By: Mathew J. Levy, Esq. & Stacey Lipitz Marder, Esq.
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When evaluating a medical practice, the lease is often considered one of the most important assets as location is crucial to the success of a practice, and the lease is often one of the largest expenses. While a favorable lease can certainly increase the value of a medical practice, a lease can also be debilitating in the event that the terms are not favorable. Therefore, prior to entering into a lease arrangement it is imperative to evaluate the legal and business issues. We have highlighted a few key issues below that all health care tenants should be aware of prior to entering into a lease.
It is recommended that the tenant be a corporate entity as opposed to an individual from an asset protection standpoint, as the entity would be liable under the lease instead of the individual. However, even if the tenant is a corporate entity, the landlord may require that the corporate entity’s owner personally guaranty the lease, meaning that the landlord can sue the owner personally in the event there is a default. If a personal guaranty is required, negotiations should involve limiting the personal guaranty.
Term of Lease and Options to Renew/Exit Strategy:
Potential tenants should make certain that they understand how long the lease is in effect for, as well as whether there is an option to renew the lease. Otherwise, there may be a chance that a practice is forced to relocate which may cause unnecessary stress, expense and aggravation. Furthermore, tenants should make sure that they have an exit strategy and can terminate the lease in the event things do not work out. Otherwise, the tenant may be in breach for terminating the lease and may be responsible to make all payments for the entire term, in addition to other penalties.
Often times, a space needs to be completed renovated prior to occupancy. Should a build-out be required, approval should be given by the Landlord with respect to work to be done prior to entering into a lease agreement, as any alteration to the premises often requires consent of the landlord. All parties should also be in agreement with respect to who will be performing the work, who will be paying for such construction/modifications, as well as who will be responsible to obtain any required permits and consents. In many instances, if the tenant is responsible for paying for the build-out, the landlord may offer rent abatement to offset the cost of the build-out since it essentially benefits the landlord. Additionally, tenants must be aware of their obligations upon termination with respect to any renovations made. Many leases require tenants to “convert” the space back to its original form at the tenant’s sole cost upon termination or expiration of the lease.
When evaluating rent, potential tenants should look at their total financial obligations. For instance, a lease may be a triple net lease, whereby the tenant is responsible to pay all or part of the taxes, insurance and maintenance associated with use of the property, in addition to the tenant’s regular monthly rent. In that case, the tenant would want to make sure that it is clear exactly what the tenant’s financial obligations are and how such amounts are calculated. The tenant may also consider adding a cap with respect to increases in fees. In the event the lease is for a multi-year term, the tenant should be aware of what the financial obligations are each year, including increases in monthly rent. Increases should generally be no more than cost of living adjustments per year.
If a healthcare provider is leasing space from another healthcare provider and there are referrals between the parties, the parties need to ensure that sure lease is in compliance with applicable rules and regulations, including the anti-kickback statute and stark law. In order to comply with such regulations, amongst other factors, the lease should be in writing and be for a period of at least 1 year. The rental amounts should also be fair market value, which do not take into account the value or volume of referrals. If the rental amount is too low or too high, it can be perceived as payment for referrals.
Many medical practices in today’s environment sublet space to other healthcare providers. Many leases contain language indicating that any assignment/sublease/license must be approved by the landlord via a specific consent process, and that the tenant is responsible for additional fees in connection with such assignment/sublease/license. In order to avoid this process, it is recommended that language be added permitting the tenant to sublease/license a certain percentage of the space to a healthcare provider without obtaining the landlord’s consent.
The lease should also clearly specify exactly what services the landlord is going to be providing. For instance, is garbage removal and parking lot maintenance included in the rental fee? If there is a crowded parking lot, are there a certain number of spots reserved for the medical practice? Is electricity and elevator service provided seven (7) days a week and twenty four (24) hours per day? Is the landlord responsible for snow removal and sidewalk maintenance, if applicable? Who is responsible to fix the hvac unit and general structural issues? What are the landlord’s responsibilities in the event of a natural disaster, such as a flood? This was especially important in dealing with the aftermath of Hurricane Sandy. Unfortunately many medical practices had no protections in their lease with respect to such disaster.
Most leases contain language indicating that the tenant has to maintain certain insurance at its sole cost. Tenants need to understand specifically what insurance is required, as well as the costs to obtain such insurance. It is further recommended that the landlord also maintain insurance to protect the space. With respect to liability, most leases indicate that the tenant is responsible for any damage to the premises or injuries that occur on the premises. Such liability should be mutual, and language should be added noting that the landlord is also liable, provided the landlord (or its contractors, employees or agents) are responsible for such damage or injuries.
Competition in the Building:
Imagine if a medical practice invested a lot of money in a space, only to find out that the landlord leased the space next door to a competitor in the medical practice’s specialty. If the medical practice has a certain specialty, language should be added to the lease making sure that competitors are not allowed in the building.
Right to Enter:
Many leases contain language allowing the landlord to enter the premises at the landlord’s discretion. Since there are patients involved, it is important that the landlord not have the ability to disrupt the continuity of patient care, or have access to information in violation of HIPAA. As such, any access to the premises by the landlord should be upon mutually agreed upon times.
As noted above, the lease is a very important part of a medical practice from a financial and liability standpoint. Prior to entering into a relationship with a landlord for space, it is important to evaluate the lease agreement in order to ensure that the arrangement offers protections for the medical practice. To that end, it is in the best interest of the medical practice to have such lease agreement reviewed by a healthcare attorney since there may be serious implications as the result of an unfavorable lease.
Mathew J. Levy is a Partner of the firm and co-chairs the Firms corporate transaction and healthcare regulatory practice. Mr. Levy has particular experience in advising health care clients with respect to contract issues, business transactions, practice formation, regulatory compliance, mergers & acquisitions, professional discipline, healthcare fraud & billing fraud, insurance carrier audits including prepay and post payment review, litigation & arbitration, and asset protection-estate planning. You can reach Mathew Levy at 516-926-3320 or email: firstname.lastname@example.org.