Lease Issues Unique to Medical Uses: A Trap For the Unwary (Part 1 of 2)*
Here’s a volatile combination: the aging population in America; the real estate industry looking for something to develop; and a lender community that is just now comprehending the value of understanding lease terms as a bedrock topic for the collateral.
So, let’s take a quick look at unique issues in leases involving medical uses. If you didn’t catch these at the loan closing (when lender approved the leases and the lease form), or during servicing following closing, you’ll need to understand this subject BEFORE you foreclose or take title to any collateral containing medical uses. Indeed, those “standard” provisions create distinctive challenges when applied in a medical lease context. In addition, medical uses often produce unique issues not found in standard office or retail leases.
“Standard” Provisions aren’t so standard in a medical lease. Here are a few:
- Compliance with Laws: Since patients visiting medical facilities are more likely than the general public to have special needs relating to accessibility, the parties should pay special attention to the compliance with laws and accessibility provisions of the lease.
- Landlord Access to Premises: HIPAA and other federal and state laws regulating confidentiality of medical records and personal health data may necessitate modifications to some typical clauses in standard office leases.
- Environmental Provisions: Medical tenants also frequently utilize materials and generate waste (such as immunotherapy and chemotherapy agents, biological specimens and the like), which require appropriate disposal to comply with applicable federal and state environmental and waste disposal laws. Therefore, an absolute prohibition from the utilization of such materials is not appropriate, but the lease should clearly specify rules governing the use of such materials and which party is responsible for their disposal. Finally, surgery centers have their own, unique, environmental issues.
- Utilities & Services: Medical tenants often have higher utility usage than standard office tenants because many medical tenants have sinks in each examining room and operate X-ray, MRI and other equipment that utilize more electricity than standard office equipment. The lease should require separate metering of the premises in order to charge tenants equitably, if there are significant variations in utility usage among the tenant base. In addition, medical uses such as surgery centers will require specialized utilities, including back up power generation. Finally, medical uses often will restrict or require specialized janitorial services.
- Assignment and Subletting: This is a topic that the lender\servicer must understand, and be flexible about. Tenants under medical office leases are often more sensitive to assignment and subletting rights than tenants in other types of leases. For example, in the case of a lease involving a physician group, the lease should adequately address the tenant's ability to admit new partners into the practice from time to time, as well as accommodating retiring physicians exiting the practice. And, this topic should be addressed in any lease guaranty-–if there is person liability for the partners (Hopefully, the lease guaranty clearly runs to the benefit of landlord and its successors; and consider the merits in obtaining a confirmation of the lease guaranty as part of your workout strategy).
Once you understand these issues, then the inquiries become:
- Have these been implemented?
- Have they been violated?
- Are these “problems” that you’ll inherit once you take back the property?
The next posting will cover some unique issues not found in standard office or retail leases. Please add your own comments, suggestions or questions on this topic.
* Confession: This entry comes from a piece written by my colleagues at Winstead PC, Andy Dow and Allan Katz. I thank them for bringing this good stuff to our attention. My contribution is “adding” the workout perspective to it.
