Recently we’ve been analysing several practices that have a demolition clause contained in their lease. It is essential prospective owners understand what this means and how to handle it. We must preface this article by saying we’re not lawyers and all commercial leases need to be examined and checked by a lawyer experienced in such leases.
A demolition clause in your lease means that the landlord can basically tell you to vacate the premises so they can demolish it. Typically, they do this to develop the property. They usually allow a certain timeframe for you to vacate and may or may not offer compensation.
Let’s step back and imagine purchasing a practice for 1 Million dollars that has a demolition clause in the lease. We would hope a competent lawyer would pick this up in the sale process. However, an inexperienced lawyer or your uncle/friend who works in some other aspect of law may not. When dealing with such large sums of money it certainly does pay to use an experienced lawyer in leases.
Going back to this initial scenario, consider if the landlord now comes to you as the new owner and says we want to put a 10-storey apartment complex where your dental practice is and we need you to vacate in the next 4 months. This is disastrous! You have paid 1 Million dollars for a practice that will not exist in that location in 4 months. You now have 4 months to fit out and move into a new tenancy. It is certainly doable within 4 months but a lot of things need to go your way. The stress associated with this will be immense. Not to mention the cost as well. Currently fit out costs and build times have increased significantly. There is a high chance the practice you just purchased for 1 Million dollars will need to close for several months while you find a tenancy, negotiate a lease and fit it out. There will be overheads that still need to be paid if you wish to continue running the same business. This all could have been prevented by your lawyer highlighting and explaining what this clause means and the possible options available.
If there is a demolition clause in the lease of the practice you wish to purchase then there are several options as to how to approach this.
- Only purchase the clinic if your lawyer can negotiate the demolition clause out of the lease or change it so monetary compensation is provided (a large proportion of the cost of a new fit out) if the demolition clause is exercised by the landlord (unlikely will be accepted in our opinion). Otherwise do not purchase the clinic.
- Lower the purchase price of the clinic to reflect the risk, cost and stress associated with having a demolition clause in your lease.
The times we’ll consider purchasing a practice with a demolition clause is if we plan to move the practice anyway. Typically, these clinics will have a low purchase price (we’re essentially just paying for the goodwill) and significant potential and upside.
We’ll highlight certain red flags associated with tenancies/practices that could contain a demolition clause in the lease below.
- Rapidly developing areas where the current tenancy is quite run down (the landlord has not put much effort or money into maintaining the premises as they know they will sell to a developer soon or develop the site themselves).
- Empty neighboring tenancies with the landlord actively not trying to fill them.
- Vendors keen on a ‘quick sale’ or the reason for sale not making sense.
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