Medical Office Leasing

As health care providers compete for patients, they seek locations convenient for patients. This phenomenon has driven clinics, urgent care facilities, and other health care providers into general office and store front retail space

Health care providers create special leasing issues. Among other things, health care providers work with chemicals, they produce biomedical waste, their patients have a greater need for privacy and are more likely than the general public to be disabled. For both the landlord and the tenant, the boilerplate language in most general office and retail leases fails to address the special characteristics of medical tenants. This article generally identifies some of the most common inadequacies related to medical office leasing.

Tenant Finish

As health care providers move into space previously finished for general office or retail space, they typically need substantial remodeling. Landlords generally like to have tenant finish work done by contractors with whom the landlord has had a prior relationship. In many situations, the landlord controls the contractors who perform the tenant finish work

Yet health care providers may seek specialists to finish the leased premises. The landlord may acquiesce to allow the tenant finish work to be done by contractors with whom the landlord has no prior relationship

Since many office leases contemplate that the landlord will hire the tenant finish contractors, the language in those leases often doesn’t address construction problems. A precise construction plan should be agreed to in advance. The landlord needs to have an opportunity to verify that the tenant’s needs for HVAC, plumbing, electricity, and other infrastructure needs fit the building’s capacity. Some representative of the landlord should have an opportunity to inspect the work in progress. Virtually all leases have provisions obligating the tenant to behave in a way which prevents mechanics liens from attaching to the property. These provisions should be reviewed to verify consistency with tenant control of the finishing At the end of the lease, the landlord is more likely to demolish the specialized health care tenant finish than with more classic office or retail tenant finish. Virtually all office and retail leases contain provisions addressing the landlord’s and tenant’s rights and responsibilities regarding restoration obligations at the end of the lease. These provisions need to dovetail with the special situation of a medical tenant.

Expense Pass Throughs

In addition to base rent, most commercial tenants pay some or all of the landlord’s operating expenses (“CAM Charges”). Yet medical tenants need to cope with the disposal of biomedical waste and have greater privacy concerns than many tenants. Many medical tenants prefer to do their own janitorial work. If biomedical tenants do their own janitorial work, then, from the tenant’s perspective, the general janitorial expenses for the building should be backed out of the CAM Charges passed on to the biomedical tenant.

Use

Medical tenants use hazardous materials and generate biomedical waste. Medical tenants can use X-ray machines, CT scans, and other machines which may generate harmful radiation. To preserve the integrity of these machines, medical tenants also have specialized needs to avoid interference with these machines. Medical uses usually violate the boilerplate use provisions in most retail and office leases. In addition to modifying the use provisions, landlords and tenants should consider the representations and warranties within the lease, together with the hours of operation.

ADA

Patients are more likely than the general public to have special access needs. Buildings containing health care providers are more likely to receive ADA scrutiny. Though, as a practical matter, the tenant’s use may trigger the need for ADA compliance, the tenant will want to avoid lease language obligating the tenant to pay any of the costs that the landlord incurs to bring the building into compliance with ADA. While medical tenants generally bear the responsibility for finishing the lease premises consistently with the ADA, tenants will want to consider excluding the general building ADA compliance charges from the list of expenses passed through to the tenant.

Miscellaneous

Generally, in commercial leases the landlord has the right to reenter the premises to show the premises to future tenants, inspect for compliance with the lease, allow the landlord access to make infrastructure repairs in the lease premises and elsewhere in the building. Yet, health care providers need to limit the landlord’s access to examining rooms and other areas during certain hours of the day. Generally, medical tenants will seek to place limitations on the landlord’s reentry rights. This can be done through designating certain privacy areas on a diagram showing the finished lease premises

It is common for office leases to contain provisions requiring the tenant to consent to a substitute premises should the landlord decide that it is in the landlord’s best interest to move the tenant from one suite in the building to another. Because of the specialized build-out needs of the medical tenant, medical tenants are more likely to resist these provisions.

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As health care providers seek to become increasingly convenient to their patients, they will continue to migrate to general office and storefront retail space. Both landlords and medical tenants need to work to ensure that their leases fit these special situations.

This article was originally published in the Colorado Real Estate Journal, August 1-14, 2001.

 

Jon Goodman is a shareholder with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm. His practice areas include Real Estate,Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance. Contact Jon Goodman.

Disclaimer — Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

JONATHAN A. GOODMAN