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Understanding medical office leases

By Paul N. Allen, J.D.& Joan M. Roediger, J.D., LLM

Very often, the relocation of a medical office, and the subsequent negotiation and execution of a new lease, follows a well-defined pattern. After a certain amount of searching, one day a realtor shows you the perfect space, in the perfect location, and assures you that the lease will need to be signed as quickly as possible if you are not to lose the space to one of your competitors. If you are acting without benefit of counsel, you will make sure that the business terms (rental rate, length of lease term, landlord allowances, and the like) match your discussions with the broker, and then you are apt to sign the lease, perhaps assuming that all of that “legal boilerplate” in the fine print is standard in every lease and basically not subject to negotiation in any case. All too often, the failure to carefully review and negotiate those boilerplate provisions may come back to haunt you down the road.

While there is no substitute for the representation of experienced legal counsel when entering into a new medical office lease, understanding some of the most significant provisions in a lease will serve you well when undertaking the initial review of a “form” lease with which your broker has presented to you. Having a little understanding of the implications of the key legal provisions can save you a lot of money in the long run. The following is the first part of a brief checklist of some of the most commonly encountered provisions and a brief explanation of the potential implications of each.

Rent Commencement Date. Surprisingly, one of the points over which landlords and tenants argue most frequently is the date on which rent begins to be payable at the commencement of the lease term. Due primarily to poor draftsmanship, the question is often very gray and, unfortunately, the tenant often must begin to pay rent before he or she would have reasonably expected to be obligated to do so.

The underlying problem is fairly simple. In the typical medical office lease, the landlord undertakes the construction of certain improvements in the premises prior to turning the space over to the tenant for occupancy. As a new tenant, you expect to walk into your finished office, move in your furniture, and then begin paying rent on the day you open for business. All too often, however, the lease provides for a fixed date on which rent will commence to be payable and there is no provision for delaying that date if completion of the landlord’s work is delayed.

As a result, a tenant with a May 1 rent commencement date may find that, due to construction delays, the space is not ready for occupancy until May 5, but the landlord nonetheless bills the tenant for rent retroactively to May 1. Further, if the lease simply states that the rent commences on May 1, the landlord is legally entitled to collect rent from that date. It is therefore incumbent upon the tenant to make sure that the lease provides that rent will not commence until the landlord’s work has been completed and, ideally, the tenant has been afforded a day or two thereafter within which to take occupancy.

Operating Expenses and Taxes. While some leases simply provide for a monthly rent, others also require the tenant to reimburse to the landlord a share of the operating expenses and taxes for the property. While there are many subtle changes that can be made to these provisions by an experienced real estate lawyer (depending on the form that the landlord is using), at a minimum a tenant should expect to receive a photocopy of the real estate tax bill for the property (as opposed to simply receiving a statement from the landlord) each year, to verify that he or she is not being overcharged. Likewise, the landlord’s statement of operating expenses should be reasonably detailed and the tenant should be afforded an annual right to review and audit the landlord’s books and records relating to both operating expenses and taxes, in order to verify that charges have been correctly computed by the landlord.

Services. It is a common mistake to assume that your new landlord will provide certain basic services to your space. Recognize that the landlord is not bound to provide services beyond those expressly stipulated in your lease. For this reason, you should carefully review the provisions of your lease that specify the services that the landlord will provide.

For example, ideally, a medical office lease (a) should provide temperature ranges indicating when HVAC service will be provided to the premises and guaranteeing a comfortable temperature range during business hours, (b) should state that you and your employees and patients will have access to the premises at all times, subject to reasonable security measures, (c) should state that the landlord will cause the property to comply with applicable laws and will undertake maintenance and repair of the common lobby and hallway areas and restrooms, as well as the structure and roof of the building, (d) should state that the sidewalks and parking areas will be well maintained, and that the landlord will undertake snow and ice removal as needed, (e) should state the security measures that will be in effect at the building during the lease term (such as the landlord’s obligation to lock exterior doors during non-business hours, and whether a security guard will be on duty), (f) should state whether and, if so, to what degree the landlord will undertake janitorial and trash removal obligations within your space (or whether these obligations will be yours), (g) should stipulate whether running water will be provided by the landlord (and, if so, whether that will include hot water, or whether you will be obligated to purchase a hot water heater for your space), and (h) should state that the landlord will furnish your space with reasonable amounts of electricity for the kinds of equipment you intend to install within your office (and, if you are to be separately charged for electricity, clearly state the basis for those charges and confirm that the landlord will not charge above the actual amount).

Default. Many tenants assume that they will never default, and therefore do not worry about the terms of the default provisions of their lease. Understand that not all defaults are the result of bad faith on a tenant’s part. You may be on vacation when the rent is due and your office manager is out with the flu, and no one remembers to pay the rent. It is at times like these that some tenants wish that they had more carefully paid attention to the default clauses in their leases.

The most critical provisions are those that define what a “default” is, as the landlord will be unable to exercise the remedies for default until the default has actually occurred. Unfortunately, most form medical office leases provide that a default occurs if you fail to pay your monthly rent, or other sums owing under the lease, on the day they are due (generally the 1st or the 15th of a calendar month).

A tenant will obviously have more peace of mind if the monetary default clause in the lease provides that a default will not occur until the landlord has given written notice to the tenant that the landlord did not receive the rent or other sums owing in a timely fashion, and the tenant has failed to cure such nonpayment within a reasonable period (generally five business days after receipt of the notice).

Note also that most leases say that your failure to perform non-monetary obligations under the lease is also a default. This can include such items as zoning violations, compliance with laws and violation of the landlord’s rules. Look to make sure that your office lease permits you a minimum of 30 days to correct (or cure) any default caused by non-monetary reasons.

These are just a few of the items you need to consider in signing your next medical office lease. Recognize that every landlord’s form lease is unique, and your best protection will include a review by an experienced legal counsel. In addition, certain factors such as the size of your office space and the length of time the space has been unoccupied will often dictate how much bargaining power you will have to persuade the landlord to make the changes you seek.

The purpose of this article has been to give you an idea of the very real impacts on your day-to-day business that the above boilerplate provisions of a lease may have, and hopefully to reinforce in your mind the need to fully understand all of the terms and conditions of a proposed lease before you sign on the dotted line.

In a future article, we will discuss other common problems in medical office leases involving improvements, damage to property, assignment, subletting, release and indemnity language.

Paul N. Allen, J.D., is a Partner in the law firm Obermayer Rebmann Maxwell & Hippel LLP and is a Member of Obermayer’s Real Estate and Business Department. Joan M. Roediger, JD, LLM is a Partner in the law firm Obermayer Rebmann Maxwell & Hippel LLP and is a Member of Obermayer’s Health Law Department.

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