10 key considerations when a healthcare tenant negotiates a shopping center lease

by DLA Piper
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The habits of healthcare consumers have changed: no longer do they perceive a medical visit as something necessarily separate from all other life events. In fact, they often seek the convenience of combining a quick trip to the doctor with their everyday errands. And from their viewpoint as consumers, a visit to a remote health care facility is typically cheaper, requires a shorter waiting time and is more conve­nient than a visit to a hospital emergency room.

Such significant change in healthcare habits means consumers are more willing to go to healthcare facilities in places like shopping malls - giving shopping center owners the opportunity to lease vacant space in their centers to non-traditional users such as acute care clinics, satellite hospital facilities, oncology treatment centers and other medical tenants.
To ensure a successful lease transaction involving a medical tenant, both the shopping center landlord and the prospective health systems tenant need to be aware of a host of particular concerns. The standard shopping center lease form in particular must be modified to ad­dress the unique considerations that arise as a result of medical use in a retail setting. In addition, counsel for both parties should analyze existing leases, governmental requirements and restrictions of record to determine the impact of a medical use at a retail center.
In this alert, we look at a short list of some of the most significant lease provisions that require analysis and modification in a retail lease for a medical use. Although retail leases are governed by state and local laws and customs, this alert addresses both landlord and tenant negotiation and drafting techniques for key provisions found in retail leases nationally.
Here are 10 of the top considerations that both medical tenants and shopping center landlords should keep in mind when negotiating a lease.
1. Zoning and land use considerations: Does the proposed use as a healthcare facility violate governmental or private restrictions encumbering the shopping center? Is a variance or conditional use permit necessary? Is the proposed use allowed under local regulations?

2. Restrictions of record:  Is the proposed use permitted under shopping center declarations and other reciprocal easement agreements?  For instance, shopping centers built on brownfield sites or former gas station locations might be encumbered by environmental restrictive covenants, which prohibit use of the property as a hospital or for other medical facilities.

3. Other tenants’ existing leases: Anchor and other existing leases at the shopping center may contain clauses limiting the permissible types of uses allowed at the shopping center or in certain defined areas in the shopping center. For example, an existing tenant may have an exclusive right to provide therapeutic massage at the shopping center. If the shopping center's lease form contains clauses prohibiting certain uses, counsel should review these clauses to confirm that the proposed medical use does not violate the prohibited uses. Unless contained in a recorded memorandum of lease, these types of restrictions are typically not of public record and therefore, there is no way for a tenant to know of them absent disclosure by the shopping center landlord.

Conversely, some medical tenants insist on an exclusive use clause in their lease, prohibiting, for example, a competing acute care facility or dental practice. Others may insist that the landlord agree not to enter into future leases for "unhealthy" uses, such as sales of tobacco or alcohol.

4. Loan documents: Landlords must carefully review the loan documents encumbering the shopping center to confirm that use of portions of the shopping center for purposes that are traditionally non-retail does not violate the terms of the loan documents or require the lender's prior approval.

5. Regulatory and licensing concerns: Certain medical uses require prior approvals from governmental licensing agencies – a pharmacy license is just one example. In some cases, public comment and public hearings may be required before applicable governmental approvals are issued. The lease should expressly require the tenant to comply with all health-related federal and state laws, including HIPAA , the Stark Law and anti-kickback laws. Certain typical retail concepts, such as the payment of percentage rent, may be prohibited under health-related laws.

6. Use and design considerations: Like other retail tenants, medical tenants want flexibility regarding their permitted use and defining which services can be delivered and which procedures can be performed on premises. Conversely, landlords want to limit the tenant's use of the premises by retaining some control rights over permissible uses.

A healthcare tenant may prefer a broadly defined permitted use provision, such as "medical or medically-related uses," enabling the health system to change the way it uses the space as its business strategies change or as best practices for patient care and technological advances in medicine evolve. But landlords may hesitate to agree to a broad permitted use provision, not least because of a desire to preserve the quality of the shopping center and concerns over exclusive use clauses in favor of other tenants.

What restrictions should be imposed on the medical tenant's proposed use?  In addition to typical prohibitions against “noxious use,” tenants should not be surprised when landlords seek to impose restrictions regarding such uses as overnight inpatient stays, sale of medical marijuana, urgent care, euthanasia or animal testing.

7. Non-standard services and tenant requirements: A medical tenant is likely to require above-standard services and equipment as well as additional requirements under the lease, such as additional security measures because of the tenant's use and hours of operation. The medical tenant may also have specific parking and access requirements. Responsibility for the provision and payment of these additional services should be appropriately allocated between the landlord and the tenant.

If the medical tenant intends to operate beyond typical retail hours, the landlord will most likely expect compensation for added costs (covering utilities, HVAC and additional security, for instance). The tenant may also require particular above-standard services, such as hazardous waste disposal or excess electrical capacity. A corollary to this is the medical tenant's frequent requirement for uninterrupted utility services, which may be more acute than that of the typical retail tenant. For example, the impact of a power failure on a fertility clinic or a pathology laboratory would be much more serious than the impact on a high-end retail clothier.

In addition, healthcare tenants often have particular design needs that may require costly modifications, both to the leased space and to the shopping center common areas (such as greater numbers of accessible or dedicated parking spaces or curb cuts). Determining who will pay for such alterations should take place during letter of intent and lease negotiations.

8. Environmental liability - Medical tenancy may bring to a shopping center radioactive materials, hazardous chemicals, volatile gasses, controlled pharmaceutical substances or infectious waste. There should be transparency between landlord and tenant about the nature of these materials. Landlord and tenant should agree that the landlord will have the right to inspect the premises and to engage an environmental specialist to confirm compliance with all applicable environmental laws. The landlord may want to require the medical tenant to have an inspection of the premises completed by an environmental specialist on surrender of the premises to confirm the absence of hazardous materials, medical waste and biological waste.

9. Use of premises by others: At times, healthcare systems want the right to allow third parties, like diagnostic labs or affiliated practice groups, to use the premises. Medicval users frequently request the right to time-share their facilities, allowing other, unofficial physicians to use the premises. Even if these arrangements are acceptable to the landlord, certain restrictions may be appropriate. Further, the typical assignment and subletting clauses may not work in a situation where the tenant is a practice of physicians.

10. Surrender:  What obligations will a healthcare tenant have to restore the premises at the expiration or termination of the lease term?  Both landlord and healthcare tenant should carefully review the lease’s surrender terms to address removal of such things as hazardous materials, special life safety systems, additional cable and conduits and reinforced walls and flooring. An environmental inspection may be part of the surrender terms.

These 10 key issues are only some of the concerns that healthcare tenants and shopping center landlords need to consider when arriving at a lease agreement. Because medical uses are not typically contem­plated when shopping centers are developed, landlords and tenants must be thorough and careful in their review of all potential restrictions.

While addressing and balancing all these issues is a complex process, with the guidance of experienced counsel both parties can arrive at an agreement that protects their own interests while advancing their mutual business goals.

An earlier version of this article appeared in Practical Law Real Estate, November 2014.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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