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Medical Lease Negotiations: Ten Items to Consider

Author: Michael A. Faerber Date: 05/15/2013

Categories: Commercial Leasing

When medical professionals lease new space there are complicated issues that can cause long-term problems if they are not addressed correctly. When we work with physicians or other healthcare-related businesses on leases, here are some of the things we look for:

1. Build-Out/Construction Issues

Medical offices often need numerous rooms for different purposes and layouts that allow for special equipment. Dental offices, for example, can require extensive plumbing. The landlord may have very specific timeline requirements for receiving, reviewing and approving plans. If you do not meet these dates, you may be in default under the lease before you even open for business. It is also important to determine who is paying for the build-out. The landlord may provide an improvement allowance to assist with build-out costs, which will increase the rent that you pay over the term of the lease. The landlord may also set conditions for releasing those funds, including lien releases from your contractors. If you are taking out a loan to cover construction costs, your lender may require a lien on fixtures to be placed in the premises and a collateral assignment of the lease. As your attorneys, we work closely with the landlord and lender during the negotiations to add ease language that avoids conflicts between the lender and landlord interests.

2. Medical Waste/Hazardous Materials

You will need landlord approval if your practice involves disposal of medical waste or use of hazardous materials. Proper procedures for storage, disposal and documentation will be required.

3. Approval of Special Equipment

We help obtain landlord approval if your practice entails the use of special equipment. X-ray equipment, for example, requires special handling, licenses and construction issues. You may also need additional electrical capacity and/or air conditioning beyond what is provided in the basic build-out. If any of the equipment exceeds regular weight limits, you need to consider landlord approval and engineering plans to address its correct placement and reinforcement of the floor.

4. Exclusive Use

Depending upon the type of location, we recommend requesting an exclusive right for your specific use. With this right in place, an optometry practice moving into a retail shopping center could be certain that no competitive business would open in the same property.

5. Signage

We review the lease to be sure it permits the signage you want and specifies who will pay for it. Depending on the type of building, that can include signage on or outside the door of your premises, full listings on any building directory, or even a larger sign advertising your practice on building frontage.

6. Patient File Confidentiality/Landlord Liens

Leases often provide landlords with a lien on all of the tenant’s property and fixtures as security for defaults. It is standard procedure for us to make certain that such liens exclude patient files and information which, by law, should be kept confidential.

7. Assignment and Sublease Issues

A lease may restrict your ability to assign the lease or sublease some or all of the premises. If you plan to bring in additional medical practitioners as partners, you may need to obtain the landlord approval. Do you want to have other doctors share office space with you or to come in occasionally? At a minimum, you will be required to obtain the landlord’s consent. In that case, we work to make the lease language as permissive as possible up front.

8. Financing and Equipment Liens

When you purchase or lease medical equipment, there may often be financing or leasehold liens on the equipment. We review these documents in conjunction with the lease to make certain that they do not conflict with limitations in the lease.

9. Definition of Permitted Use

If you plan to offer different types of medical services, it is particularly important to understand the permitted use of your space. Even if you believe they are related, they may not be under the original terms of the lease. We typically work to make this term as nonrestrictive as possible so that you do not encounter problems if you want or need to expand your practice.

10. Common Area Maintenance Costs

The landlord is usually responsible for maintaining common areas and property surrounding the building. This cost is often passed on to the tenants through a common area maintenance (CAM) charge. You will want to review the lease language regarding CAM to make certain you understand what is and is not included and try to negotiate out any items which are not reasonable. You should understand how the landlord will calculate your percentage share, how often you will be required to make payments and if you will have any opportunity to review the book and records of the landlord to evaluate the CAM charges being assessed to you.

For more information regarding these matters or any questions regarding commercial leases in general, please contact Michael Faerber atmfaerber@mcmillanmetro.com.