Negotiating your medical office lease – Four essential provisions

Alan M. Freeman

You have found the “perfect” new location and the best available space for your new medical office. Or perhaps your existing lease has expired and it is time to sign a new lease with your landlord for the same space or for a larger or smaller office in the building. This is a critical time for your practice, one that could impact your future growth, as well as your financial success, for years to come;

Once you have worked out the most basic terms of your upcoming occupancy, such as the monthly rent and your lease term, the landlord will often “fill in the blanks” on its lengthy form lease and then present it for signature. You and your attorney will need to review and negotiate this document carefully, to ensure the flexibility of your practice and to protect you from major unexpected costs and expenses.

While there are numerous issues to cover during your lease negotiation, here are four essential concerns for a medical practice that are too often minimized or even overlooked.

1. Permitted Use of Your Office: You will typically encounter limitations on how your space may be used or operated, whether through applicable laws, the landlord’s own restrictions or provisions from the leases of tenants already in the building.
   1. Legal Use: Faced with more office and retail vacancies, landlords have been willing to expand their tenant rosters to include medical professionals. However, restrictions posed by zoning laws or the building’s certificate of occupancy may present legal issues. Your attorney should search the public records for the landlord’s property to ensure that your particular medical use, or in fact any medical use, is permitted for the location and for the specific premises that you wish to lease. If there is a limitation on your use, or an outright prohibition, you should work with your landlord to address it, perhaps by seeking a governmental variance to allow your use, although this may delay the timing of your occupancy. In any event, your lease should allow you to terminate the deal if the matter is not resolved to your satisfaction within a certain time following lease execution.
   2. Landlord’s Restrictions: The landlord may want to narrow the use of the premises to your medical specialty, which may impair the future development of your overall practice. For example, a use limited to a “physiatrist office” may prevent the on-site presence of aphysical or occupational therapist. Similarly, an “ophthalmology office” could prevent an optician in your office. The preferred lease language would be broader, such as “medical office and uses ancillary thereto,” to allow non-medical practitioners, and even other medical practices, to operate within in your space.
   3. Pre-Existing Tenants: In multi-tenant buildings, the existing occupants’ leases may specifically prohibit medical uses. This has historically applied to shopping centers, where tenants have resisted medical offices as inconsistent with the retail identity of the property and its primary goal of attracting daily shoppers. As you can’t expect to have your attorney review every other lease at the property, the best way to resolve this concern is to have the landlord represent in the lease that there are no such prohibitions against medical uses, or at least against your intended practice.
2. Assignment and Subletting: Nearly all leases address this all-important issue. By way ofdefinition, an assignment of a lease is when a tenant transfers its entire interest in its lease to another party, who then becomes the tenant of record, directly responsible for tenant duties under the lease (although the assigning party typically remains as a “guarantor” of the new tenant’s obligations). In contrast, a sublease is when a tenant allows another party to occupy some or all of its premises for limited period and/or for less than the entire space, in which case the tenant of record is unchanged and the subtenant has no direct relationship with the landlord.
   
   For greater control of its tenant mix, a landlord will often want to limit each tenant’s right to assign or sublet, by requiring the landlord’s prior written consent to any such transaction. This may adversely affect you in a number of ways, including your future rights to (a) assign the lease to a proposed purchaser of your practice, (b) assign the lease to another practitioner so that you can relocate to larger or smaller space (often called the “exit strategy”), or (c) sublet part of the space to another health professionals, so as to downsize your practice, expand services offered to the public, or receive additional income pending the future growth of your practice. You should therefore insist that the lease require your landlord to be “reasonable” in its decision to accept or deny a proposed assignment or subletting based on such factors as the intended use by the new occupant and its financial ability to perform as tenant or subtenant under the lease. In addition, to avoid interference with the future sale of all or a major share of your medical practice, the lease should allow you to assign or sublet to the purchaser without having to obtain the landlord’s consent (while still providing prior notice of such transaction to the landlord).
3. Tenant’s Alterations: Eachlandlord understandably want to monitor the improvements and alterations that take place in it buildings, particularly structural changes, major utility work or the installation of special machinery, equipment or devices. If the practice plans to do its own construction (instead of paying the landlord to do so), the lease language must ensure the proper build-out of the medical office, addressing desired offices, examining rooms, clinical space and as applicable, surgery rooms. As with assignment and subletting, the lease should provide that the landlord will be “reasonable” in providing consent to your upcoming alterations, whether for an initial occupancy or for work later during the lease term.
   
   It is advisable to have your architect prepare, as an exhibit to your lease, a list of all anticipated major work and a floor plan for landlord’s upfront approval, subject only to your landlord’s reasonable consent to your architect’s plans and specifications submitted following lease execution. The lease should also allow you the ongoing right to perform “cosmetic” changes to the space without having to obtain the landlord’s consent, covering non-structural items such as office furnishings and fixtures. Finally, if the proposed build-out of your office will involve structural or other major work to the premises, the lease should have a “permit contingency,” whereby if required building permits and other governmental approvals for such work are not obtained by a certain date, then you will have the right to terminate your lease and avoid being bound for years to space that does not fully serve your professional needs.
4. Personal Guaranty: Doctors and other professionals uniformly incorporate or take other legal steps to limit personal liability for their practices’ business debts and claims through a professional corporation or other legal entity, depending on specific state law. In response, a landlord will often seek a personal guaranty of the tenant’s lease obligations from one or more principal owners of the practice.
   
   A doctor who signs a full personal guaranty of the tenant’s lease obligations places tremendous risk to his/her financial security. If for some reason the practice is struggling or other adverse life factors come into play, the individual will face ongoing rent and other monetary obligations from a long-term lease. While many landlords will insist on this personal liability for the entire lease term, there are several options to propose to limit this exposure, including the following: (a) a “limited” guaranty that expires after the initial few years, so long as the tenant has, to date, generally complied with the terms of the lease, or (b) a “good guy” guaranty, which usually covers a longer period of the lease term but then will expire once the tenant vacates the premises, repairs any damage, and pays all rent up to the date of vacating.

A successful lease negotiation covers a wide range of business and legal issues, as the landlord and tenant seek an enduring and mutually beneficial relationship. In addition to the standard lease negotiation areas, e.g., the right to renew the lease term, the parties’ respective repair obligations and the tenant’s contribution towards the landlord’s operating costs, special attention should be paid to these four essential lease provisions, which will steer you towards a thriving medical practice of flexibility and financial success.

Alan M. Freeman is Counsel in the Real Estate Department at Mandelbaum Barrett PC, a full-service law firm based in Roseland, NJ. Contact him at afreeman@mblawfirm.com.