Get 12 Protections When Leasing to a Medical Tenant

Physician practices, pathology labs, ambulatory surgery centers, clinics, and other medical providers need commercial space to lease. To obtain it, they’re willing to go not only to offices but also malls, retail outlets, and other nontraditional properties. All of this creates new opportunities for landlords. But it also creates new challenges. Leasing to medical tenants raises unique issues for which standard lease forms are ill-equipped. Here’s a look at the special 12 lease protections you need when leasing commercial space for medical use.

Physician practices, pathology labs, ambulatory surgery centers, clinics, and other medical providers need commercial space to lease. To obtain it, they’re willing to go not only to offices but also malls, retail outlets, and other nontraditional properties. All of this creates new opportunities for landlords. But it also creates new challenges. Leasing to medical tenants raises unique issues for which standard lease forms are ill-equipped. Here’s a look at the special 12 lease protections you need when leasing commercial space for medical use.

1. Require Proper Installation of Medical Equipment

Challenge: Many medical tenants use equipment like x-ray machines, CT scanners, and nuclear imagers that can expose patients, visitors, and other tenants to health and safety hazards—and landlords to liability risks.

Solution: Make tenants responsible for proper and legally compliant installation, maintenance, use, and removal of medical equipment. Also require tenants to ensure proper insulation of the walls, floors, doors, and ceilings of all treatment or examination rooms where the equipment is used.

Model Lease Language

No x-ray machines or other similar or dissimilar medical equipment, machines, or devices now existing or hereinafter invented shall be installed or used in the demised premises unless installed, used, maintained, and removed at Tenant’s sole cost and expense, in accordance with all the terms and conditions of this Lease, including, without limitation, rules and regulations of the local board of fire underwriters, the local fire insurance exchange, and all applicable federal, state, and municipal governments and quasi-governmental authorities, and not unless the same is properly electrically filtered and insulated so that there is no interference in the Shopping Center with telephone, video, fiberoptic, internet, digital, or other equipment. All walls, ceilings, floors, and doors of any room or area used for examination, diagnosis, testing, treatment, or therapy shall be properly shielded and shall comply with all applicable rules, regulations, ordinances, and other requirements.  

2. Impose a Lien on Medical Equipment

Challenge: The great value of medical equipment makes the tactic of imposing a lien on a tenant’s personal equipment as security for performance of lease obligations especially effective in the medical setting. But for that same reason, medical tenants are more apt to resist lease lien language.

Solution: Negotiating leverage is likely to determine the outcome. If a tenant finances the equipment, the lender will also probably request a subordination of the landlord’s lien so that the lender’s lien rights are superior. That’s generally an acceptable demand, provided that the lender agrees to certain restrictions regarding entry into the premises and removal of the property.

3. Require Proper Installation of Medical Equipment

Challenge: Running a medical operation typically requires consumption of water and electricity at rates that far exceed normal tenant usage. This can raise all kinds of problems if you’re not prepared.

Solution: Before entering into the lease, determine the tenant’s expected utility needs and ensure that the property has adequate capacity to meet those demands and that the medical tenant’s consumption won’t interfere with the water and electricity usage of any other tenant. Next, ensure that the lease accounts for the additional utility usage by either charging the tenant more or providing for separate metering of its premises.

4. Require Proper Storage and Disposal of Medical Waste

Challenge: One of the biggest challenges posed by leasing to medical tenants is the medical waste they generate, which may include radioactive materials, hazardous chemicals, volatile gasses, controlled pharmaceutical substances, infectious waste, and other biohazards. In addition to posing a danger to health, medical waste makes your property subject to a host of laws and regulations, including environmental protection requirements and the Occupational Safety and Health Act (OSHA)—specifically, the rules requiring employers to protect workers against exposure to bloodborne pathogens, such as those commonly found on hypodermic needles and other medical sharps.

Solution: Include lease language that allocates responsibility for the separation, storage, removal, and disposal of medical waste and requires that it be done in compliance with all applicable laws.

Model Lease Language

Tenant shall be solely responsible for the storage, handling, removal, and disposal of all medical waste generated at the Premises and covenants and agrees that such storage, handling, removal, and disposal shall be done in compliance with all applicable laws and regulatory requirements and at Tenant’s sole expense.  

5. Beware of Lease Indemnity Loopholes

Challenge: You should also require medical tenants to indemnify you against any and all cleanup costs and claims resulting from their failure to comply with regulatory requirements for medical waste.

Caution: The general tenant indemnification language in your standard lease may not protect you against costs associated with tenant medical waste violations and emissions.

