You are well aware of the grim reaper of practice value – the demo clause (or the landlord who wrote it in, depending on where we want to lay blame). With all the spokes in the wheel of your legacy, it can feel defeating that one of those spokes gets to have such a negative impact on your practice value.
Years ago, banks were far less concerned about these clauses. Many current practice owners obtained financing without knowing the clause existed when they bought, or even what it meant. And now the buy-sell conversation seems to lead with this topic.
Demolition clauses are clauses in the lease that state the premises can be demolished with a stated period of notice and your business is homeless. If you have a 10 year lease term with a demo clause requiring 6 months notice, you really have a 6 month lease. That is to say, you are bound to pay the landlord for 10 years and can’t get out of the lease but the landlord can activate the clause and see you evicted with 6 months notice.
Banks are leery to lend beyond the term of the lease that the demo clause takes effect. If a clause takes effect in 2030, for example, banks will typically lend from the date of sale to that date. This shortens amortizations from the typical 12-year for a practice loan, consequently impacting your practice’s value.
If you’ve got a demo clause (or you’re not sure), here’s what I suggest. Upload your lease (the original and all amendments) into an AI app. Something like Claude, Chat GPT, Perplexity, whatever one you like. And ask the AI if there is a demolition clause in the lease. I’ve done this and been impressed with the ability to find and summarize the detail. Further, if your lease is in PDF format and you have the upgraded Adobe, you can ask Adobe to find this clause.
If the grim reaper rears its head and you are in fact in possession of a “dirty lease”, here are some options and considerations that might help:
- Review in depth with your lawyer. Ask them or a certified leasing consultant about negotiating with the landlord. Even if this gets bumped back a few years, you’re likely putting six figures in your pocket.
- If there are other tenants in the facility and you are on good terms, ask them if they have a demo clause. A neighbouring tenant that has a demo clause that kicks in in 2037 means the building is going to be hard to tear down before that even if you have one that activates in 2030.
- Throw money at it. In certain instances the landlord may be more receptive to adjusting the clause with an increase in the lease rate you pay. This may cost you more on a month-to-month basis but securing that lease with a delay in the theoretical demolition is valuable. Alternatively, I’ve had some clients achieve success with a cheque in exchange for removal of the clause (or pushing it back to allow at least 12 years after the sale of your practice).
- If it’s still a no-go, ask if the landlord would be willing to provide assurance in writing that there is no intention to demolish the facility.
This is all about risk mitigation. Having to relocate a practice a few kilometres away creates confusion for patients and costs for owners. Threats to goodwill (perceived or actual) and leasehold improvement costs are always considered in risk assessment for both a lender and purchaser.
Don’t be caught off-guard by not knowing what’s in your lease. And know that there are strategies that can sometimes offset the nasty effects of clauses like these if you’re prepared to negotiate on behalf of your future.
