One of the most important activities that a medical practice can undertake is the lease of new space for its practice. Doctors and staff are all very busy serving patients which leaves little time to focus on the myriad of issues that can impact a medical lease. It is critical however that the doctors and staff meet and discuss issues of importance when moving to a new space. This article will highlight certain key issues and the reasons why each should be addressed during the negotiation of a medical lease; these issues include addressing concerns for the privacy and comfort of patients, requirements of the medical personnel using the space, and planning for the growth and business plan of the medical practice.
Usage of premises
With medical leases, landlords seek to limit the usage of the premises to the specific activities that the tenant will be conducting. Tenants need to carefully review their usage rights to ensure that all of the uses and activities they conduct now or plan to conduct in the future at the premises are addressed and included in the lease. If a usage is not included, that usage may not be conducted by the tenant unless the tenant is able to get the landlord to modify the lease to include the additional usage. For example, if the tenant is an orthopedic practice and anticipates later conducting physical therapy, the tenant will want to include physical therapy as a usage permitted under the lease. Having a broad usage provision will also benefit the tenant if it needs to sublease or assign its space as the usage of the sublessee/assignee must be as permitted under the lease and with a broad use provision, the pool of potential candidates is increased.
It can be helpful to the business of a medical tenant for it to be located in a building with other medical practices that provide services that are ancillary to or benefit that of the tenant such as blood analysis and testing, xrays, or physical therapy. A tenant may not however want to be located in a building with its competitors. To protect itself from this issue, the tenant can request of the landlord that it agree in the lease not to lease to competitors of the tenant. At times, landlords do not wish to include these types of provisions due to issues in policing their enforcement or insuring that such provisions are not violated when leasing to future tenants. These types of provisions may also hamstring the efforts of a landlord in leasing its space.
Third party usage of premises
Related to the issue of the usage to be conducted by the tenant of the premises, is the ability of the tenant to allow others such as vendors or suppliers to enter upon the premises and conduct uses or activities at the request of the tenant. For example, the tenant may wish to have a lab company at the premises to draw blood from patients several days a week. If the lease does not permit third parties to use and conduct activities at the premises, the tenant will be unable to allow the lab company to conduct its activities at the premises unless the tenant obtains the consent of the landlord and the lease is modified to permit this activity. In allowing third parties to use and conduct activities upon its premises, the tenant needs to be aware of its responsibility for those parties and the potential liability they create and advise its insurance company of the presence and activities of those parties in order to obtain additional insurance if needed and desired.
Many medical practices have large pieces of medical equipment installed as fixtures within the premises. In installing this equipment, the tenant will want to ensure that it can remove the equipment upon termination of the lease. The tenant should seek this assurance from the landlord in writing prior to installing any equipment or fixtures. The tenant should also explore its costs to remove the equipment and whether there will be any damage to the premises which it would need to repair in vacating the premises. If the tenant leases or finances its equipment, the lessor or lender, as applicable will want to ensure that it can enter upon the premises to repossess the equipment if necessary, and the consent of the landlord should be obtained with respect to such entry.
Privacy of patients
Under a lease, the landlord will require a right to enter the premises to conduct repairs, inspect the premises, and show the premises to its lenders and to purchasers. The tenant should be willing to allow these entries so that the landlord may conduct its business. The tenant must however ensure that the privacy of its patients is protected as required by applicable law. The tenant may want to (i) request written notice prior to any entry except for emergency situations, (ii) require that the landlord and its agents be accompanied at all times by an employee of the tenant, and (iii) limit or restrict the access by the landlord and its agents to certain areas of the premises such as where files and records are maintained.
Term of lease
Most leases will have an initial term of at least five years and if the tenant and landlord both agree, the lease term could be even longer. To protect itself and plan for future growth, the tenant will want the ability to extend the term of the lease. Landlords are generally willing to grant extensions to a tenant so long as there is no default by a tenant under the lease and provided that the landlord can increase the rent and other charges to the tenant under the lease and recoup its increasing costs. The parties will want to discuss what concessions the landlord will include with each renewal such as additional upfit or remodeling allowances.
Assignment of interest in lease
In entering into a new lease, a tenant should review its five and tenyear business plans to determine how to address the assignment and sublease restrictions that the landlord places upon the lease. If the tenant anticipates that it will be admitting new doctors into ownership of the practice, the tenant should verify that there are no restrictions prohibiting this change in ownership of the tenant entity. In addition, if the tenant intends to grow the practice and merge or consolidate with another entity or practice, or sell the practice to a new entity that will take over the operation of the practice, the tenant will want to ensure that the language in the lease allows the tenant to engage in these growth activities. The tenant should also consider the possibility that it may need to downsize its space in the future if doctors leave its practice or the business is not as successful as the tenant had hoped. To plan for this possibility, the tenant will want to have the ability to assign or sublease its premises.
