Top Issues in Health Care Provider Leases

Attorneys doing lease work for health care providers should be aware of and prepared to counsel their clients on a variety of topics that often arise in health care provider leases. This is a list of some of the top issues to consider when advising health care provider clients on leases.

1. Does the space meet the needs of the health care provider?

Depending on the type of health care being provided and the equipment that will be used, tenants should consider whether the space meets their needs in terms of electrical capacity, ventilation, layout, and other practice specific requirements. Changes to the current space will be at a cost and ultimately the cost is borne by the tenant. The length of the lease term should also be considered when a tenant is considering substantial changes to a space to meet the practice’s needs. Generally, a tenant should have a longer term (with the option to renew) if a large investment is being made in the space.

A health care provider should also consider the physical location of the space, in terms of the demographics the office is going to serve (e.g., government pay or private pay), opportunities for branding and signage, visibility, and access (e.g., first floor space). Further, a tenant should consider expansion possibilities to adjacent spaces and an option to purchase the space, if applicable.

2. Are the Stark Law and/or Anti-Kickback Statute being violated?

Stark Law and Anti-Kickback Statute concerns arise in health care provider leases in the context of the physicians practicing within the space, and the payment of rent made to the ownership of the leased space. 42 U.S.C. § 1395nn; 42 U.S.C. § 1320a – 7b(b). A “physician” includes a doctor of medicine or osteopathy, a doctor of dental surgery or dental medicine, a doctor of podiatric medicine, a doctor of optometry, and a chiropractor. 42 U.S.C. § 1395x (r).

The Stark Law is a civil enforcement statute that prohibits physicians from referring patients to receive “designated health services” payable by Medicare or Medicaid from entities with which the physician or an immediate family member has a financial relationship. What qualifies as a financial relationship has been broadly interpreted in application and covers both direct and indirect interests.

The Anti-Kickback Statute is a criminal statute with both criminal and civil penalties. This statute covers a broader range of conduct and prohibits transactions intended to induce or reward referrals for items or services reimbursed by Medicare or Medicaid. All medical providers (not only physicians) in a position to arrange or recommend medical services are covered by this statute. It differs from the strict liability of Stark Law in that a showing of intent is required for a violation to have occurred.

To address these issues, a lease for medical office space should contain a representation and warranty that the lease does not violate either law. Further, in the event a lease would otherwise violate the Stark Law, an exception exists for leases that meet the following requirements:

1. The lease is in writing, signed by the parties, and specifically describes the premises;
2. The duration of the lease is at least 1 year;
3. The leased space does not exceed that which is reasonable and necessary for the legitimate business purposes of the lease and is used exclusively by tenant. However, the tenant’s payment of its pro rata share of the common area expenses is permitted;
4. The rent during the term is set in advance and is at a fair market rate;
5. The rent is not determined based on volume or percentage of revenue for services performed at the premises;
6. In the absence of any referral, the lease would still be commercially reasonable; and
7. If the lease expires, a holdover lease meets the requirements in 1-6 above. 42 CFR § 411.357(a)(1)-(7).

Ensuring that a lease contains the recommended representation and warranty and meets the lease exception requirements is necessary for health care provider leases. However, as the Stark Law is a strict liability law, the lease should also include language requiring the other party to indemnify your client for damages caused by that party due to a breach of the representations and warranties.

3. How will a dispute be resolved
between the landlord and tenant?

The dispute resolution language of a lease is often one of the most overlooked provisions. The dispute resolution language should be carefully considered, and the preferred method of dispute resolution will depend on the specifics of the health care provider lease, including the type of space being leased, and whether the client is the landlord or the tenant. The options are generally mediation, arbitration, litigation, or some combination of these options.

The commercial arbitration process available through the American Health Lawyers Association should be considered. This arbitration process uses experts in the health care industry to resolve the dispute, which may be important depending on the specifics of the space being leased. Further, the hearing process is private and the documents are not publicly released unless requested by a party or pursuant to a court order. American Health Lawyers Association, Commercial Arbitration Rule 6.3. Parties to a lease can go a step further and agree in the lease that in the event of arbitration, the process and the award remain confidential. This may serve the needs of both parties, protecting the financials of the landlord and the integrity of the health care provider.

About the authors

Elizabeth M. Sorokac, Esq. is the Managing Attorney and a Member of Reisman Sorokac. Ms. Sorokac has worked on commercial real estate transactions for more than 16 years and has often worked on health care provider leases. Her practice includes commercial real estate, health care law, and zoning and land use.

Michael Quebbemann, Esq. is an Associate Attorney with Reisman Sorokac. Mr. Quebbemann has more than 5 years experience practicing in commercial real estate, finance, cannabis, entity formation, and other areas of business law.