nov-Dec 2022 issue.
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