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Understanding medical office leases II

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

In the December issue, we set forth the first part of a brief checklist of some of the most important provisions found in medical office leases, and the reasons that they have financial relevance to you. This article continues and concludes that checklist. While some of the provisions discussed below are a bit more esoteric than those discussed in December’s article, you will see that an understanding of them when negotiating a medical office lease can translate into real dollars saved.

Assignment and Subletting. Most form medical office leases provide that a tenant may not sublease space or assign the lease absent the landlord’s prior consent, which may be withheld in the landlord’s sole discretion. Two changes to this provision can make life much simpler for a tenant. First, try to persuade the landlord to change the provision to state 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.

Many assignment and sublease provisions in medical office leases are also drafted in a manner that requires the landlord’s consent to transactions that you might not ordinarily consider to be “assignments” or “subleases.” These would include the merger or sale of your practice. The lease should be modified to confirm that these sorts of events will not constitute assignments or subleases requiring the landlord’s consent.

Duty to Remove Improvements. Most standard form medical office leases contain a provision (usually found either in the “alterations” section or in the “surrender” section) stipulating that at the end of the lease term, the tenant will not only vacate the premises but also will remove any and all improvements and alterations installed within the premises during the lease term. This includes those improvements and alterations that may have been installed by the landlord for the tenant at the inception of the lease. This provision is fully enforceable in most, if not all, jurisdictions, and the tenant who is unaware of it may find an unexpected significant expense awaiting him or her at the end of the lease.

The best solution, of course, is to have the provision modified to simply state that all alterations and improvements will remain in the premises and become the landlord’s property, and will not have to removed by the tenant at the end of the term. Many landlords balk at this change, however, because it can result in undesirable improvements remaining in place at the end of the term that will make the space hard to lease.

A compromise acceptable to most landlords states that the tenant will only be obligated to remove those improvements designated for removal by the landlord at the time the landlord consents to the tenant’s construction of the improvements. This means that when you ask the landlord for permission to install sinks in each exam room, the landlord will have to tell you at the time he or she approves the installation whether you will be obligated to remove the sinks at the end of the lease.

Condition of Existing Improvements. Very often, physicians lease office space that was previously occupied by another professional. In such cases, the landlord often delivers the space more or less “as is,” apart from re-painting, re-carpeting and perhaps undertaking some minor construction. The natural assumption on the part of a layman when signing a lease for space of this sort is that if, for example, an electrical wall plug or an overhead light fixture already in the space (installed by the prior tenant) proves defective in the first month after occupancy, the landlord will be responsible for replacing it. In a typical medical office lease, this is generally not the case, however. Rather, most office leases provide that the tenant is responsible for anything that goes wrong within the tenant’s space, except for defects of a structural nature or involving the central building systems, and damage caused by the landlord or its employees.

The solution to this problem is to make sure that your lease of medical office space that you are taking substantially “as-is” contains a landlord warranty against “latent” and “patent” defects (respectively, defects that are invisible and only appear over time, and defects readily visible to the naked eye). Landlords try to limit such warranties to a period less than the entire term of the lease, and generally the parties compromise at anywhere from one month to two years. Nonetheless, even a one month warranty gives you an opportunity to “kick the tires” after you take occupancy, and keeps the landlord “on the hook” to fix defects in the pre-existing improvements in the premises.

Release and Indemnity. Form medical office leases commonly contain a provision stating that the tenant releases the landlord from liability for any personal injury or property damage that occurs within the leased premises. The theory behind this provision is that both the landlord and the tenant will maintain insurance, and that the tenant will look to its insurance rather than filing suit against the landlord in the event that, for example, the roof leaks, a pipe breaks or someone slips and falls in the space. Properly drafted, the release should have an exception for matters which are directly caused by the negligence or willful misconduct of the landlord, yet many leases do not contain this language, so it is worth checking.

Likewise, the typical form medical office lease contains a provision stating 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 space. Again, such a provision should contain 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).

Damage from Fire and other Casualties. Even in modern buildings, business operations are often brought to an untimely halt due to the occurrence of a fire, a flood, an earthquake, or other “casualties.” Tenants commonly assume that their leases offer reasonable protections on these occasions, but often this is not the case. On the unfortunate morning that you walk into your wet, smoky or otherwise unusable medical office after a casualty, you will have one less worry if your lease provides you with the following protections: (a) the landlord should be obligated to give you notice after a casualty stating the length of time needed to complete repairs, and you should have the right to terminate the lease if the repairs cannot be completed within a reasonable period (generally 90 to 120 days after the casualty), (b) if the landlord’s notice states that repairs can be completed within the required time frame but the landlord fails to complete the repairs within that time, you should also have the right to terminate the lease, and (c) your rent should abate from the date of the casualty until the premises are restored to a condition suitable for you to resume occupancy (if the premises are only partially damaged, the rent should only partially abate).

The landlord will also want rights to terminate the lease after a casualty, and you should try to make sure that if the landlord terminates your lease, he or she will also be obligated to terminate all of the other leases in the building which were affected by the casualty (otherwise, the landlord may use this clause as a means of terminating your lease in order to bring in a higher paying tenant following restoration). If the foregoing protections are in place, you will be able to concentrate more fully on the important task of finding temporary quarters during the period when the landlord is sorting out the casualty and undertaking the necessary repairs.

Of course, the provisions discussed above and in December’s article do not represent the entire spectrum of issues that commonly arise in medical office leasing, and nothing will protect you as well as the services of an experienced leasing attorney who understands your needs and goals. Nonetheless, while you may not secure every change to the landlord’s form that you would like to obtain, having a basic knowledge of the major provisions of a medical office lease will give you a better idea of whether you are getting the deal you think you have been offered, and will make the fine print and legalese in your lease a bit more understandable and will assist you with your lease negotiations.

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, J.D., L.L.M., 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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