Rent the Right Way: Medical offices require unique leases

As tenants of medical office spaces, physicians often create special leasing issues. Medical tenants use hazardous materials, generate biomedical waste, demand confidentiality of patient records and require compliance with occupational safety standards—all unique aspects of the medical profession. Yet, often, physicians will sign “form” medical office lease agreements provided by the landlord without the benefit of legal counsel. Typically, the landlord provides a standard fill-in-the-blank lease form with the tenant’s name and the general business terms (including the term of lease, rental rate and commencement date). Tenants may gloss over the legal boilerplate provisions included in the lease agreement, assuming that these terms are standard to all leases and are not subject to negotiation.

While it is tempting to sign the lease on the spot, you should have an attorney experienced in medical office leases review the standard lease agreement and negotiate certain provisions. In fact, in the current real estate recession, there may be even more leverage to negotiate desirable terms and address the special characteristics of your tenancy. Because a medical office lease is a large expense that often requires a multi-year commitment, you do not want to be a party to an agreement that is not reflective of you and your practice.

Improvements to Premises

Standard form medical office leases usually have two differing approaches to the situation in which a physician makes improvements or alterations to the rented premises. The first approach provides that at the end of the lease term, the tenant is required to remove all improvements and alterations installed within the rented premises during the lease term, and must be responsible for any damage caused by the removal. The second approach provides that, at the end of the lease term, all improvements and alterations become the property of the landlord and cannot be removed from the premises. A tenant who is unaware of the particular terms in the office lease may find an unexpected expense awaiting him or her at the end of the lease.

While a particular landlord’s medical office lease may contain a variation of the two approaches described above, the lease can be modified to state that any and all trade fixtures, furniture and furnishings paid for and installed by the tenant will remain the property of the tenant upon reaching the end of the lease. Any damage caused by the removal of the fixtures or furniture will be the responsibility of the tenant.

Services Provided

Too often, physicians wrongly assume that a landlord will provide certain basic services, but a landlord is only legally required to provide the services expressly stipulated in the lease. Often, for example, landlords turn off a building’s air conditioning at night and on weekends. If your practice provides extended evening or weekend hours, the lease should stipulate that air conditioning will be provided to accommodate your practice’s schedule. Similarly, medical practices rely on some types of equipment, such as X-ray machines, that consume significant electrical resources. The lease should clarify whether the landlord will furnish the necessary amount of electricity or will charge separately for such extensive use. If the latter is the case, the lease should further provide the basis for those charges (separate meters or usage audits, for example). If the premises will be metered separately, then the tenant should receive an offsetting deduction for the operating expenses. Similarly, if your practice generates medical waste or hazardous materials, the lease should identify guidelines for waste disposal, including who will dispose of such material and the manner in which it will be collected.

Operating Expenses and Taxes

As a tenant, you want clarity regarding all monetary obligations. Some medical office leases require you to simply pay the established monthly rental rate. Others require pro rata payments of some or all of the landlord’s operating expenses and real estate taxes associated with the property in addition to the monthly base rent. Operating expenses may include the costs of operating, maintaining, repairing, insuring, lighting, cleaning, painting and securing the property and its common areas. Because these expenses are not static, your monthly payment obligations may be unpredictable.

It is important for you to understand whether you are a party to an office lease that requires the proportional payment of the building’s operating expenses and taxes. Don’t be fooled, however; tenants pay these operational expenses one way or another. The difference is whether these fees are already included in the monthly base rent or are added to the monthly rent. If you are required under the lease to pay the operating expenses and taxes and fail to do so, you could be in default of the lease and be subject to monetary penalties, eviction or a lawsuit.

In order to minimize your financial responsibility for these operating expenses, you should verify that the landlord’s operating expense calculations are correct and that you are not being overcharged. It’s important to understand how these charges are estimated and what your pro rata share will be. If the operating expenses include real estate taxes, you should request an annual copy of the tax bill. In addition, you should have the right to annually review and audit the landlord’s books and records relating to operating expenses and taxes, to verify that the charges have been accurately calculated.

Good legal counsel may be able to protect medical tenants in other ways. The lease can be amended, for example, to require the landlord to competitively bid certain expenses such as security, maintenance and janitorial services, as well as to appeal tax assessments.

Operating and maintaining the premises efficiently while minimizing expenses enables the landlord to pass savings on to the tenants.

Furthermore, the lease can be negotiated to include a maximum limit for a tenant’s share of the operating expenses. This essentially caps the amount of fees you are required to pay, regardless of whether the landlord’s operating costs increase or decrease.

Defaults and the Right to Cure

While you may think you will never default on your lease, don’t ignore the default provisions. Remember, defaults may not necessarily be the result of bad faith or bad action. A non-monetary default may include failing to maintain the premises or violating a zoning restriction, something you may not even be aware of. The lease, therefore, should require the landlord to provide written notice of default and allow the tenant a minimum of 30 days to correct or cure any such default.

Most importantly, a savvy tenant should seek the guidance of experienced legal counsel to advise and negotiate the lease to meet the client’s professional needs and insure the continued health of the medical practice. ENT TODAY

Steven M. Harris, Esq., is a nationally recognized health care attorney and a member of the law firm McDonald Hopkins, LLC. He may be reached at sharris@mcdonaldhopkins.com.