Leasing to Medical Offices: Some Doctoring Needed

There are unique considerations in leasing space to a physician or medical group that don't come into play with standard office leasing. You should address those issues specifically in your lease to avoid unnecessary ambiguities.

“There are a number of important differences between a general business office and a doctor's office where patients are being seen and medicines are being dispensed,” says Michael J. Klein, an attorney with the Chicago office of McDonald Hopkins LLC. “As a property owner, you'll want a good, clear idea of exactly how the space will be used.”

Klein identifies the following nine key areas to focus on.

Zoning

Be sure the proposed use of your space for a medical office does not run afoul of the established zoning for the location, Klein cautions. Factors such as increased traffic or nonstandard hours may need to be taken into account.

Utilities

“The less ‘normal’ the use of your commercial space is, the more you need to pay attention to whether the utilities are adequate for the use,” Klein notes. “For example, a sink in every patient exam room means more plumbing. Is the plumbing system adequate? CT scanning or X-ray equipment means more electrical use. Are the power sources adequate? You need to know exactly what types of equipment will go in the space and what the doctors will be doing.”

Modifications and Improvements

Unless your space was constructed originally for medical office use, leasing to a medical group can mean significant changes to the space.

Be aware of the most current ADA and OSHA requirements for accommodations such as wheelchair ramps and handicap-accessible parking, Klein says, as these requirements change over time.

You should be clear on who will be responsible for these needed changes, Klein says. “It's negotiable,” he explains. “Owners take the position that the tenant is responsible. The tenant, on the other hand, may want an allowance for improvements. You will need to decide how much you want to put forward.”

However, you still need to have some oversight when it comes to the improvements, Klein adds. “The reason you want to control the work is that it could affect your ability to lease to other tenants,” he says. “And if it's multi-tenant space, what one tenant does will affect the others.”

Restoration

If you lease to a medical office tenant that makes changes to your space, you should be sure to address what happens to that space when the tenant leaves, Klein says.

“As the owner, you have the right to say what happens at the end of the lease,” he explains. “You can request that the space be restored when the tenant moves out.”

Inspection

Be sure the lease also addresses your right as the owner to be able to inspect the space regularly. Klein says that you may want to show the space to a future tenant or to your lenders. You also want to know that the space is being properly maintained. Because medical offices have patient records that must be kept confidential, your tenant may require certain limitations to this right.

“The tenant may request advance notice or could limit your access to certain areas where patient records are kept unless you are accompanied by a member of the staff,” Klein says. “Keep in mind that the tenant is required by law to maintain such secure areas.”

Janitorial Service and Waste Disposal

This is a particularly important area when leasing to medical offices, Klein notes. Several considerations are key, first of which is your janitorial service, if you are providing it.

“More cleaning is required in medical offices than other types of offices,” Klein says. “Certain areas must be kept sanitary and access may be limited. The issue of maintaining confidentiality applies also. My advice is to know what the tenant expects,” he adds. “If it's more than what you normally provide, address it clearly in the lease.”

A second related issue is the proper disposal of medical and hazardous waste. OSHA and EPA requirements apply, Klein notes, and many states have their own regulations regarding disposal of this type of waste. This issue is often best dealt with as a separate covenant to the lease, which should be extremely clear.

“State specifically that this waste cannot be mixed with normal trash, and that it must be disposed of in a separate, specially marked container. State that it cannot be disposed of down the drain. Be very, very specific,” Klein says.

Disposal of medical and hazardous waste often is handled by specialty vendors, and your tenant may already work with such a company. Klein recommends that your lease stipulate that you must approve the tenant's vendor or that you will provide the tenant with a list of approved vendors of your own.

Be sure to take steps to protect yourself in the disposal of such waste, Klein stresses. Your tenant should indemnify you, as the property owner, against any liability as a result of the waste disposal.

Operational Issues

Medical office hours differ from the hours of operation of most other types of offices, so your lease should address those differences and any related costs. For example, if the office has hours on Saturday mornings and some evenings, your tenant will need extended use of heating, ventilating, and air conditioning services.

Another operational consideration is the number of patients that will go in and out and the impact of that increased level of traffic compared to other types of offices. “There is likely to be more foot traffic and so more wear and tear on your property,” Klein adds. “You should get reimbursed for that greater wear and tear.”

Sharing Space

Physicians sometimes find that they have excess space that they can make available to a medical colleague who needs an office on a limited basis. Be clear what you want your role to be in such an assignment of leased space, Klein says.

“If your tenant wants to share space with another professional, you should require that he has your consent,” he explains. “You want to make sure it is someone with a good reputation who has not had problems with another property owner. Indicate that you will be reasonable, but that you want the right to say yes or no.”

Signage

All commercial tenants want signage for their business, and medical offices are no different, Klein says. They may want more than the typical signage allowances based on the square footage leased, such as extra signage to help direct patients. Discuss the issue ahead of time and include specifics in the lease, Klein says.

The Bottom Line

While there are some additional issues to deal with when leasing to a medical office, you shouldn't avoid the opportunity, as long as you take the appropriate steps to cover all issues in the lease and protect yourself and your business interests. “Be sure you understand the business and that both parties are clear on the expectations,” says Klein.

Insider Source

Michael J. Klein: Member, McDonald Hopkins LLC, 640 N. LaSalle St., Ste. 590, Chicago, IL 60654; (312) 280-0111; mklein@mcdonaldhopkins.com.

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