Legal Audit Approaches for Peak Performance

by John McMillan, LL.B

Achieving and maintaining peak performance certainly involves a focus on marketing, operational efficiencies and controls and the use of new technologies. Often overlooked or neglected are the many legal relationships, agreements and statutory requirements that have over the years become all the more important in light of the recognition that dental practices are marketable assets. The value of your practice will be in large part reliant on the integrity of your legal arrangements, which makes it more important than ever to obtain legal and accounting advice and to conduct a periodic legal audit of your material contracts and relationships.

Your Premises Lease
If you do not own the property where you operate, your premises lease is a critical asset, but can also be a liability (and an obstacle to the sale of your practice). There are certain threats contained in many leases that your lawyer should watch for, including (but not limited to):

• Demolition clauses – The right of the landlord to terminate the lease if they wish to demolish (or remodel) the building

• Relocation clauses – The right of the landlord to relocate your premises (often with insufficient compensation)

• Recapture clauses – The right of the landlord to terminate the lease in the event of a request for an assignment (to a purchaser for example)

• Additional Rent provisions – Buried costs can be significant and variable

You should also be looking to secure certain provisions for your benefit:

• Exclusivity (where applicable)

• Tenant inducements

• Options to renew (lenders typically require the lease term plus renewals to be equal or greater than the term of the loan – this will be critical at the time of sale)

• Assignment and subletting rights (ideally without your continued covenant)

Equipment Leases
It is very important that you carefully review your equipment leases (ideally before you commit) with your accountant and your lawyer to ensure you understand the rights and obligations of the parties and the true cost of the equipment over time.

Group Practice Arrangements
Group practice arrangements can bring economic and clinical benefits. However, how that group practice arrangement is structured can have vastly different implications. The term “partnership” is often used to describe these types of arrangements and was the norm for many decades, but such an arrangement can have adverse tax, liability and marketability implications and there are other arrangements (such as “cost sharing”) that can achieve all of the economic benefits of group practices without the disadvantages of partnerships. It is important that you consult with your accountant and lawyer to explore optimal structures.

Employee Matters
The last decade has seen a dramatic increase in employee litigiousness, but also in corresponding professionalism in dental office management. Accordingly, an increasing proportion of practices have high quality contracts and workplace policies. While it is still a relative sellers’ market, buyers are getting increasingly savvy and therefore decreasingly likely to be willing to hire all your employees “on the same terms” (as was common historically). Today’s buyers are significantly more likely to scrutinize your staff contracts and Workplace Policy Manual. When sales fall apart as a certain proportion do, a common cause can be the poor quality (or non-existence) of staff contracts and policies.

Seek the advice of an experienced employment lawyer who works extensively with dentists to deal with any staff issues and to transition all your staff now to proper contracts and a Workplace Policy Manual, especially if you are aiming to sell within five years.

Understand that few areas of law have as many traps as employment law. Unlike many of the contracts in your filing cabinet, your staff contracts and policies are more likely to be challenged by at least an opposing lawyer (not to mention a Court or tribunal). If and when you get a demand letter from an employee-side lawyer for six figures plus, you will pray that you were not penny wise and pound foolish and that your employment agreements and policies are actually enforceable.

Associate and Hygienist Agreements
In addition to employee contracts and policies, a properly advised purchaser will require production of current agreements with “independent” contractors; they will be specifically looking to verify that the interest in the charts can be transferred without risk of any third party claiming an interest in the charts or otherwise causing patient loss.

Certain provinces permit hygienists to self-initiate or offer independent services without dentist oversight. This trend has led to more dentists and hygienists signing “independent contractor” versus employment agreements. While there can be benefits to both parties (including no source deductions, tax deductions for the hygienist, and the non-application of employment law) it is important to ensure (with specialized legal advice) that the test for independent contractor is satisfied given the actual working circumstances. When the CRA investigates these arrangements, they will often conclude the worker was actually an employee, despite what the parties called the relationship. The facts must support the claim.

Restrictive Covenants
As a significant portion of your practice value is reliant upon patient retention, it is important that your associate and hygienist agreements include reasonable and enforceable restrictive covenants. While it is true that most of the dental and hygiene Colleges in Canada have express prohibitions against solicitation of patients, this does not include any provision to compensate the principal dentist for losses in the event of solicitation – this must be addressed in your written agreements. Case law on restrictive covenants has changed significantly over the years and the courts continue to add to that body of law, so you should consult with experienced legal counsel.

Legislative Compliance
More than ever, dentists today also need to be aware of many (non-dental) statutory restrictions and requirements affecting dentists, examples being laws relating to employment, occupational health and safety, privacy, accessibility, anti-spam and the environment.

Caring for Your Professional Corporation
Incorporated? It is important that you maintain proper corporate records under the laws of your Province or Territory. A deficient corporation can be problematic both during your ownership and certainly if you are hoping to sell your practice under a share sale. Proper maintenance would include for example filings with your relevant Ministry as to directors and officers of the corporation (or changes thereof) and preparation and execution of annual resolutions, dividend resolutions and any other corporate actions that require approval by the board or shareholders. Renewal of the corporations Certificate of Authorization from your governing College will also be required.

More than ever, it is critically important that you consult with your accountant regarding tax planning strategies, as there are significant revisions to tax laws recently proposed by the federal government that may affect you.

Estate Planning
You should also have an estate plan in place. The unfortunate reality is that things do not always go as planned and there are measures that can be taken to ensure the proper management of your affairs (under a Power of Attorney) and the orderly disposition of your practice (by your Estate Trustee) in the event of your unexpected death.

There are also strategies to leave a bit more for your beneficiaries if your practice is incorporated, such as multiple wills (in certain provinces) to avoid probate on the shares of your corporation, or an employment agreement between you and your corporation, which agreement can provide for a $10,000.00 tax-free death benefit to be paid by your corporation to your surviving spouse.

The reality is that the business success of the dentist today is a product of much more than costs and billings – it is also the product of minimizing threats and exploiting opportunities (with the help of your professional advisors). Your careful attention to these issues throughout your career will be well rewarded.

The author would like to acknowledge and thank Mariana Bracic, J.D., for her contribution on the employment matters.

John McMillan, LL.B. is a Toronto corporate /commercial lawyer serving health professionals. He can be reached at 416-364-4771 or

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