What you should think about before entering into a medical centre lease
Considering establishing a medical practice? An important step will be finding suitable premises from where to operate, which usually involves entering into a lease of a medical centre. Entering into a commercial lease is an integral part of setting up and operating a medical practice, and it is crucial you get this right both for the operation of your business and if you decide to sell the practice later on.
Here are some key things to consider when entering into a medical centre lease.
1. Negotiate the best Lease Term and Options to Renew for your practice
You will want to ensure that that the initial term of the lease and any options to renew are adequate for you and for your medical practice. Whether a lease term is suitable will depend upon a number of factors including: your long-term plans; the nature of your practice; the cost of installation and fit-out of the premises; and, the cost of relocating at the end of the lease.
Having a suitable lease term plus options to renew provides security of tenure, and means that you can focus on establishing and running your practice rather than thinking about finding new premises. If you decide to sell your practice later on, a suitably long lease term including options to renew is generally more attractive to a buyer.
The lease will set out all the key dates which you should pay attention to and diarise, including commencement, duration and expiry, and any options for renewal. In particular, the lease will stipulate how and when you can exercise any option to renew. It is crucial that you make a note of all of these so you do not miss any key dates.
2. Take care with the Rent Review provisions
The cost of rent will be an important consideration in entering into a medical centre lease. The lease will clearly indicate the initial rent that is payable.
Rent, however, will not be fixed for the duration of the lease, and may increase or decrease subject to rent reviews and fixed increases. It is important to note any rent review clauses, which will stipulate the frequency and the method by which the rent amount can be reviewed.
There are two commonly used rent review mechanisms:
- Annual reviews against the Consumer Price Index (CPI), accounting for inflation in the price of goods or services.
- Market rent reviews commonly taking place periodically, such as before the commencement of any option periods. A property valuer or real estate agent will determine the market rent based on current market prices.
The rent may also be subject to fixed increases, where rent increases by a fixed percentage on an annual basis.
Care should be taken in agreeing to rent review clauses to ensure that rent review is not solely at the landlord’s discretion. A tenant should have an independent entitlement to have the rent reviewed. You should also take note of any ‘ratchet’ clauses that prevent rent decreasing after a review.
A commercial lawyer who has experience in preparing and reviewing medical centre leases will be able to provide guidance as to what is usual and reasonable in respect of rent review provisions.
3. Try and limit your Outgoings
In addition to the rent, a tenant is usually required to contribute towards the landlord’s expenses, which can include rates, taxes and operating costs. The lease should clearly set out what expenses or what proportion of expenses you will be liable for.
A tenant’s liability for outgoings (sometimes referred to as ‘variable outgoings’) under a lease is in addition to rent, and it is important that you are aware of the extent of your liability. As far as possible, the lease should set out what you will be liable for and what expenses are not your responsibility.
Your lawyer will be able to suggest and negotiate some exclusions to the outgoings. For example, it should be clearly stated that the outgoings do not include any capital costs or any items of expenditure which the landlord may not recover by law.
4. Make sure you can use the Premises for your intended use
When negotiating a medical centre lease, you should ensure that the premises are legally and physically suitable for your intended use.
The lease should specify the permitted use for the premises. It is advisable to also ascertain what existing local government approvals apply to the use of the premises, including type of use and hours of use for business. If you require the premises to be developed or altered to meet your needs, you should check whether any approvals are required. You may also wish to make the lease subject to such approvals being given.
The permitted use of the premises should be described accurately and widely enough in the lease to cover all intended uses and activities. If you intend to expand your practice, you may consider a provision in the lease to enable changes to the permitted use. A flexible provision like this may also make the business more attractive to buyers and make the premises more attractive to subtenants.
5. Ensure you can assign and/or sublet the premises
Generally, a medical centre lease will contain a provision allowing the tenant to assign the lease with the landlord’s consent (which should not be unreasonably withheld). The right to assign a lease is an essential entitlement for a tenant. For example, at some stage the lease may no longer suit your requirements, you may wish to retire or simply sell your medical practice. Without the right to assign, you may be locked into the lease until the expiry date or be liable for early termination fees.
A medical centre lease may also permit a tenant to sublet with the consent of the landlord (which also should not be unreasonably withheld). It is important to note that if you sublet without the consent of the landlord or in the absence of a clause allowing subleasing in the lease, you are likely to be in breach of the lease.
How can we help you?
If you are considering entering into a lease of medical centre, engaging an experienced commercial lawyer can help ensure that the lease is fair and reasonable and meets your objectives.
The Corporate and Commercial team at Panetta McGrath Lawyers is available to provide assistance for all your medical practice and commercial leasing needs.
