A Healthcare Facility Lease Check-up
By: KATIE L. COLE & MARY S. RANUM
April 2009
The leasing of healthcare facilities requires the consideration of a number of healthcare industry-specific issues. Many of these issues are not present in a standard office building lease transaction, and as a result are often not properly addressed in a healthcare facility lease. The following list can be used as a quick “check-up” to determine whether a lease addresses these issues.
1. Does the relationship between the landlord and tenant trigger specific healthcare laws and regulations?
If a tenant is in a position to either receive referrals from, or provide referrals to, the landlord, Medicare Anti-Kickback Statute and Stark, and possibly state law, must be considered. For example, if a medical practice owns a building and leases part of the building to a pharmacy, or a medical group leases space from a hospital, it is important to consider whether the relationship complies with the law.
The Medicare Anti-Kickback Statute makes it a felony to offer solicit, pay or receive any compensation if the payment is intended to influence referrals under a Federal health care program. The law focuses purely on intent; courts have said that even if there are many legitimate reasons for a payment, if one purpose of the payment is to influence referrals, the payment is a felony. The law does include a “Safe Harbor” exemption relating to space rental: (1) the lease must be in writing; (2) the lease must identify the premises; (3) if the lease is for periodic intervals of time, rather than full-time, the lease must specify the exact schedule of the intervals, their precise length, and the exact rent for each interval; (4) the term of the lease must at least one year; and (5) the rent must be at fair market value. Compliance with the safe harbor exemption is not required, but it is wise to attempt to structure leases to fit within it.
Stark provides that if a physician has a financial relationship with an organization, the organization may not bill for any of the eleven “designated health services,” (including lab services, physical therapy, radiology and other imaging services, and all hospital services) ordered by the physician unless the financial relationship meets one of the law’s exceptions. Unlike the anti-kickback law, if Stark applies, the relationship MUST meet the Stark lease exception. The terms of the Stark exception are similar, but not identical to, the anti-kickback safe harbor. Violation of Stark is not a criminal offense, but it will result in a penalty of up to $15,000 per occurrence.
This article is not intended to be a complete explanation of these rules, but to highlight the importance of addressing these issues properly.
2. Could the landlord’s access to the premises violate HIPAA?
A typical lease agreement will allow entry onto the premises by a landlord for limited purposes such as inspection. Because HIPAA (Health Insurance Portability and Accountability Act) establishes rules to protect individuals’ medical records and other personal health information, and requires safeguards to protect the privacy of that information, a health facility lease should provide that the landlord may not enter any examination room while tenant’s patients are present, or enter other areas of the premises if the entry would jeopardize the privacy or confidentiality of tenant’s patients or tenant’s patients’ records.
3. Does the permitted use clause allow for changes in medical practices and technology?
The permitted use provision of a lease restricts the permissible business operations at premises. A tenant’s goal is to maintain flexibility to change its use over time with changes in its medical practice and technology. Thus, a tenant would want a permitted use provision as broad as “any legally permissible health care use”, while a landlord’s goal is to limit tenant’s permitted uses so the landlord has control over the uses in the building and the ability to grant exclusive use rights to other tenants.
4. Does the lease permit the use of hazardous materials necessary for the medical practice?
A typical lease will include a provision prohibiting the tenant from using or storing any hazardous or regulated materials on the premises without the consent of the landlord. If the tenant’s practice requires the use of hazardous or regulated materials, the lease should provide that any materials commonly used in connection with tenant’s permitted use of the premises will be permitted, so long as the materials are used and stored in compliance with applicable laws.
5. Does the lease specify which party will be responsible for the disposal of medical waste?
Many multi-tenant building leases provide that landlord will provide the janitorial services for the building. Most healthcare facility leases require a tenant to arrange for its own medical waste.
6. Will the installation of medical equipment trigger special building requirements?
The building requirements for distribution of weight loads and the HVAC and electrical systems should be reviewed in connection with any large or specialized medical equipment to be used in the healthcare facility. The placement of the equipment and installation of the necessary building specifications should be specifically addressed in the lease.
7. Which party is responsible for the installation of tenant’s improvements?
The lease should specifically provide which party is responsible for the installation and costs of installation of tenant’s improvements. The lease should also clarify the ownership of the tenant improvements.
8. Will tenant’s equipment be removed at the end of the term?
The lease should specify which equipment may be removed by a tenant at the end of the term, and which equipment must be removed by a tenant at the end of the term. Many leases provide that any equipment that is attached to the premises will become the property of a landlord, but that may not be appropriate in the case of many health facilities (i.e. large imaging equipment is frequently bolted to the premises when installed). A tenant should also consider the potential costs of removal of all of the equipment at the end of term.
9. Would an exclusive use provision be appropriate?
An “exclusive” is the right of a tenant to operate a specific type of practice or sell specific items to the exclusion of the other tenants of a building. An exclusivity clause may be particularly important for a healthcare tenant if the services provided have a retail component (i.e. sale of eyeglasses). Landlords are generally hesitant to grant exclusives because they limit the landlord’s ability to add new tenants and they are difficult to administer.
10. Does the lease require a guaranty? If so, does the guaranty allow physicians to join or leave the practice?
A landlord may require a guaranty from the members of a physicians group for tenant’s performance of its obligations under the lease. A healthcare tenant should consider provisions that that allow members to be released from a guaranty if they leave the practice, and to include new members in the guaranty as they join the practice. The members may also seek to limit their respective guaranty amounts to their percentage ownership in the practice.