No one is interested in thinking about their mortality; and yet, we know that someday, we all die. We also know the horror stories that circulate about people who die without adequate preparation, leaving themselves intestate, and forcing their loved ones to navigate the bureaucratic mess that could have been avoided had the deceased been prepared for their passing. Having a will is an obvious element of estate planning. But have you ever thought about preparing your lease for death?
A lease is a document for a fixed period of time; it rarely includes a clause which indicates you may terminate it during its term. So, what happens if you die in the middle of your lease term? Most would imagine that the lease simply ends—it seems intuitive that if one of the parties to a lease is no longer alive, the contract would terminate. And while a landlord might agree that the lease can terminate, they would be doing so outside the strictures of the agreement. Most leases include a clause, buried in the boilerplate legalese, that a lease transfers to any “successors or assigns” of the tenant. A successor or assign includes, among other individuals or entities, one’s estate. A loved one might suddenly find that, upon your passing, your estate is a party to your lease agreement by succession.
This might seem far-fetched, but consider this story. An early-stage dentist in a major Canadian city signed a lease for ten years on a brand-new practice. But tragically, before the practice could even open, he died. On top of having to navigate an intestacy, and the bereavement of an untimely death, his spouse discovered that his estate is now obligated to pay rent to the Landlord for the remaining nine and a half years left on his lease, to the tune of $9000 per month. That isn’t just a story—it’s true.
The obvious thing an estate will try to do is to sell the practice of the deceased, and in doing so, request a transfer of the practice’s lease to the purchaser. But also consider these grim statistics; in North America, only 30% of practices will sell within 90 days of the death of its principal. Only another 10% will sell after that 90-day period. Sixty percent of practices will not sell at all if the sale is delayed more than 90 days. If the practice fails to sell, the estate and heirs are left to try to negotiate their way out of the lease agreement, which often involves a payout to the landlord of several months of rent, and meanwhile, since the practice hasn’t sold, they cannot rely on the expected proceeds from that sale, and instead have to dip into whatever other assets are available—and possibly their own pockets.
Though this should make you concerned, the good news is that there are things you can do to avoid this situation. You certainly want to have a will drafted. Consult with an experienced wills and estates lawyer who can help you set up for what happens to your business when you die. And when it comes to your lease, you need to make sure that it is set up correctly to deal with a possible death during the term. This is important advice whether you are entering into a lease for the first time, or what you expect is the last lease renewal negotiation before you retire.
One thing you need to ensure you have left on your lease is term. Buyers will often be looking for ten to twelve years of term left on a lease in order to satisfy their lender’s requirements. When you’re thinking about retiring, make sure you have sufficient term ahead of you in order to make your lease more appealing to a potential purchaser of your practice.
You also need to make sure your assignment clause is robust and tenant-friendly. The assignment clause governs the ability for your lease to be transferred, most importantly in connection with the sale of your practice. Oftentimes, an assignment clause will have onerous requirements for obtaining a landlord’s consent to the assignment, and will indicate that a tenant remains responsible for the lease after it has been assigned. Many will provide the landlord with a termination right if you request an assignment of the lease. Most concerningly, many leases allow a landlord to take any excess “consideration” paid by a purchaser to a vendor in relation to the assignment; that means the proceeds of the sale of your practice are exposed. A skilled negotiator can spot and address these concerns, so that you, or your estate, are able to sell the business and transfer the lease without worry.
For ultimate protection in the event you die during the term of your lease, I recommend trying to include a clause in your lease that allows your estate to terminate the lease, with a certain amount of notice to the landlord, in the event you (1) die and (2) your estate is unable to sell your practice. That will allow the lease to terminate without the ongoing obligation of your estate to pay the rent on the remainder of the lease term. This would be the gold standard in protecting your estate in the event of your passing during a term.
If you happen to own your own real estate, it’s still important to consider these issues. A strong lease in place between the entity that owns the property, and your professional corporation that pays rent to the ownership entity, will ensure that, if you were to die, your heirs can continue holding the real estate, and transfer the lease to a third-party purchaser of your practice. You’ve done the work ahead of time to make things as simple as possible for your heirs.
Our mortality isn’t something we want to think about, but that doesn’t mean we shouldn’t have plans in place. A prudent dentist is going to want to structure their affairs correctly so as not to pass on problems to their heirs. The good news is that there are things a dentist can do to prepare for this situation, and they can surround themselves with a team of advisors who can help them shore up their estate planning. Make sure one of those advisors is an expert on dental leasing.
About the author
Eric Pook is the President of Cirrus Consulting Group, a commercial real estate and office lease negotiation firm for dentists which has negotiated over 13,000 leases in the past 30 years. Eric has been consulting small businesses since the late ‘90s with an emphasis on revenue creation and cost mitigation. He grew up in a medical entrepreneurial environment and continued that passion by starting or growing businesses throughout North America.
