Hospital systems and other medical providers are aggressively opening locations in suburban shopping centers to make health services more convenient for their patients. At first glance, this is a mutually beneficial development. The costs to lease retail facilities are often advantageous for healthcare providers, while retail owners reap the benefits of this new demand for their space.
However, medical use tenants and retail landlords must navigate certain obstacles during lease negotiations for a successful lease term. Here are three fundamental challenges for retail-medical leasing.
A medical provider will want to perform all of its anticipated activities within its premises. While medical tenants will try to broadly define their permitted use and obtain exclusives covering their primary practice area, landlords limit these provisions to preserve opportunities for leasing to future medical tenants. Both parties to the lease should be aware of the medical and quasi-medical uses of the shopping center's existing and prospective tenants.
For example, the landlord might insist on adding language to the lease that specifically allows leasing space to a pharmacy with an in-store outpatient clinic. Before signing the lease, both landlord and tenant should verify that the medical tenant's permitted use will not conflict with any existing tenant's exclusive use clauses.
Before leasing space in a shopping mall, the healthcare tenant should carefully scrutinize the applicable zoning code. If the zoning designation for the shopping center does not allow for the tenant's anticipated use, the tenant and landlord should coordinate efforts to obtain zoning relief from the appropriate authorities and discuss the impact that the zoning process might have on overall project timing. Cooperation between landlord and tenant is especially critical in situations where the build-out of the tenant's space begins before the zoning process ends. In these instances, the lease should delineate the rights and obligations of both parties if the desired zoning relief is not obtained.
The tenant should also ensure that the intended use will not violate any declarations or other encumbrances recorded against the property. To accomplish this, the tenant should order a title search or request representations from the landlord. Particularly, environmental restrictive covenants associated with certain brownfields programs might prohibit medical use of the property.
If the tenant's medical use requires redundant energy supply (e.g., operating rooms), the lease should specify the location and capacity of the tenant's dedicated generator, with a clear breakdown of the parties' related cost and maintenance responsibilities.
Retail landlords may be unfamiliar with the patient privacy restrictions placed on healthcare providers under the Health Insurance Portability and Accounting Act. To avoid HIPAA's stiff civil and criminal enforcement, the medical tenant is right to limit landlord access within those areas where patient records are kept. Typically, the landlord will agree to stay out of any patient file areas unless accompanied by a tenant representative or if an emergency occurs. These access restrictions also must be explained to contractors who need to access the space during the term of the lease, especially those contractors completing build- out items after the healthcare tenant opens for business.
Need for Flexibility
For the business deal between the shopping center landlord and the health system tenant to work effectively, relaxing certain retail leasing standards is crucial. For medical offices, the hours of operation will follow the work schedule of its on-site doctors, differing from other retail businesses. In return, retail landlords will often deny co-tenancy rights, which allow for rental reduction based on the vacancy of other space in the shopping mall to medical use tenants. They perceive medical tenants as being economically independent of the other businesses at the property.
Access to the medical premises is a critical negotiation point. Depending on the nature of its medical use, the tenant may push the landlord for exceptions to the permitted loading zone hours for ambulances and handicapped patients. Similarly, the number and location of tenant's reserved parking spaces are a common source of contention.
Medical tenants frequently have cooperative use agreements with other healthcare systems. By extension, these tenants negotiate for their cooperating specialists to practice within the premises without obtaining the landlord's consent. Additionally, healthcare tenants will fight radius restrictions, limiting the tenant's ability to open other locations within a specified area, and landlords' attempts to impose percentage rent, which is complicated by the nuances of insurance coverage and Medicaid.
Retail landlords will often insist that healthcare tenants coordinate and pay for their own trash collection, including red bag waste and other hazardous medical materials. The outcome of lease negotiations on these issues will vary depending upon the context of each particular transaction.
This article is for informational purposes only and not for the purpose of providing legal advice and is not to be acted on as such.