About 6 months after signing the lease for my first medical practice I knew I had made a big mistake. A flashy new practice with an expensive fitout in a recently expanded shopping centre, the practice itself was thriving. More patients than we could handle and plenty of doctors available to work for me. But all I could think was – I wish I had looked harder for a better location. And having signed a 10 year lease with a personal guarantee I had a long time to regret this decision. The rent was expensive, the outgoings extortionate, the neighbour was a gym pumping loud music into our consultation rooms, and it was clear centre management didn’t really care about any of our complaints. A commercial lease is a big deal and should never be entered into lightly. It’s not like renting a home. You can’t just break the lease and pay a month’s rent. You are legally responsible for those lease payments until the conclusion of the contract, until you assign it (with the landlord’s permission), or until you go bankrupt. Here are 10 things you need to consider when signing a commercial lease for a medical practice
- Hire a professional negotiator: Signing a commercial lease can be a complex process, and it’s important to have someone on your side who understands the nuances of the negotiation process. Hiring a professional negotiator, such as a commercial real estate broker or a lawyer who specialises in commercial leases, can help ensure that you get the best possible lease terms.
- Check out neighbouring tenants, especially if their business is noisy: It’s important to consider the other tenants in the building or complex, particularly if their business involves loud or disruptive activities. Noise can be a significant issue for a medical practice, so it’s important to ensure that neighbouring tenants won’t be a distraction or disruption to your business. And although all leases state you have a right to ‘quiet enjoyment’ of your tenancy, enforcing this can be difficult. We ended up taking our landlord to QCAT over the issue but the gym went broke shortly after this so the problem solved itself.
- Avoid personal guarantees : Personal guarantees are a common feature of commercial leases, but they can be risky for business owners. Personal guarantees mean that if your business is unable to meet its lease obligations, you could be held personally liable for the remaining lease payments. To avoid this risk, try to negotiate a lease that doesn’t require a personal guarantee. The landlord will probably request a higher Bank Guarantee – usually 6 months rent. But it’s better to sacrifice this money to get out of a terrible lease or if the business doesn’t work than be left with paying the remaining lease payments. Signing a lease without a personal guarantee worked in my favour during the pandemic. I leased a medical practice in Melbourne just before the Delta wave hit and when we all thought things would get back to normal. When the state closed down again I was stuck in Sydney and unable to travel to the clinic. To make matters worse Premier Andrews indicated the lockdown could go on for months. At this time I decided to cut my losses. I advised my landlord that I was leaving and gave him 2 options: terminate the lease and keep the $20,000 Bank Guarantee, or he could put in a claim when I liquidate the company the lease was in. Knowing the company had no assets he wisely chose Option 1. I paid $20,000 but probably saved $200,000.
- Have a backup preference for a sit: While it’s important to have a preferred location in mind, it’s also important to have a backup plan. Don’t fall in love with one option, as this can lead to negotiating from a position of weakness. Instead, have a few options in mind and be willing to walk away from a deal if it doesn’t meet your needs. Almost landslords will want you as a tenant – they love medical centres. So use this to your advantage and play them off against each other for the best deal.
- Be careful about accepting a large fitout incentive: Some landlords may offer a large fitout incentive to help you build out your space. While this can be tempting, it’s important to remember that this money will be in lieu of lower rent. Once the sugar hit of incentive payment is received and spent you’ll be left with higher lease payments for the rest of the lease term.
- Never sign a long lease: It’s generally not advisable to sign a lease longer than three years, as this can lock you into a lease that may not be in your best interests in the future. A three-year lease with two three-year renewal options is a good compromise that provides some flexibility while still giving you some long-term stability.
- Avoid shopping centres: The high foot traffic in a shopping centre can be attractive to a medical practice. However, it’s important to remember that once you’re established, you won’t necessarily need the walk-by traffic, but you’ll still be paying a premium for it. Better to work hard on your marketing and building your patient base in the first few months. If you offer great medical care, your patients will find you and come to where you are. They won’t care if you aren’t conveniently located in a shopping centre.
- Instead of a fitout incentive, negotiate a longer rent-free period: If you need help building out your space, consider negotiating a longer rent-free period instead of accepting a fitout incentive. This can help you avoid the higher lease payments that come with a fitout incentive.
- Don’t hire a “medical fitout” builder: Some builders may specialise in medical fitouts, but they may also charge a premium for their services. A regular builder can often do the same work for less money, so be sure to get quotes from both types of builders. Another mistake I made was googling “Medical fitouts” and then promptly spending about $200,000 more than I needed to on a subpar fitout.
- Don’t make the consultation rooms too small: The size of your consultation rooms can impact your ability to attract and retain doctors. Rooms that are too small can be uncomfortable and uninviting, so aim for rooms that are at least 12 square meters (4 x 3m).
Signing a bad lease can cause lots of problems for a new practice. Cash flow can be tight in the first few months or even years and your job is to make sure the journey from your first dollar of revenue to your first dollar of profit is as quick as possible. Nothing slows this quicker than paying too much in lease payments. So make sure you get it right.
Fortunately for me I only spent 5 years in that 10 year lease before I was acquired by a corporate medical group. The lease is their problem now!
