As tenants of medical office buildings, medical users create unique leasing issues. They handle hazardous materials, produce biomedical waste, require confidentiality in patient recording, and are in the watchful eye of safety/regulatory bodies. While medical professionals are familiar with these inevitabilities, most of what makes their business unique are rarely found on a medical office lease.
After location identification, the majority of our time is spent negotiating the lease. It has been our observation that many physicians will negotiate and sign lease agreements without the benefit of educated real estate advisory or legal counsel. Commonly, this medical tenant is simply concerned with the general business terms (including the term of lease, rental rate and commencement date) and rarely gives the lengthy document a second look.
While it is tempting to sign the lease to reduce the amount of time spent towards negotiating or communicating real estate interests, a few select studies have documented that tenants who solicit real estate advisors for their business negotiations tend to have greater business longevity. Because a medical office lease is an expense that often requires a multi-year commitment, tenants should not want to be party to any agreement that is not reflective of their own interests. Below are a few examples of where real estate advisors or legal counsel may be requested:
- Medical office leases typically offer one of two approaches in which a physician can make improvements or alterations to the rented space. Either the tenant is required to remove all improvements installed during the lease term or all improvements simply become part of the property. While the lease may variably contain language that references one of these two approaches, the fact is, knowing additional expenses are tucked within the lease is unsettling to our clients.
- Too often, physicians assume that a landlord will provide certain basic services for their tenancy. It should be known that landlords only provide the services that are expressly stipulated within the lease. Often, for example, landlords turn off a building’s air conditioning “after hours”, designated as evenings and weekends. If a medical tenant requires extended evening or weekend hours, advisors may assist, in the very least, by educating the tenant on what can be done to facilitate this request. Similarly, medical practices rely on certain types of equipment that consume significant electrical resources. In this case, an advisor should be able to make certain whether the landlord will furnish the necessary amount of electricity or will charge separately for such extensive use.
- As a tenant, you want clarity for all financial obligations. Some medical office leases require you to simply pay the established monthly rental rate. Others require pro rata payments of some, or all, of the landlord’s operating expenses and real estate taxes associated with the property, in addition to the monthly base rent. In the past, we have noticed where operating expenses have been interpreted loosely by landlords, which may come as a shock to some. Overall, though, the majority of medical office landlords will adhere to the strict guidelines as set forth by educational bodies that attempt govern building use metrics. But, without proper advisory payment, especially the fluctuated amount, may easily become misrepresented. In order to minimize the financial responsibility for operating expenses, tenants should verify that the landlord’s operating expense calculations are correct and not being overcharged. If the operating expenses include real estate taxes, tenants should request an annual copy of the tax bill. In addition, within the lease, tenants may have the opportunity to verify that the operating expense charges have been accurately calculated.
- Lastly, while you may think you will never default on your lease, it is hard to ignore default provisions. Remember, defaults may not necessarily be the result of bad faith or bad action. A non-monetary default may include failing to maintain the premises or violation of one specific clause within the complete document as written by the landlord’s counsel. Some leases provide a certain time period to “cure” the default, but some do not. It is necessary to identify the potential for violations or default and discuss each one.
It is of great importance to seek the guidance of experienced healthcare real estate advisors or counselors to negotiate the lease in an effort to meet the tenant’s professional needs and insure the continued health of their medical business.