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All things being equal, it is better to prevent a problem than it is to fix such problem. This is true for your body and your lease agreement. Traditionally, doctors, dentists, therapist and other health care service professionals have occupied suites in medical office buildings. Recently, there has been a shift by some health care service professionals to occupy space in non-traditional retail and mixed-use centers to access more patients. Health care service professionals should consider certain factors when deciding whether to locate in a medical office building or non-traditional space. These factors include the following: (1) Term Length, (2) Anti Kick-Back Issues, (3) After-Hours Access and Utilities, (4) Compliance with ADA, (5) Maintaining Privacy, (6) Hazardous waste, (7) Compliance with Zoning, (8) Cost and Control of Build-Out (9) Use of Specialized Equipment, (10) Tenant Financing, (11) Restoration Upon Surrender, (12) Parking, (13) Relocation, (14) Personal Guaranty, (15) Exclusive Use, and (16) Death and Disability.
Health care professionals, such as dentists, physicians, psychologists, and radiologists are different from general office or retail tenants. Providing healthcare services often involves confidential relationships. The practicalities of offering private services need to be addressed in the lease agreement. Attention to these factors will help insure that the medical practice is able to operate as intended.
1. Longer Lease Terms: Medical office leases are generally 7-10 years in term length as opposed to 3-5 years for general office tenants. The longer term is a consequence of higher initial build out costs for plumbing and other equipment.
2. Anti-Kick-Back Issues: Special rules apply to leases when the landlord is a hospital or physician owned building. Safe harbors created under Stark and Anti-Kick Back Laws impose criteria that such leases must satisfy. Proper compliance and documentation must be addressed if landlord-tenant relationship exists absent application such safe harbors.
3. After-Hours Access and Utilities: Health care professionals may see patients after normal building hours and in the case of urgent care clinics operate on a 24-hour basis. Be explicit if the tenant’s use will operation outside of normal business hours. Pay special attention to how the utilities are accounted for after normal building hours. Make sure your lease agreement spells out any rules and costs for after-hours usage of the property.
4. Compliance with ADA: As a practical matter, health care professionals need to pay special attention to the Americans with Disabilities Act (ADA) clause contained in the lease document. The cost of making compliant can be significant. Buildings containing health care professionals are more likely to receive ADA scrutiny because patients are more likely than the general public to have special access needs.
5. Maintaining Privacy: Health care professionals need to limit the landlord’s access to examining rooms and other areas during certain hours of the day as well as block access to patient records.
6. Hazardous Waste: Medical waste cannot be combined with normal trash. Health care professionals will be required to properly dispose of any contaminated material, medical waste, or other articles which may be contagious or radioactive. Health care professionals in retail centers or mixed-use centers may be required to contract separately for medical waste disposal.
7. Compliance with Zoning: Most jurisdictions subject medical uses to zoning regulation. Landlords will avoid representing compliance and often disclaim any representation that the tenant’s use is compliant with local law. Before signing a lease it is wise to check with the local jurisdiction to confirm that the medical use is allowed, or allowed with conditions, or not permitted.
8. Cost and Control of Build-Out: Landlord’s generally prefer that tenant improvements are done by architects and contractors with whom the landlord has a prior relationship. This is especially true if the landlord is contributing a significant improvement allowance. It is critical for the tenants to use contractors, space planners and construction professionals who are experienced and qualified in medical design and build-out as well as maintain some control in the management of the design and construction process.
9. Use of Specialized Equipment: Some health care professionals store and use hazardous substances which, create special requirements that need to be accounted for in the lease to avoid non-compliance with standard commercial lease language. Sometimes specialized equipment impacts build-out, such as when the tenant uses X-ray machines, CT scans, MRI scans and other machines that may generate harmful radiation which must be shielded from the rest of the building or require structural alterations to support heavy loads.
10. Tenant Financing: As a result of the cost of tenant improvements, health care professionals often finance tenant improvement costs in excess of any landlord allowance as well as medical equipment. To facilitate a lender to finance medical equipment, a tenant will often request that landlord subordinate to tenant’s lenders any security granted to the landlord on a tenant’s equipment.
11. Restoration Upon Surrender: Virtually all leases contain provisions addressing tenant’s rights and responsibilities regarding restoration obligations of the leased premises at the end of the lease term, which includes identification of those improvements and fixtures remain. The language in the alteration and surrender provisions need to be cognizant of the special situation of a medical tenant.
12. Parking: Parking for older buildings might be an issue. Older facilities may not have enough parking spaces for healthcare service professionals. Practices with a high volume of patients should have access to five or six parking spaces per 1,000 square feet they occupy.
13. Relocation: Landlords may request that a tenant to consent to a substitute premises should the landlord decide that it is in the landlord’s best interest to move the tenant from one suite in the building to another. Because of the specialized build-out needs of a health care professionals, this provision may not be practical.
14. Personal Guaranty. A personal guaranty allows the landlord to pursue repayment if the practice defaults under the terms of the lease agreement, personally from the individual guarantors, typically, the owners of the practice. A guaranty will be particularly important to a landlord that has fronted tenant improvement costs. Tenant often request that the guaranty to terminate at the end of the initial term or once the tenant improvement allowance has been amortized. Any limitation on the guarantor’s obligation should be spelled out specifically in the guaranty.
15. Exclusive Use: An exclusive use provision is a lease provision in which the landlord promises not to lease any space in the building to a similar specialty. This is to prevent the competition from setting up shop in your building competition. Keep in mind, sometimes sharing space with the competition is advantageous.
Death & Disability Clauses: A death and disability clause provides for the ability to terminate the lease (typically with an early termination fee) in the event a key professional is unable to practice due to death or disability.
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Fischer Law Office
Phone: (303) 290-7454
An Ounce of Prevention is Worth a Pound of Cure:
Special Lease Provision for for Health Care Professionals.