Rights to expand
In examining its plans for growth and space needs, the tenant will want to seek the right to expand to vacant space located adjacent to the premises to meet the needs of its growing business. The tenant can plan for this growth by obtaining from the landlord the first right to expand to vacant space adjacent to its premises. The tenant should ask whether there are any other tenants that have rights superior to that of the tenant. The landlord will want the tenant to act quickly to make a decision when space becomes available as to whether the tenant desires to expand into the vacant space. The tenant will need sufficient time to review its current and future needs to decide whether or not it makes business sense at that time to expand into the available space.
When occupying leased space, the tenant should investigate the current condition of the premises and consider the prior usage of the premises. If there is a possibility that in the past the premises were used for the storage, manufacture, treatment, or processing of materials and substances that are regulated under the law, the tenant will want to take measures to ensure that the premises were not contaminated by such materials and substances which could be harmful to its patients and staff. This would include a review of any environmental audits that have been obtained by the landlord. An audit should include a review of the history of the premises and its prior usage. The tenant should seek representations from the landlord regarding the prior usage of the premises and that there are no current issues of which the landlord is aware. Since a tenant can be liable for environmental issues as an operator of the premises, tenants need to be mindful of establishing a baseline as to the condition of the premises upon the tenant’s occupancy so that the tenant can argue that any existing issues are not the responsibility of the tenant.
Related to the issue of hazardous materials is the issue of the medical waste that will be handled by the tenant at the premises. Landlords generally require that the tenant is responsible for disposing of its medical waste. The tenant will need to store and dispose of its medical waste in a lawful manner and ensure that prior to its disposition, the medical waste is secured in a manner that patients are protected, and that the medical waste cannot be discharged, accessed or taken by a thirdparty, or any of its patients.
Upfit of premises
Despite the busy schedules of doctors and staff, the tenant will want to have a planning session with the doctors and staff to ensure that their input is obtained and their needs are addressed in the design of the office and examination rooms and as well, the location of equipment. Issues as simple as where to locate sinks in the examination rooms can prove to be costly and timeconsuming issues later if the sinks are installed in an inconvenient location and the doctors request that the sinks be removed and relocated. At least one member of the tenant staff should be closely involved in the process of reviewing and approving plans and specifications for the premises. Landlords often have standard materials that are used in upfit and the tenant will want to become familiar with the materials used by the landlord to determine if these materials are acceptable to the tenant. With certain types of medical practices such as day surgery, a tenant may wish to ensure that its premises has a rear exit thorough which patients may leave after procedures and avoid having to walk through the waiting room and lobby.
Landlord lien upon personal property
Most landlords request that the tenant grant the landlord a security interest in their equipment and personal property to secure the performance by the tenant under the lease. This is an understandable position by the landlord; however, many tenants will finance or lease a large portion of their equipment and personal property which would make the tenant unable to allow the landlord to have a lien upon their personal property or equipment. One solution to this issue would be to allow the landlord to have a lien subordinate to any financing obtained by the tenant. The landlord would have to agree to subordinate to financing that exists upon the date of the lease and any future financing. If the landlord has recorded a financing statement to perfect its security interest in the personal property of the tenant, the landlord would need to file an amended financing statement to subordinate its position to that of the financing lender.
The tenant will want to make certain that its patients and vendors are able to locate its premises. To do so, the tenant will want to ensure that the lease allows the tenant to have sufficient, clear and wellplaced signage on its premises, in the building lobby, on the exterior of the building and on any monument signage.
Last but not least, the tenant must ensure that it has sufficient parking at the premises for its patients, and that its parking is convenient for patients. Patients with mobility issues may have difficulty if the tenant parking not located adjacent to or near the building leased. The tenant should ask the landlord what the required parking ratio is for the building and how many other tenants are using the parking. The tenant may wish to require that the landlord provide it certain spaces that are reserved for visitors of the tenant or at least for visitors to the building so that all spaces or the mostdesired spaces adjacent to the building are not used by occupants of the building. For the comfort of and accessibility by its patients, a tenant may wish to have reserved parking available at the rear of the building where patients may exit without having to walk through the premises after a procedure.