It’s tempting to focus solely on location, price, and amenities when shopping for medical office space. Before you sign, however, be aware that health care practices have unique requirements that must also be considered when reviewing a medical lease agreement. There is no such thing as a “standard form” lease agreement, so don’t be afraid to negotiate.
Here are 9 mistakes to avoid when negotiating a medical lease:
Mistake #1: You Sign the “Standard” Contract
Remember, everything is negotiable. Don’t let a landlord or broker convince you to sign a standardized, pre-printed lease form. The landlord drafted that lease agreement, likely with the aid of his attorney, to protect his bottom line. You should never accept terms that are unfavorable to you just because “no one negotiates.” This is simply not true. In addition, that standard lease may not comply with health care regulations that apply to a healthcare practice.
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Mistake #2: You Let Your Broker Negotiate for You
Don’t mistake your broker’s friendly attitude for friendship. Brokers are helpful, but they are paid commission on the lease value and therefore have little incentive to engage in negotiations that may delay his pay day. Instead, make sure you have a professional on your side.
“Landlords offer different packages of rental rates and tenant improvements. Tenants may need help when presented with options such as triple net, modified gross, and full-service leases,” says health law and contract attorney Keith Lefkowitz. “Landlords may also try to stick tenants them with the full maintenance and replacement cost of the HVAC system – a provision a medical lease attorney can help you avoid.”
Additionally, when physicians lease space to a clinical laboratory, compliance with Stark Law is critical. “An attorney experienced with commercial lease contracts and with the regulatory requirements of medical leases can help you negotiate the best deal,” adds Lefkowitz.
Don’t leave money on the table or lock yourself into an unbearable agreement because you are unfamiliar with leasing options and practices. Hire counsel to look after your best interests so you don’t find yourself locked into an unsustainable arrangement.
Mistake #3: You Assume All Costs of the Build-Out
Converting a blank office space into a medical facility requires costly customizations. Negotiate the construction plan (including approved contractors) prior to signing a lease and ask for a tenant improvement allowance. The best way to determine what is reasonable in your market is to shop around. Talk to other landlords in the area. Prospective tenants have leverage. Use that leverage to negotiate perks, including a tenant improvement allowance or rent abatement while the build-out is completed.
Also, be clear on what will be required at the end of your lease: Will you be required to restore the space to its original condition? Negotiate those requirements now.
Some leases include provisions that force you to move to substitute premises should another tenant want to expand into your space, for example. Remove these provisions if your tenant improvements are substantial and expensive or interfere with patient access. Alternatively, make sure your agreement covers the expense of and time lost for the relocation.
Mistake #4: You Don’t Get a Cap on Rent Increases
Some leases get more expensive as the cost of living (COL) goes up. This may sound reasonable to you, but you still need to understand how these “pass-through” expenses work. Otherwise, your landlord could use COL increases as an excuse to raise your rent more than what is reasonable.
For example, if you do not spell out that COL will be standard whether the building is fully leased or not, you could wind up paying extra to make up for a space the landlord failed to lease.
Also, by which index will COL increases be calculated? Tie rent increases to a broadly accepted real-world index, such as the Consumer Price Index, and consider sharing the cost of those increases with your landlord or instituting a cap on annual increases.
Mistake #5: You Don’t Shop Around
Tenants should not fall in love with one space, advises Lefkowitz. “Negotiate lease rates and tenant improvement packages with at least two to three spaces before sitting down to look at lease documents. If you are only working on one deal at a time, you lose leverage and ultimately time if the deal falls through. Having back-ups is key to securing a desirable deal in a timely manner.”
Mistake #6: You Allow the Landlord Unrestricted Access to Your Clinic
Your landlord has the right to access your offices to make repairs and monitor maintenance. But you have the responsibility to protect the privacy of your patients and the confidentiality of your patient’s medical records as required by HIPAA. Restrict the landlord’s access to exam rooms during office hours and require supervision by a member of your practice when admitted to a room where medical records are stored physically or electronically.
Mistake #7: You Don’t Have an Escape Clause
Hopefully, you will not need to break your lease, but you should have a plan if you ever need to. Negotiate an escape clause so you do not get locked into an unbearable agreement or get penalized too severely if you need to break the lease.
One option is an early termination clause that locks you into the lease for a few years before the clause kicks in and allows you to break the lease for a termination fee or by covering the cost of restoring the space to its original condition. It is a difficult clause to negotiate so be prepared to make accommodations.
Mistake #8: You Don’t Consider Stark Law & Anti-Kickback Statute Compliance When Leasing in a Physician-Owned Building
Physicians often seek to mitigate the cost of running a health care practice by investing in commercial real estate. While the Stark Law does not prohibit this practice, it does establish rules for physicians renting medical office space and equipment to or from designated health service providers when the physician also refers patients to the company for services that are reimbursable by Medicare.
To remain in compliance with Stark Law, lease arrangements must meet the requirements of Stark’s “rental of office space” exception. The Anti-Kickback Statute (AKS) also has a safe harbor for medical lease arrangements that applies to ownership structures consisting of physicians or medical providers. Both Stark and AKS seek to protect legitimate lease agreements between physicians and health providers while prohibiting improper referral arrangements. Consult an attorney to confirm your medical lease meets these safe harbor requirements.
Mistake #9: You Go It Alone
Investing in the advice of an attorney could save you thousands of dollars in rent and other costs that may have been left on the table simply because you are not familiar with common leasing practices. A skilled healthcare compliance attorney can also review the compliance of any lease agreements with federal health care regulations, mitigating your risk of audits or investigations.
Healthcare is your profession, and you know it inside and out. Get the help of a legal professional who knows the ins and outs of medical leases as well as the unique regulatory compliance issues associated with those leases.
Hendershot Cowart P.C. has been advising medical professionals and health care investors on practice set-up, medical leases, compliance, employment agreements, fraud defense, and more for over 30 years. Beyond redlining and negotiating medical leases, we can also help you set up and manage your practice, every step of the way.