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"Seven Key Lease Issues"

Benjamin Franklin once said, “[a]n ounce of prevention is worth a pound of cure.” While this phrase is commonly used in the medical field, it also has meaning as it relates to the negotiation of commercial leases.

It is imperative that before a medical provider enters into a lease for medical office space, he or she should review and understand the terms of the lease in order to avoid problems in the future. In the case of lease negotiation, the devil is definitely in the details. This article focuses on seven tips the tenant should consider when negotiating a lease to prevent costly issues from arising. The seven tips are as follows:

1) It is important for the tenant to read the ENTIRE lease. Since it is typical that the landlord, or an attorney hired by landlord, has drafted the lease, the landlord has an advantage as the landlord is familiar with the language used and exactly what that language implies. Thus, in order to level the playing field, it is imperative you read the entire lease – and read it again! Take the time to understand the smallest details and especially, how they relate to you. Ask, “how will this impact me?” Try to walk through a few “what if?” scenarios in order to understand the potential consequences that could be set in motion should some unfavorable clause actually come into play. Pay close attention to the exhibits, particularly the Rules and Regulations. Some of these issues may actually impact you as a tenant, so read the Rules and Regulations as carefully as you do the rest of the lease. Consider hiring an attorney to explain the lease in more details and to assist in tailoring and negotiating the lease to meet the practice's individual needs and objectives.

2) In most form medical office leases, the landlord has the right to reenter the leased premises to inspect it to ensure that the tenant is complying with the lease, to show it to future tenants, and to allow the landlord to make needed repairs to the leased premises. Generally, medical tenants will seek to place limitations on the landlord's reentry rights. Specifically, such access is limited by requesting that the landlord give tenant at least twenty-four hours advance notice before entering the leased premises. In addition, due to the nature of their practice, health care providers may limit the landlord's access to examining rooms and other areas during certain hours of the day. This can be done through designating certain privacy areas on a diagram showing the finished leased premises.

3) If the Tenant is leasing space in a multi-tenant building, particularly if it is a medical office building, it is prudent for the tenant to request that the landlord add an exclusive use provision. An exclusive use provision basically prohibits the landlord from leasing any of the remaining space in the building to any tenant whose intended use would be in direct conflict with your specific medical specialty.

4) A common provision found in most leases is the indemnification provision. This provision provides that the tenant will indemnify the landlord against any claims brought by third parties for personal injury or property damage caused by the tenant or otherwise occurring in the leased premises. It is important that such a provision is qualified by the inclusion of an exception for matters directly caused by the landlord’s negligence or willful misconduct, as it is improper for the landlord to seek indemnification from the tenant for the landlord’s own wrongful acts (or those of the landlord’s employees, agents or contractors). Further, as most indemnification provisions are completely one-sided, it is important to ask for a mutual indemnification as the landlord should have an obligation to indemnify tenant for injuries and damages caused by the negligence or willful misconduct of landlord as it relates to the leased premises.

5) While some medical office leases require the physician simply to pay a monthly rent, in other leases the tenant is obligated to pay additional rent (e.g., the tenant’s share of the operating expenses). Typically, in a multi-tenant building, the landlord “passes through” to its tenants all of landlord’s expenses for operating the entire building. Typical operating expenses include the landlord’s costs of operating, maintaining, repairing, cleaning, painting, and securing the property. As a tenant, you want absolute clarity regarding all monetary obligations. There can be hidden traps for the naïve tenant in this part of the lease. Pay close attention to how your share of the operating expenses will be calculated. For example, if the lease states that your share of operating expenses will be your square footage divided by the total occupied square footage in the building, and you occupy 10% of a building which has 50% of its space filled, then you must reimburse the landlord for 20% of its operating expenses. This outcome can be prevented by insisting that the calculation be based on your portion of the leasable space in the building, whether or not the rest of the building is occupied. Further, you should include in the lease that the tenant has the right to review and audit the landlord's books and records relating to operating expenses and taxes annually to ensure that you are not overcharged.

6) It is important to have the ability to assign and/or sublet the leased premises in the event that the location is not good for business, and the term has not expired. However, it is common to find in the majority of form medical office leases a provision that states that approval for the tenant to sublet space or assign the leased premises is at the sole discretion of the Landlord. This means that the Landlord does not have to articulate any reason whatsoever when withholding consent to any assignment and/or sublet of the leased premises. Thus, it is important to ask that the landlord amend this language to provide that the landlord’s consent to a proposed sublease or assignment will not be unreasonably withheld, delayed or denied. This will prevent the landlord from arbitrarily withholding consent should you ever wish to assign the lease to a credit-worthy, reputable third party.

7) In the event the landlord agrees to a sublease, in order to comply with the safe harbor exceptions to the Anti-Kickback Statute, when you sublease space you must ensure that (i) the sublease is in writing and is signed by both parties, (ii) the sublease describes the specific space being leased, (iii) if the sublease provides access for periodic intervals rather than full time, the intervals are specified in the sublease, (iv) the sublease must be at least for one (1) year, (v) the aggregate rent charged for the term of the sublease is set in advance, consistent with fair market value and does not take into account the volume or value of referrals between the parties of business payable under Medicare or a state healthcare program, and (vi) the aggregate space rented does not exceed that which is reasonably necessary to accomplish the commercially reasonable business purpose of the rental.

When negotiating a lease, it is important to take preventive steps in an effort to avoid issues that may be costly to deal with in the future. You should be able to avoid many lease-related headaches by implementing some of the aforementioned tips along with the help of an experienced commercial real estate attorney.

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