Real Estate Law

Medical Office Leases

Medical Office Leases

Real Estate Law Corporation™

Medical office leases are often different than a standard office lease. The Federal Self-Referral Prohibition (42 U.S.C. Sec. 1395nn) or “Stark Law,” will apply to Designated Health Services (DHS) as well as any financial relationship between a physician and entity performing or billing for the DHS. A physician is not allowed to refer DHS, payable by Medicare or Medicaid, to any entity which the physician or an immediate family member, has a financial relationship with, unless an exception under Stark Law is met.

Under Stark Law, a “physician” is any doctor of medicine or osteopathy, a doctor of dental surgery or dental medicine, a doctor of podiatric medicine, a doctor of optometry, or a chiropractor.

Under Stark Law, a medical office lease will often require all of the following conditions to be met:

  1. Written lease, signed by both parties;
  2. Must clearly specify the premises;
  3. Lease term length of at least 1 year;
  4. The rented space should be reasonably necessary for legitimate business purpose;
  5. Space should be exclusively used by tenant;
  6. Rental rates should set in advance, fair market value (FMV), not determined by the volume or value of referrals; and is
  7. commercially reasonable.

Fair Market Value Rent

Careful analysis of the rental value and the rental increases is required by knowledgeable counsel. Tenant improvement allowances or free rent should also fall within a standard FMV range. For many tenants, low rental rates would be cause for celebration, but for Physician tenants it can result in legal liability.

Other Costs & Expenses

You should also be careful to analyze other costs, such as utilities, taxes, insurance and common area maintenance (CAM) expenses. It is also important to ensure CAM reconciliations are done and provided to you in a timely manner. Failure to pay CAM expenses in a timely manner can also pose a potential liability risk to physician tenants.

Options to Extend Term

Another important section of the lease to review is the term of the lease and whether you can request any extensions of the lease term. If a physician is building a practice and seeing lots of patients it is important to ensure the continuity of care for your patients and negotiate an option to extend the lease term. A landlord may not be willing to extend the term, which can disrupt your patient’s access to medical care.

Termination Rights

Another important aspect to consider before signing a medical office lease, is the right to termination. If either party materially breaches the lease terms, they should have an option to terminate the lease. This will avoid having to stay in a location that is not meeting your patient’s needs.

Building Hours and Janitorial Waste

Physician tenants should also make sure building hours are specified and that janitorial services are provided and there is a method for disposal of hazardous waste materials.

Commercial Lease Attorneys

If you need legal assistance with a medical office lease, Real Estate Law Corporation has experienced commercial leasing attorneys that serve clients in the greater Sacramento area and all over California. Our knowledgeable health care counsel are familiar with medical office building leases.

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