Solution: Ask your attorney to vet your indemnification clause and ensure it covers medical waste. Be on the lookout for clauses that limit indemnification rights to losses caused by a tenant’s negligence, which may be inadequate to protect you against OSHA and environmental violations that impose “strict liability”—that is, committing the violation is enough to establish liability even if it wasn’t the result of negligence.

6. Require Proper Storage and Disposal of Pharmaceutical Products

Challenge: Medical tenants may need to store pharmaceuticals and other controlled substances on the premises. The presence of these materials at your property exposes you to liability under laws regulating the use and disposal of pharmaceutical products.

Solution: As with medical waste, make the tenant solely responsible for proper and compliant use, storage, and disposal of pharmaceutical products. Specifically ban disposal of any pharmaceuticals in general trash receptacles. Require the tenant to pay the costs of any additional security measures or services you incur as a result of its keeping pharmaceutical and controlled products, such as medical marijuana, at the property.

7. Guard Against Impermissible Uses

Challenge: Use issues may arise when you lease to medical tenants. Other tenants may object to having a medical business on the property, particularly if it’s a controversial operation like a medical marijuana dispensary, abortion clinic, or drug and alcohol treatment center. But just having any medical business as a tenant may be problematic for other tenants, especially if the property is located in a retail or other nontraditional setting.

Example: A shopping center lease gave a fabric store tenant the right to pay lower rent if the landlord violated its duty to run the shopping center as a “first-class retail project.” The tenant claimed that the landlord violated that duty by leasing space to an addiction counseling provider. The Washington court agreed and issued a “declaratory judgment” finding that the tenant had the right to pay the lower substitute rent and terminate the lease early for as long as the provider remained in the space [Jo-Ann Stores, LLC v. Sound Props., LLC, 2021 U.S. Dist. LEXIS 106644, 2021 WL 2313428].

Solution: First, make sure that leasing space to a tenant for medical use doesn’t violate the use clause, exclusive, or other use-related covenants contained in leases with any of your other tenants. If you do lease to a medical tenant, include appropriate language to ban inappropriate uses. Recognize that standard use clauses that you use with other tenants may not work for a medical tenant. Thus, for example, a clause banning drug sale or distribution on the premises would be inappropriate when leasing to a clinic with an on-site pharmacy; a clause banning use of the property for a massage parlor may be a nonstarter for certain kinds of rehabilitation or therapy clinics that offer medical massage services.

8. Prohibit Tenant from Creating “Nuisances”

Challenge: Medical operations may generate noises, vibrations, odors, crowds, and other “nuisances” that interfere with neighboring tenants’ use and enjoyment of the property. Result: Tenants may seek to terminate their lease or sue you for damages.

Solution: Include language in the lease barring medical tenants from engaging in any nuisance activity.

Model Lease Language

Tenant covenants and agrees not to suffer, allow, or permit any offensive or obnoxious odor, noise, vibration, or other undesirable effect to emanate from the demised premises, or any machine, equipment, device, or other installation therein, or otherwise suffer, allow, or permit the same to constitute a disturbance to occupants of the Shopping Center.  

9. Limit Medical Tenant’s Hours of Operation

Challenge: Medical businesses often stay open longer than other retail and office tenants, particularly emergency rooms, urgent care centers, and other facilities that operate 24/52/365. As a result, landlords must maintain HVAC, lighting, security, and other services for longer hours.

Solution: Be aware of these needs going into lease negotiations and ensure the lease addresses the issue, either by imposing limits on the tenant’s hours of operations (like the model language below) or making the tenant responsible for the additional costs you incur as a result of its longer hours.

Model Lease Language

Tenant covenants and agrees that it will (a) not allow or permit any patient to reside in or remain in the demised premises on an overnight or inpatient basis; and (b) be open for business only during Business Hours (as defined elsewhere in this Lease). Tenant understands and agrees that Landlord will not be obligated to furnish any services, including without limitation, HVAC, security, and elevator services, other than during Business Hours.   

10. Require Tenant to Comply with the ADA

Challenge: The offices of medical providers are generally deemed places of public accommodation subject to the accessibility requirements of the Americans with Disabilities Act of 1990 (ADA). So, the lease should address the ADA liability issues that may arise.

Solution: Negotiate to make the tenant responsible for any upgrades to the facility, common areas, parking lots, or other parts of the property required to bring the premises into compliance with ADA requirements. And while landlords can’t delegate their own liability under the ADA, they can add lease provisions “allocating their compliance responsibilities” with tenants, including indemnification for losses resulting from a tenant’s noncompliance.   

