Lease law: A river runs through it

As I write this month's submission, there is water streaming into the basement of my veterinary hospital.

We are in the midst of the late June mid-Atlantic states flood of 2006 and at the moment, I can't think of a more salient legal topic for veterinarians than lease law.

The reason: Today I am particularly thrilled to be a tenant and especially nervous to be a property owner. (I rent this flooding practice building, and I am waiting to see how much water comes into the buildings I own.)

Real-estate leases are widely ignored by the general public and frequently don't receive adequate attention when a veterinarian enters into a rental arrangement for a practice location, a satellite clinic, a storage facility or even a residence. When doctors come to me to assist them in arranging a practice purchase or sale, they are often much more interested in the financial elements of the inventory and equipment sale than in any of the details of an anticipated shopping center or building lease.

Speaking as an attorney and real-estate developer, I assure you that veterinarians ignore lease details at their extreme peril.

Leases often contain much complex, mind-numbing language. But as is true with many legal documents, details are not necessarily simply unjustifiably verbose legalese. Frequently, parties to a veterinary practice sale are bored with these details. That is, they are bored until ...

• The shopping center is sold out from under them;

• Their leased building is condemned for a new or widened highway;

• Lightning takes out the X-ray machine;

• Flood water shuts down the building for 10 days in mid-June.

Here are a few of the high points in negotiating and drafting of real-estate leases for office occupancy. Similar lease issues often apply when a veterinarian decides to rent a house, condominium or apartment. As I have often mentioned in the past, there is no substitute for "brainstorming" potential problems and drafting to prevent disputes when those issues actually arise.

Allow me to break my recommendations and ideas down into two distinct parts: advice for tenants and advice for landlords. (Don't forget that lawyers should only counsel or represent one party to a negotiation at a time.)

Here are some pointers for all you docs out there who are looking to rent a practice facility or lease space that will become a practice or satellite facility:

Term

Does it really matter how long the term is, or how the term is structured?

Yes, it does because term length and renewal term options have a great deal of bearing on the future of a practice at a specific location. Lease terms do not have to be long for a renter to protect his/her right to a location; they simply have to allow the tenant to stay in the facility for a long time. Note that there is a difference.

In instances where a veterinary practice occupies rented space, it is often quite restricting for the renter. The party leasing the space might be obligated to stay in the office, shopping center or other property for 5, 10, 15 or 20 years. A lot can happen in such protracted periods of time, and a long lease can inhibit the practice owner's personal and practice flexibility.

Sometimes a better alternative is a convenient two- or three-year lease term with a whole bunch of guaranteed two- to three-year renewals. This arrangement obligates the building owner to continue renting out the space to the veterinarian tenant. At the same time, the renting doctor has the option of identifying a better location, deciding to enter into purchase negotiations, or even of selling his goodwill and equipment to another practitioner who may not love the rental space, and so on.

Utilities

Is there a common water, gas or electric meter with some other tenant?

If the veterinarian agrees to pay those utilities in exchange for a reduced rent, what type of tenant will be sharing those utilities? Even if the attached apartment currently houses an elderly married couple, don't forget that a rent-adjustment clause is critically needed in the event that a family of six moves in six months after the lease is signed. (Older, married couples use about the same amount of hot water per month as one teenager uses in a morning shower.)

Growth

Think about the cost of moving fixtures, and think about what renovations are justified in light of how long you actually will be able to live with the amount of space and the location you have.

Perhaps you should obtain an option on the lot behind or the lot next door. Maybe your lease should contain a term providing for a rent reduction for upgrades such as the installation of high-voltage electrical service or a new lighted sign that enhances the value of the property for the landlord.

Considerations for landlords

The same issues are important for landlords to consider about how a lease should be crafted:

1. Term: Never forget the impact of inflation! You young guys and gals probably don't think much about the Carter years when the prime rate was hovering in the double-digit zone. Whether you agree to a 20-year term or 10 two-year terms, you must include inflation indexing language. Also, if the tenant is not paying taxes, be alert and draft in automatic rent increases to reflect a realistic factor for property tax increases. The adjustment factor can be based on, among other things, historic tax increase patterns for the area. (In some upstate New York regions, for example, you might have to figure about 20 percent a year or so).

2. Utilities: Again, never forget the impact of inflation. If the tenant is paying the utilities, any term renewal you grant probably should require that this situation continue. If you are paying the utilities, it is critical to remember that the cost of those may outpace inflation dramatically.

3. Growth: If your rental building is in a fairly prime area, has frontage on a major road, has terrific curb appeal or has other outstanding qualities, perhaps you should obtain an option on the lot behind or the lot next door.

(Your place) + (the obscure lot behind) could = value well beyond the value of each property separately.

To summarize, it is my strong feeling that in lease law, as in all other aspects of business counseling, one should try to discover all that is knowable and to anticipate whatever is realistically predictable.

Dr. Allen is president of the Associates in Veterinary Law P.C., which provides legal and consulting services exclusively to veterinarians. He may be contacted at (607) 754-1510 or info@veterinarylaw.com.