Negotiate Cleanup Responsibilities, Remedies with Medical Office Tenant
Medical office leasing is a hot market. And if you're like many office building owners, you're thinking about renting space in your building to a medical office tenant. But unlike regular tenants, medical office tenants bring certain environmental risks. For example, you can expect the space to become contaminated during the lease, when the medical office tenant starts generating hazardous materials and medical waste.
When the lease ends, you'll want the tenant to return the space to you in the same condition that it was in when the tenant first got it, ordinary wear and tear excepted—in other words, uncontaminated. After all, it might cost a fortune to clean up that contamination—and you don't want to be stuck with the cleanup work or the bill. But unless you negotiate the tenant's cleanup responsibilities and your remedies if it doesn't meet those responsibilities, you could end up with a contaminated space and a huge cleanup bill.
To avoid that situation, it's vital that your lease set out the tenant's cleanup responsibilities and your remedies. But before you can draft lease provisions that protect your interests, you'll need to negotiate key contamination-related issues with the tenant. With the help of Houston attorney John S. Hollyfield, the Insider has compiled a list of 19 of those key contamination-related issues to negotiate. Six key issues concern the tenant's cleanup responsibilities. Two key issues protect your wallet from contamination risks. And 11 key issues concern your remedies if the tenant doesn't meet its cleanup responsibilities, as well as ways to reduce contamination risks and your liability. Make sure you discuss these last 11 key issues with your attorney before negotiating them with the tenant.
How to Find Contamination
Before negotiating those key issues, you'll need to know how you'll find the contamination in the space, says Hollyfield. The process of finding contamination involves three steps:
First, conduct a baseline assessment of the space to determine its level of contamination (if any) at the beginning of the lease.
Second, conduct an exit assessment one or two months before the lease ends to determine the level of contamination.
Third, compare the results of the two inspections to determine whether any additional or new contamination has occurred in the space. All additional or new contamination must be remediated—that is, cleaned up—so that you'll get back a clean space.
Be aware that the cleanup process can be very expensive and time-consuming, so it might continue after the lease has ended, depending on how long before the end of the lease term the cleanup process begins, how much of the space is contaminated, and how badly, notes Hollyfield.
6 Key Cleanup Responsibility Issues
Make sure you negotiate with the medical office tenant these six key issues relating to the tenant's clean-up responsibilities, says Hollyfield:
Assessment Responsibilities
* Whether you or the tenant will pick the company to do the baseline assessment of the space.
* Whether you or the tenant will pay for the baseline assessment.
* Whether you or the tenant will pick the company to do the exit assessment of the space.
* Whether you or the tenant will pay for the exit assessment.
Cleanup Responsibilities
* Whether you or the tenant will take responsibility for the clean-up process (including, without limitation, hiring third-party remediators).
Practical Pointer: Bear in mind that you might want to take responsibility for the cleanup process to ensure that it's done properly, notes Hollyfield. Or you may want the tenant to have that responsibility, if it would be too much of a headache for you.
Cleanliness
* What level of cleanliness the space must achieve after you find additional or new contamination.
Practical Pointer: One issue that's non-negotiable is who will pay all of the costs of the cleanup process, says Hollyfield. The tenant should be solely responsible for paying those costs if it contaminated the space, he says.
2 Key Financial Protections
Negotiate with the medical office tenant these two points, designed to protect your wallet from contamination risks and costs, says Hollyfield:
* Whether the tenant must give you a larger than usual security deposit and/or get specialized insurance to protect you from contamination risks or costs.
* Whether costs that you incur in dealing with medical waste or protecting against contamination can be passed through to the tenant.
Practical Pointer: Consider hiring a consultant to educate yourself about the risks inherent in renting to medical office tenants, says Hollyfield.
11 Key Liability & Remedy Issues
You'll need to know what rights and protections you have if the tenant doesn't meet its assessment and cleanup responsibilities, says Hollyfield. But your state's laws may limit what you're entitled to and may require you to take certain actions—such as mitigating (that is, lessening) your damages. Find out from your attorney what actions you need to take to reduce contamination risks and lessen your liability, and which remedies are available to you if the space and/or building becomes contaminated. Then negotiate these points with the medical office tenant, recommends Hollyfield. Specifically, you should discuss these 11 key issues:
Actions You Can Take Against Tenant
Make sure you're allowed to take one or more of the following actions against the tenant if it does not meet its assessment and clean-up responsibilities:
* Kick the tenant out of the space during the cleanup process, but keep the lease in effect.
* Charge rent during the cleanup process, even if the tenant has vacated its space.
* Treat the tenant as a holdover tenant if the cleanup process continues beyond the original expiration date.
* Extend the lease term if the cleanup process continues beyond the original expiration date, rather than treating the tenant as a holdover tenant.
* Make the tenant liable for “consequential damages” under the lease's indemnification clause if you lose an incoming tenant because the tenant didn't meet its assessment or remediation responsibilities.
Actions You Can Take to Reduce Contamination Risks & Liability
* Whether you should review and then monitor the tenant's procedures for handling, storing, and disposing of medical waste and hazardous materials to ensure that its practices will avoid contamination.
* Whether you must mitigate your damages if the tenant doesn't clean up the contamination. (Not all states require mitigation.)
* If your state requires you to mitigate your damages, whether you can—and should—eliminate the mitigation requirement in the lease.
* If you must mitigate your damages, what actions you need to take under your state law. For example, if the space isn't too contaminated, find out whether you're required to re-let the space. Or if the space is too contaminated to re-let, ask whether you must begin the clean-up process.
Practical Pointer: Decide how clean is “clean” when you're trying to clean up contamination, says Hollyfield. Your state's laws may tolerate more residual contamination than you or your lender will tolerate, he warns. Also, ask your attorney what obligations you may have under state or federal law to notify or warn other building tenants or regulators if any contamination is found, he recommends. And make sure the tenant complies with all applicable laws relating to medical waste and hazardous materials, including reporting to government entities, adds Hollyfield.
Other Remedies Available to You
* What other remedies and protections you have if the tenant doesn't try to properly clean up the contaminated space. For example, find out if your lease's indemnification clause will require the tenant to indemnify—that is, reimburse—you for the loss in value of the space resulting from the contamination. And ask whether the lease's insurance clause will require the tenant's liability insurance policy to provide contractual indemnity coverage in your favor.
* What other remedies and protections you have if the space is so contaminated that it can't be cleaned up. In addition to an indemnification requirement, you'll want the right to sue the tenant for damages (not only consequential damages) for violating the lease clause that specifies the condition in which the space must be left at the end of the term (typically called the “surrender” clause). Be aware that a medical office tenant may be unable to afford to pay you enough damages to equal or exceed the value of the entire building, notes Hollyfield. And a contaminated building that can't be cleaned up will probably be worthless. But that's a risk you take by renting to a medical office tenant, he notes.
Practical Pointer: Check on what impact contamination might have on the value of your building and whether it would cause you to default under your loan, suggests Hollyfield. Also, the outcome of your lease negotiations with the medical office tenant will depend heavily on the tenant's and your negotiating power and the facts of your particular situation, he says. Whatever you and the tenant agree to, make sure the lease clearly spells out the tenant's assessment and remediation responsibilities and then requires that they “survive” the lease so that they don't end when the lease ends, he advises.
Insider Source
John S. Hollyfield, Esq.: Of Counsel, Fulbright & Jaworski LLP, Fulbright Tower, 1301 McKinney St., Ste. 5100, Houston, TX 77010-3095; (713) 651-5151; jhollyfield@fullbright.com