How retail landlords can successfully make retail-medical leases work. By Andrew Maguire, Esq.
Recently, there has been a nationwide surge of hospital systems and other medical providers opening locations in suburban malls and shopping centers. Suburban medical offices offer convenient health care for patients, and retail landlords are excited by this new demand for their space. However, the medical use tenant and retail landlord must navigate three main obstacles to make retail-medical leases work properly.
Any medical provider will want their lease to allow it to perform its full range of services within their leased space. During lease negotiations, medical tenants often push for the exclusive right to conduct their practice specialty within the shopping center. The landlord will typically limit these ‘use exclusives’ to preserve the landlord’s options for leasing to other medical-related tenants in the future. For example, the landlord might insist on adding language to the lease, which permits it to lease space to a pharmacy with an in-store clinic. Both parties to the lease should review the use exclusives, which have been granted to the shopping center’s existing tenants to verify that the medical tenant’s use will not conflict with these existing tenants.
Before leasing any retail space, the healthcare tenant should carefully check the applicable zoning code. If the zoning designation for the shopping center does not allow for the tenant’s medical use, the tenant and landlord should coordinate efforts to obtain zoning relief from the municipality.
Retail landlords may be unfamiliar with the patient privacy restrictions placed on healthcare providers under the Health Insurance Portability and Accounting Act of 1996 (‘HIPAA’). To avoid HIPAA’s stiff civil and criminal enforcement, the medical tenant is right to limit landlord access within those areas where patient records are kept. Typically, the landlord will agree to stay out of any patient file areas unless accompanied by a tenant representative or in the event of an emergency. These access restrictions must be explained to contractors who enter the space to perform work during the term of the lease.
Retail Standards vs. Medical Needs
In order for the lease between the shopping center landlord and the health system tenant to work effectively, certain retail leasing standards must be relaxed. Although landlords often impose mandatory business hours and continuous operations requirements on their shopping center tenants, healthcare providers usually argue that their hours of operation must follow the work schedule of their on-site doctors.
In return, retail landlords will often deny co-tenancy rights (which allow for rental reduction based on the vacancy of other space in the shopping center) to medical use tenants, as medical tenants are perceived as being economically independent of the other businesses in the shopping center. For this same reason, healthcare tenants generally object to paying for membership in merchants associations with the landlord’s other tenants.
Access to the medical premises is a critical deal point which often results in intense negotiation. Depending on the nature of its medical use, the tenant may push the landlord to make exceptions to permitted loading zone hours to accommodate ambulances and handicapped patients. Similarly, the number and location of tenant’s reserved parking spaces is a common source of contention. If the tenant’s medical use requires redundant energy supply (e.g., urgent care with operating rooms), the lease should specify the location and capacity of the tenant’s dedicated generator, with a clear breakdown of the parties’ related economic as well as maintenance responsibilities.
Medical tenants frequently have cooperative use agreements with other healthcare systems. By extension, these tenants negotiate for their cooperating specialists to practice within the premises without obtaining landlord’s consent.
Additionally, healthcare tenants will fight radius restrictions (which limit the tenant’s ability to open other locations within a specified area) and landlords’ attempts to impose percentage rent (which is complicated by the nuances of insurance coverage and Medicaid).
Retail landlords will often insist that healthcare tenants coordinate and pay for their own trash collection, including ‘red bag’ waste and other hazardous medical materials. The outcome of lease negotiations on these issues will vary depending upon the context of each particular transaction.
Andrew Maguire is a real estate partner at McCausland Keen + Buckman. He negotiates leases for a variety of retail landlords and health system tenants across the country. Contact him at firstname.lastname@example.org.