Date: October 2, 2024Attorney: Peter H. Tanella and Joshua M. Gorsky
When purchasing a veterinary practice, one of the key considerations is the real estate where the practice operates. If the buyer does not intend to purchase the property itself, they will need to either assume the existing lease or enter into a new one. Understanding the nuances of these lease agreements is essential to ensure a smooth transition and to protect the buyer’s interests.
Assumption of an Existing Lease vs. Signing a New Lease
In most transactions, the buyer will face one of two scenarios: either the landlord will ask them to assume the existing lease, or the buyer will be required to sign a new lease. While the logistics of these processes differ slightly, the fundamental terms and considerations remain largely the same. Here are some key aspects to keep in mind:
1. Premises
- Occupancy: Does the veterinary practice occupy the entire building? Is it in a shopping center, or a stand-alone building? Will you be the only tenant? If not, who are the other tenants? This information is crucial for understanding the dynamics of the property, the expenses you’ll be responsible for and potential impacts on your business.
2. Use of Premises
- Zoning Compliance: Ensure that the zoning ordinance allows for the operation of a veterinary hospital. While it may seem obvious if a hospital is already operating there, understanding the legal basis for this use is important for future security.
3. Term of Lease
- Lease Term and Financing: If financing is involved in the purchase, lenders typically require the lease term to match the loan term, often structured as a 5-year initial term with one or more 5-year renewal options.
- Right of First Refusal (ROFR): Some leases include a ROFR, allowing the tenant to match any third-party offer to purchase the property. Watch out for certain pitfalls often included in this section such as the landlord having the right to terminate the lease if the tenant declines the ROFR.
4. Base Rent
- CPI Adjustments: Rent often increases annually based on the Consumer Price Index (CPI), which reflects inflation. While this provides a measure of predictability, it’s essential to have an annual cap in place to prevent excessive rent increases.
5. Additional Rent
- Taxes. Don’t assume that you’ll only be responsible for Base Rent under the lease The majority of leases have the Tenant being responsible for some portion of the real estate taxes.
- Base Year. Some leases include a base-year model where Tenant shall be responsible for a portion of the increase in real estate taxes over the “base-year”. The base-year is typically the year the lease commenced. When assuming a lease, a tenant should try to reset the base year to the year of the assignment.
- Insurance. The insurance required under the lease will vary depending on the nature of the property being leased. Most often, Landlord will ensure the exterior of the property and Tenant will ensure the interior and carry a general liability policy. In that scenario, Landlord will sometimes be responsible for the cost of Landlord’s own insurance, and other times will pass through that cost through to the Tenant.
- Common Area Maintenance / Repairs and Maintenance. The variations of tenant’s responsibilities in this section are endless. The takeaway here would be to seek out this information in the lease if it is not conspicuous. This section warrants careful review and negotiation to avoid unexpected costs
6. Insurance Coverage
- Liability and Casualty Coverage: The lease will likely require the tenant to maintain specific levels of insurance coverage via different carriers. It’s advisable to have your insurance professional review these requirements when the final draft lease is available.
8. Damage to Premises
- Termination Rights: The lease should specify a damage threshold that allows either party to terminate the lease if the premises are significantly damaged. This protection is crucial for tenants who cannot afford to remain liable under a lease agreement but unable to practice in an otherwise damaged property.
9. Termination Upon Sale
- Avoiding Unfavorable Terms: Terms allowing the landlord to terminate the lease upon the sale of the property should be avoided. Such provisions can undermine the stability of your business location.
10. Sublet/Assignment
- Permitted Transfers: Consider negotiating the inclusion of a “permitted transfer” provision, which outlines a clear process for assigning the lease if you decide to sell the practice. Landlord consent for assignments should not be unreasonably withheld, delayed, or conditioned.
11. Indemnification
- Mutuality: It’s often beneficial to negotiate mutual indemnification provisions, ensuring that both parties are equally protected.
12. Signage
- Pre-Approval: If specific signage is important for your business, consider negotiating pre-approval of the desired signage within the lease terms.
13. Additional Terms to Consider
- Quiet Enjoyment: Ensure the lease includes a “quiet enjoyment” clause, allowing you to operate your business without interference from the landlord.
- Landlord Representations: The lease should include representations from the landlord regarding the property’s compliance with applicable laws.
- Default and Mitigation: In states like New York, where landlords are not required by law to mitigate damages after a tenant default, it’s wise to include language in the lease obligating the landlord to do so.
- Subordination: Protect your lease from being overridden by the landlord’s lenders in the event of foreclosure or similar action.
- Attorney’s Fees: Consider negotiating a provision allowing the prevailing party in any legal dispute to recover attorney’s fees from the losing party. This provision removes cost as a consideration for you to enforce your rights under the lease.
By thoroughly evaluating these key lease elements, buyers can better safeguard their interests and facilitate a smoother transition into their new veterinary practice. Consulting with the experienced attorneys at the National Veterinary Law Group at Mandelbaum Barrett PC offers additional protection, helping to identify and avoid potential risks, ensuring a successful start to your practice.