Use Clauses and Exclusives in a Medical Lease

In an ordinary office lease, a use clause that says general office use rarely causes trouble. A practice depends on exact services, and those services change. Attorneys at Frier Levitt warn that narrow or poorly drafted use provisions can unintentionally restrict services, ancillary offerings or future lines of care, and that the absence of exclusivity protections can allow competing practices into the same building or campus.

The two clauses work together. A broad use clause gives you room to grow. A well-defined exclusive protects the patient base you are building. Asking for one can affect the other: the wider your claimed specialty, the more a landlord may resist an exclusive for all of it.

Describe the practice as it will operate over the whole term, including renewal options, and not only as it runs on move-in day. Your attorney can draft it to be accurate without being restrictive. Walk through these questions first:

• ✓Does the clause cover our specialty and related specialties we may add?
• ✓Does it allow procedures, sedation or minor surgery if we do them or might?
• ✓Does it allow imaging, laboratory work, physical therapy or other ancillary services?
• ✓Could we dispense or sell products to patients, and does any standard clause ban drug sales on the premises?
• ✓Does it allow telehealth, teaching, research or visiting providers?
• ✓Are our hours, including urgent or after-hours visits, consistent with building rules?
• ✓Does the building have a prohibited-uses list, and does anything on it touch our services?
• ✓Could we use the space for a successor practice or a buyer's services after a sale?

Check the other direction as well. Other tenants' exclusives can bind you. Before signing, ask the landlord to represent that your permitted use does not violate any existing exclusive or restriction, and ask what the remedy is if it later turns out that it does.

Medical office buildings tied to a hospital can carry limits that a commercial landlord would never think of. Attorneys at Winstead describe several: a hospital system may limit leasing to physicians with staff privileges at the hospital, may require tenants to be medical-related, and may prohibit uses it considers inconsistent with its mission, including restrictions at faith-based systems on certain services.

If you are considering such a building, read those restrictions against your current services and your growth plan. Ask what happens if a physician loses privileges, if the practice is sold to a group without privileges, or if the building's owner changes. Rent and other financial terms in a hospital-owned building also raise Stark law and Anti-Kickback questions for counsel.

An exclusive is a landlord promise not to lease other space in the property to a defined competitor. Attorney Steve A. Weisfeld, quoted in a newsletter for landlords, says medical exclusives may be limited to the doctor's specialty, and that they sometimes survive the end of the lease for a period so the space is not handed to another doctor in the same specialty, although that is not the norm. Winstead's attorneys add that landlords on hospital campuses care about tenant mix and may favor representation across many specialties, so an exclusive may be harder to get there.

An exclusive is only as good as its drafting. These are the terms to pin down:

• The defined use. A specialty, a list of procedures, or both. Subspecialties and overlapping fields are where disputes arise.
• The area covered. The building, the campus, or other property owned by the landlord or its affiliates.
• Existing tenants. Tenants already in the building are usually carved out. Ask for a list, and ask whether they can expand or change their use.
• Incidental use. How much of a competitor's practice can overlap before the exclusive is breached.
• Remedy. Rent reduction, termination right or both, and what you need to do to enforce it.
• Conditions. Whether you lose the exclusive if you stop offering the service, default or assign the lease.

Exclusives can carry their own legal questions, so ask your attorney how state law treats them and whether a competition issue arises when the restriction is broad. TAG can test how much a given landlord will give by negotiating against real alternatives, and your attorney can draft what is agreed.

Form leases often prohibit hazardous materials. For a clinic, that can be impossible to follow. Winstead's attorneys say an absolute prohibition is not appropriate for materials medical tenants use, and that the lease should clearly specify the rules governing their use and which party is responsible for disposal.

Know which rules you are working with. EPA says medical waste is primarily regulated by state environmental and health departments, that state programs differ significantly, and that you should contact your state program first. OSHA's bloodborne pathogens standard at 29 CFR 1910.1030 says disposal of all regulated waste has to follow applicable federal, state and local regulations. EPA also has separate rules for hazardous waste pharmaceuticals at healthcare facilities. Your compliance lead and waste vendor should confirm what applies to you.

1. List what you will use and generate, including sharps, biological specimens, chemicals, pharmaceuticals and any radioactive materials.
2. Replace a flat prohibition with a carve-out for materials customarily used in your practice, handled in compliance with law.
3. Say who contracts and pays for regulated waste. Weisfeld notes that this usually falls to the tenant, separate from common area charges.
4. Agree where containers will be stored and how pickups will move through the building, so that nothing sits in public areas.
5. Limit your indemnity to what you actually bring into the building, and ask for a landlord statement about existing conditions.
6. Have your attorney read the surrender clause, so that end-of-term clean-up duties are clear.