Model Lease Language

Tenant hereby agrees to indemnify, defend, and hold Landlord harmless from any and all cost, expense, liability, or obligation that may arise, or be imposed on the Tenant, Landlord, or the Premises under the Americans With Disabilities Act of 1990, as is now in effect or hereafter amended, and all rules and regulations issued under that law (collectively referred to as the “ADA”). Without limitation of the foregoing, Tenant shall be solely responsible for compliance with any of the following requirements of the ADA that may be applicable, and all cost and expense related thereto:

  • Barrier removal to ensure that members of the public with disabilities have access to the Premises and all goods and services provided at the Premises;
  • Providing auxiliary aids and services when necessary to remove communication barriers for members of the public with disabilities; and
  • Compliance with the U.S. Department of Justice ADA Accessibility Guidelines when performing any alterations, renovations, or remodels, or when otherwise required by local, state, or federal authorities; and providing reasonable accommodations for all employees and employment applicants with disabilities.

11. Address HIPAA Medical Privacy Issues

Challenge: One of the things that makes medical tenants different from other tenants is that they keep patient records and other personal health information that they’re obligated to protect under the Health Insurance Portability and Accountability Act (HIPAA). While responsibility for HIPAA compliance falls on the medical tenant rather than the landlord (assuming the landlord isn’t a healthcare provider), it may still have an impact on the lease terms. Specifically, agreeing to the standard lease language you use to ensure access to tenants’ premises for repairs, maintenance, etc., may be incompatible with a medical tenant’s HIPAA obligations to keep protected health information private.

Solution: Be prepared to compromise on access rights, at least for the areas of the premises where tenants keep their protected health information. One common concession is agreeing to follow the tenant’s security protocols when entering such areas. You also need to educate your maintenance crew, leasing staff, and other personnel charged with entering the space about the HIPAA rules so that they’re sensitive to the medical tenant’s needs.

12. Structure Lease to Meet Stark and Anti-Kickback Safe Harbors

Challenge: Federal laws make it illegal for doctors and other medical providers to ask for or take bribes in exchange for referring patients covered by Medicare, Medicaid, and other federal health programs. There are two key laws you need to know about if you lease to medical tenants:

  • The Stark Law, which bans physicians from making referrals for certain “designated health services” to entities in which the physician has a financial relationship; and
  • The Anti-Kickback Statute (AKS), which makes it a crime to knowingly solicit, offer, or receive payment, gifts, or remuneration in exchange for referrals.

When medical providers enter into commercial leases, they risk being held liable under these laws, especially if rent is below market or based on the number of patients a tenant refers and/or the value those referrals generate.

Example: A hospital leases office space at below-market rent to a physician practice that refers Medicare patients to its pathology lab. The reduced rent would very likely be seen as a kickback paid by the hospital in exchange for referrals, thereby exposing both the hospital and practice to liability.

Stark and the AKS apply only if the landlord is a physician (or the immediate family member of a physician) or entity like a hospital that makes or receives referrals to or from their medical tenants. Most commercial landlords don’t fall into this category. However, the laws may still have a direct impact on how you structure the lease of a medical tenant. The reason for that is that the laws are so strictly enforced that many providers won’t enter into any commercial leases unless they comply—that is, are structured to meet the specific criteria required to satisfy the liability exceptions/safe harbors that apply to each law.

Solution: Be aware of this compliance need of medical tenants and be prepared to structure their leases accordingly. Although the Stark and AKS exceptions aren’t exactly the same, there’s a lot of overlap. The good news is that you probably won’t have to depart much from your usual leasing protocols to comply. A medical lease should be okay under both Stark and the AKS as long as:

  • The lease is in writing and signed by the parties;
  • The lease specifies the premises to be leased and covers all of the leased space, including storage;
  • The lease and any renewal terms are for a period of at least one year;
  • Rental charges (including any allowances, free rent periods, and other tenant concessions) are at fair market value (defined as the value of the rental property for general commercial purposes, not taking into account the premises’ intended use) and consistent with arm’s-length lease transactions;
  • The rent is set in advance and doesn’t take into account the value or volume of referrals (Note: Future rental increases are allowed as long as the increases are specified in advance, or calculated using a definitive formula, such as adjustments tied to the consumer price index);
  • The space leased doesn’t exceed what’s reasonably necessary to accomplish the commercially reasonable business purpose of the rental; and

The premises is used exclusively by the tenant and not shared with or used by the landlord or any entity related to the landlord.