Lease Language… The Devil is in the Details

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The focus of most medical lease negotiations is on the business terms and while they are certainly critically important, after coming to agreement on business terms you should not forget to spend the time necessary to negotiate a good lease document. 70 to 80% of any lease document will probably never be used. Most of the language in a lease is like an insurance policy, it is only important if there is an event that invokes it. Many of the non monetary issues are given only cursory attention during the negotiation process.

Among the issues which should be considered are:

Use – Most tenants pay very little attention to the use provision but you should make sure in deciding on the description that it is sufficiently broad to cover all of the things you currently do as well as future services that you may offer as your practice and medicine continue to change. You should also try to keep the use sufficiently broad to allow flexibility in the event you should need or want to sublease in the future.

Permitted and Restricted Uses – Particularly in buildings on hospital campuses but also in buildings which may now have or have in the past had tenants which were owned by hospitals you need to pay particular attention to the Permitted and Restricted Use paragraph. Hospitals in an attempt to drive ancillary services to the hospital have put a range of restrictions on tenants of Medical Office Buildings (MOBs) which they have touched by the hospital either as a tenant or a building owner. Make sure that you will not be restricted from offering a service which may now or in the future be important to your practice. The areas they tend to restrict include imaging services, laboratory services, physical therapy and some types of procedures. Ultrasound, for example, is a procedure which is generally restricted by hospitals but is also frequently used in the normal course of diagnosis by a wide range of specialties. Failing to address any such service which is a restricted use puts you at risk of being declared in default in the future. Also remember that just because the landlord chooses not declare you in default when they discover the violation does not mean they won’t choose to declare you in default at some point in the future.

Damage & Destruction – This paragraph covers damage to the premises which is either partial or total as the result of fire, water damage, acts of nature or terrorism. It is important to remember that this is an issue which effects both the Landlord and the Tenant. There are no winners in negotiating this paragraph, rather it is everyone’s intent that they just survive such an event. The language covering both partial and total damage should specify a reasonable time for reconstruction. Notice of the Landlord’s intent should ideally be given within 30 days but certainly no more than 60 days after the event. This paragraph should also discuss what happens if the Landlord gives notice to the tenant of its intent to reconstruct the space within a certain timeframe and doesn’t follow thru.

Assignment & Subletting- It is important to remember that there is a difference in an assignment and a sublease. In a sublease the tenant brings in a subtenant to share the space or take over the space entirely but in a sublease the original tenant remains liable for the obligations of the lease most notably the monetary obligations. In a true assignment the original tenant is allowed to assign all of it’s rights and obligations including monetary obligations to a substitute tenant. Most Landlords are reluctant to allow for an assignment of a lease because just like a bank they want to keep as much collateral or as many guarantors backing the payment of rent as possible. The landlord should however be willing to allow a sublease provided they approval the substitute tenant’s financials and use of the space. The landlord’s approval should be qualified to say that their approval shall not be unreasonably withheld, restricted or conditioned.

On your next lease hopefully you will spend the necessary time and attention on these and the other non monetary points in the lease to insure that if one of these items occurs that your practice will be able to survive it. The business points are an early measure of negotiating success but careful negotiation of the lease language may ultimately be more indicative of a truly successful lease.

Provided by Stan Sharp, President of HealthOne Realty Advisors.
(770-578-4996 or
ssharp@healthonerealty.com)

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