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Review medical office lease before signing

Contract Language. By Steven M. Harris, amednews contributor. April 7, 2008.

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CONTRACT LANGUAGE

A column examining the ins and outs of contract issues

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In a typical landlord-physician tenant relationship, the landlord presents the physician with a standard fill-in-the-blank lease form in which the landlord has written in the tenant's name and the general business terms, such as the rental rate, term of lease. The rest of the form often is preprinted.

But even if you are told that the preprinted portion is standard, boilerplate language, physicians need to review and understand the medical office lease agreement carefully to avoid a future misunderstanding that could lead to unexpected additional payments, eviction or a lawsuit. Because a medical office lease is a large expense that often requires a multiyear commitment, you do not want to be a party to an agreement that does not reflect your practice objectives.

While some medical office leases require the physician simply to pay a monthly rent, other leases require payment of some or all of the landlord's operating expenses and real estate taxes for the property as well.

Typical operating expenses include the costs of operating, maintaining, repairing, lighting, cleaning, painting, policing and securing the property. With an office lease that requires payment for operating expenses and taxes, that payment is in addition to making the monthly base rental payments.

To minimize financial responsibility for the additional expenses and reduce the opportunities for default, it is important to verify that the landlord's operating expense calculations are correct and that the physician is not being overcharged.

If you are responsible for paying the landlord's real estate taxes, you should request an annual copy of the tax bill. In addition, the statement of operating expenses provided in the lease should be detailed, and you should have the right annually to review and audit the landlord's books and records relating to operating expenses and taxes.

It is safe to assume that the landlord's standard-form lease will not provide the tenant with the right to inspect the landlord's books and records, but you might consider modifying the form lease and including the following provision:

"The landlord shall maintain with respect to the landlord's operating costs such books and records as would be kept according to generally accepted accounting principles and shall maintain and preserve such books and records at landlord's office for a period of not less than three (3) years. The tenant shall have the right upon thirty (30) days written notice to the landlord to examine during regular business hours at landlord's office all books and records of landlord pertaining to landlord's operating costs."

Improvements to premises

What happens at the end of the lease term when you make improvements or alterations to the rented premises? In my experience, I have seen variations of two general approaches provided in standard-form medical office leases.

In some standard-form medical office leases, at the end of the lease term, the tenant is required to remove all improvements and alterations installed within the rented premises during the lease term. Any damage caused from the removal is the tenant's responsibility to repair.

Other standard forms contain a provision stating that at the end of the lease term, all improvements and alterations become the property of the landlord and cannot be removed from the premises.

While the landlord's form medical office lease may contain variations of the two approaches described above, the following is a sample provision that provides you with more protection and is often acceptable to the landlord:

"All trade fixtures, furniture, and furnishings installed in the premises by tenant and paid for by tenant shall remain the property of tenant and may be removed upon the expiration of the term of this lease; provided that any of such items as are affixed to the premises and require severance may be removed only if tenant repairs any damage caused by such removal at the tenant's expense."

The provisions discussed above represent just a few of the key issues that physicians should be aware of in medical office leases. But there is a wide spectrum of issues unique to medical office leases that only an experienced attorney can identify.

It is often the case that physician tenants are eager to sign the office lease without thoroughly understanding what the agreement entails. While the landlord may attempt to have you sign the standard-form lease agreement, the savvy tenant should seek to tailor and negotiate the lease to meet the practice's individual needs and objectives.

Harris, a partner at McDonald Hopkins in Chicago, concentrates on health care law and has counseled physicians, physician networks and health care groups nationally. The author and publisher are not rendering professional advice and assume no liability in connection with its use. He can be reached at 312-280-0111, or by e-mail (sharris@mcdonaldhopkins.com).

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