When you’re thinking about building up your dental practice, it pays off to anticipate and plan for events that will likely happen far in the future. And, when it comes to your lease, an important future event to plan for is the “assignment” of your lease in connection with the transition of your practice. Assignment is when you transfer, or assign, your rights as tenant (such as the right to occupy office space) and responsibilities as tenant (such as the responsibility of paying rent) to another person or entity. Making sure that you have the legal ability to assign your lease and the terms of such assignment may be critical if you decide to sell your practice or take on a business partner. Keep in mind that you might not be completely off the hook after you assign your lease, but even so, assignment is a powerful tool that you’ll want to be able to use.
Selling your Practice
You have a substantial investment in your dental office and your dental practice will have a lot of real value, including its geographic location, good will associated with it, and (not the least of which) the many costly building improvements that you’ve invested to customize your practice space. Much of this value is tied to your lease, and a purchaser of your dental practice will want to take over your lease and benefit from your investment and the value that you’ve created. However, a lease isn’t like a piece of furniture that can simply be sold – it is an agreement between you, as a tenant, and your landlord and your ability to assign your lease will need to be negotiated at the outset when you first enter into your lease.
The way a purchaser of your practice will step into your shoes as a tenant is through the assignment of your lease. However, landlords typically don’t want to give you the power to assign your lease to someone else (called an assignee) without their permission. Your landlord may want to reserve the right to approve any future assignees (in this case, the purchaser) or require that any assignees meet certain financial requirements. If your landlord really doesn’t want you to assign your lease, they may try to reserve the right to “recapture” the leased property if you try to assign it, meaning they can terminate the lease before the assignment takes effect. A recapture provision in your lease thus will make the sale of your dental practice contingent on the whims of your landlord – a situation you’ll want to avoid.
Assignment provisions are also important when you change the way your business is structured. Often, your limited liability company entity rather than you, personally, will be the “tenant” under your dental office lease. But, down the road, you may want to have a different entity serve as the tenant, or perhaps you will want to include a new business partner on the lease so that they will be responsible under it as well. Both of these scenarios will require lease assignments, so it’s important that you know what you can or can’t do under the assignments of your lease before you start making business restructuring plans.
You should note that it’s likely that you’ll be required to sign a “Personal Guaranty” for your lease, which means that you’ll still personally be on the hook for the tenant’s obligations under the lease (including, notably, paying rent) if your practice entity fails to uphold them. Even when a lease is assigned, a personal guaranty typically remains in place so where an assignee (such as a purchaser of your dental practice or a new partner) fails to uphold its obligations as tenant – you’re still personally on the hook if you’ve signed a personal guaranty. It is crucial that you negotiate the termination of this personal guaranty in connection with an assignment in some shape or form.
Plan Before You Negotiate
So, you can see why paying attention to assignment now will pay off later. Ideally, you’ll want to lock your assignment provisions down at the start of lease negotiations. Make sure you fully understand the nuances involved with assignment now, and you’ll be thankful you did in the future.