Special Considerations with Health Care Real Estate Leasing

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25192_1391265912837_546364_nBy Louis M. Oliverio

Health care real estate leasing transactions offer a variety of unique issues that differ from the negotiation of the typical lease arrangement.  Some special issues unique to health care real estate leases, from both the landlord’s and tenant’s perspective include:

  • Use Restrictions.  The landlord will desire strict provisions to limit the use of the space to the particular medical specialty of the practicing physician. For an on-campus medical office building, the landlord may require (perhaps because of a requirement of the underlying ground lease) that all or the majority of practicing physicians in the space be properly licensed and members of the medical staff of the hospital. The tenant physician will desire as broad of a permitted as use as possible so as to not limit advances in office practice because of improving medical technology, such as increased ability to perform certain surgical procedures in the office.
  • Ethical Directives.  Space leasing in religious-affiliated medical campus settings may involve tenant compliance with ethical directives, such as The Ethical and Religious Directives for Catholic Health Care Services.  Tenants will need to ensure that their anticipated medical practice will comply with these directives and should also attempt to limit applicability only to directives as they exist on the date of the lease.

  • Lease Term and Relocation.  Medical office tenants tend to desire the ability to remain in their space for longer periods of time than in the traditional office leasing scenario, both for patient convenience and because of the equipment required in the space.  Landlords typically want flexibility to relocate tenants for the benefit of the office building.
  • Assignment and Subletting.  One of the most heavily negotiated provisions in any lease will be the assignment and subletting provisions.  Landlords should insist on the change of control or introduction of new partners into the medical practice as being deemed assignments of the lease that will require landlord consent.  Tenant, on the other hand, needs the ability to sell the practice or to cause a change in control of the practice without breaching the lease.  These provisions will need to be very carefully reviewed and negotiated.
  • Regulatory Compliance.  Federal and state laws apply to relationships between hospitals and referral physicians, most notably the federal Stark law and anti-kickback statute.  In many cases, hospitals seek involvement of private third-party developers experienced in medical office buildings to undertake the development as a means of avoiding direct relationships with referring physicians. In situations, however, where a hospital is entering into a lease with a referring physician, careful scrutiny must be given to ensure health care regulatory compliance. Among other issues, the rent established must be at fair market value and that the lease itself should be for a commercially reasonable business purpose.  The financial components of the transaction must be reviewed carefully.  In addition, certain lease provisions to account for changing compliance laws should be included.
  • HIPAA/Privacy Matters. It is important, particularly for tenants, for the lease to address patient privacy/medical records matters as a result of the Health Insurance Portability and Accountability Act (HIPAA) and the Health Information Technology for Economic and Clinical Health (HITECH) Act.  Tenants will be required to implement safeguards to protect privacy and security of protected health information and must take reasonable efforts to prevent disclosure of this information.  The lease agreement needs to address how private information will be impacted in instances such as when the landlord may inspect the premises or when the tenant is in default under the lease.
  • Hazardous Substances. Standard space lease provisions regarding hazardous substances need to be carefully reviewed in health care leases.  Landlord needs to ensure that the tenant is obligated to properly handle and dispose of medical waste, while tenant needs to ensure a carve-out exists for small amounts of hazardous substances used in the ordinary course of tenant’s medical practice.

The above summary is intended only to be a general overview of issues to consider when reviewing health care real estate leases.  Taking time to understand the specific needs of the client at the outset will assist in an effective and efficient lease negotiation, whether on the landlord or tenant side.

Louis Oliverio has joined the Pittsburgh office of Dinsmore & Shohl as of September 3, 2013, arriving from a large international law firm.  He has extensive experience in representing hospital systems, developers, landlords and tenants of health care real estate assets.  Louis may be reached at 412-288-5884 or louis.oliverio@dinsmore.com.

The opinions expressed are those of the author and do not necessarily reflect the reviews of the firm or its clients.  This article is for general information purposes only and is not intended to be and should not be taken as legal advice.