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Are You Prepared For Your Lease Music To Stop?

Perhaps you are familiar with the child’s game of musical chairs – where children move around a group of chairs and when the music stops each child dashes for a chair leaving the most unprepared child without a chair and out of the game. As a tenant, you need a chair at your practice premises. Unless you are prepared, you will lose your premises when the music stops.

Losing your premises is not a question of if; it is a question of when. The time line you care about is the number of years remaining in your career, plus 10 years, which gives you and your practice purchaser an economically viable time line. This time line could be 10 years if you are retiring now and only need 10 years for your buyer to amortize loan financing, or 50 years if you are 25 years old expecting to practice for the next 40 years before you sell.

Property owners will not compromise the value of their real estate to make you happy. Commercial properties have a defined economic life (40 years for example), a limited useful life (after which repair costs more than replacement), and a “highest and best use life” (which is when the property return is at its highest). Any one or combination of these timeline changes will provide incentive for the landlord to end your tenancy – stopping your music.

The key issue here is to be prepared for when the music ends.

In most cases, a landlord will not tell you the exact moment they plan to end your tenancy to administer their real estate – because they do not know themselves. Therefore it’s really a matter of managing your own timeline.

You have a number of choices.

First, you can buy your own property. Think this through carefully. Will you come out ahead going through the expense and effort of ownership compared to moving at some point?

Second, in theory you can set up a lease which gives you unconditional control of the premises for a period of time you need which could be as long as 50 years, but it’s very unusual.

Third, you can hope for the best, which really means that you have to understand when it’s likely that the music will stop and you will have to move. Understanding when this is likely involves a firm understanding of the terms and conditions of both your lease, and the real estate market as it affects the building within which your premises is located.

As far as the property containing your premises is concerned, property redevelopment is very unlikely in a property less than 30 years old, or a property with an atypical zoning, such as a historical designation, or a retail development in a residential subdivision.

As far as your lease goes, leases are set up to protect the economic value of the property by giving the landlord the ability to end your tenancy on the landlords’ timeline. Many tenants are lulled into a false sense of security if they do not recognize or have an obvious form of lease termination.

Even if your lease has a “term plus option” total of 20 years, your lease has one or more of the following flaws and you will have to spend the money to relocate your practice.

Your lease may contain one or more of the following:

  • An option to terminate your lease on short (often six months or less) notice if it wants to demolish, renovate, redecorate or sell the property.
  • An option prohibiting you from transferring your options to renew to a practice buyer, effectively shortening the lease time line to the current term if you wish to assign.
  • An option to terminate the lease as an alternative to assignment.
  • A relocation clause forcing you to relocate, possibly at your expense, to undesirable premises.
  • An option permitting the landlord to change the lease at renewal time giving the landlord the opportunity to add one or more of these clauses.

Even without any of the above, your landlord may refuse to provide additional options to renew, in which case you will have to relocate at the end of the last renewal term.

All of these scenarios limit the life span and therefore the value of your practice by the cost to relocate.

There is hope. If you plan your affairs carefully under the guidance of an experienced professional you can adjust your lease and tenancy in concert with your long term strategy to minimize both the risk and economic impact of the music stopping.

Written by
Ian D. Toms