Selling Your Practice? What Physician Tenants Need to Know About Commercial Lease Assignments

Dale and Jeff - Back to BackBy Dale Willerton and Jeff Grandfield – The Lease Coach

If you are looking to sell (or buy) an existing practice, don’t overlook the commercial lease assignment. To define this term, a lease assignment is an agreement or procedure that transfers the leasehold interest and obligations from one tenant to another so a new lease does not have to be negotiated. Lease assignments occur most often when a business is sold. To avoid potential disaster, managing a commercial lease assignment must be done effectively and properly. Here are some points to consider:

1.  What Are You Selling?   You are selling an established practice and its location, including patient goodwill, leasehold improvements, fixtures, signage, etc.   From the buyer’s perspective your physical location, or the commercial lease on your practice, is very important.  Therefore, you are loosely selling the opportunity to control this piece of real estate – and that has value.

2.  Check The Lease Agreement – The Lease Assignment or Transfer Clause is of one of the vital organs of a commercial lease agreement.  Within the Lease Agreement there may be conditions such as personal guaranties and increased deposits imposed on the business seller (tenant assignor) and the buyer (assignee). If you mishandle the lease assignment process, you may lose a prospective buyer due to landlord delays and/or interference.

3.  The Rights of the Tenant: Unless you negotiated on this clause when you first leased the premises, chances are you are in danger.  The landlord is not required to include an Assignment Clause (or even a reasonably fair one) in the lease agreement.  You must negotiate and demand that your tenant rights are included.  The Lease Coach frequently renegotiates the Assignment Clause when we negotiate on a new lease or a lease renewal for a physician tenant because almost every practice eventually sells.

4. Assignment Timing Issues: If the landlord stalls approving the Lease Assignment, the purchaser may get tired of waiting and walk away.  Some lease agreements do not stipulate a limit on how long the landlord can take for the approval process (30/60 days). For a physician tenant, you will want the approval process to take 10-15 days maximum to avoid losing a purchaser’s interest.

5.  The Approval Process:  The Lease Coach tries to determine up-front what the landlord wants for financial information and what the proposed Assignee is willing to provide.  In some cases, the purchaser comes out looking like a desirable tenant; however, he/she may have a heavy debt load or little professional experience running a practice.  Landlords can be sensitive to this since they are accustomed to you (the existing tenant) paying their rent on-time etc.

6.  Renewal Option Clauses.  Often, your practice purchaser wants to assume your lease renewal option clause (if you have one).  This means that the purchaser has some certainty that if he/she buys your practice with only 18 months left on the lease term they cannot be kicked out by the landlord at that time (they can use the renewal option clause). Don’t assume the renewal option clause is transferrable to the buyer. 

7. The Assignment Processing Fee:   These fees range dramatically from 0 to $2,500; $500-$1,000 is typical.  The seller must usually pay this amount and notify to the landlord (in writing) to initiate the process.

8. The Assignment Agreement:  Depending on whom The Lease Coach is representing (the selling or buying physician), we often negotiate for additional points such as the deposit, renewal options, guaranty etc. Be aware – the landlord may stipulate the seller (assignor) be responsible for the lease if the buyer (assignee) defaults.

Tens of thousands of businesses (including healthcare practices) are bought and sold each year. And they almost all require a lease assignment or negotiation with the landlord. A landlord can deliberately or creatively sabotage lease assignments. They may do this out of fear that the new tenant who is buying your practice may default on rental payments. Or it could be that the landlord agrees to the assignment but wants a higher rental rate, greater deposit or a personal guaranty (or all of those things) from the assignee buying your practice. Remember, from the landlord’s perspective a lease assignment is often a lateral move, even a nuisance because the tenant is the one making money from the sale of the business while the landlord simply continues to collect the same rent, but possibly from an unproven tenant or business person. 

For a copy of our free CD, Leasing Do’s & Don’ts for Commercial Tenants, please e-mail your request to DaleWillerton@TheLeaseCoach.com.

Dale Willerton and Jeff Grandfield – The Lease Coach are Commercial Lease Consultants who work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals For Dummies (Wiley, 2013). Got a leasing question? Need help with your new lease or renewal? Call 1-800-738-9202, e-mail DaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com.

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