Partner Changes and Guarantees in a Medical Lease

A lease names a tenant, and a practice is a group of people whose makeup changes. Attorneys at Winstead point out that medical tenants are often more sensitive to assignment and subletting rights than other tenants, and that a physician group's lease should address admitting new partners and accommodating retiring physicians.

The trap is in the definitions. Frier Levitt notes that assignment provisions frequently treat a change of control as an assignment needing landlord consent, even when the tenant entity remains the same and stays solvent. Those clauses can interfere with routine physician turnover and hand the landlord leverage when no real risk to the tenancy exists.

A New York case summarized by Smith, Gambrell & Russell shows how far this can go. A radiology group's lease with a hospital landlord defined assignment to include a transfer of a controlling interest or the ability to control the tenant's decisions, and required any assignee to hold privileges at the hospital. The court found that an acquisition structure breached the clause even though no stock was transferred between the two companies, and it awarded the landlord possession. Outcomes depend on the wording and the state, so have your attorney read yours.

Read the transfer clause against ordinary events, not only a sale of the practice. Ask whether each of these needs consent, and try to carve out the routine ones:

• Admitting a new partner or shareholder.
• A partner retiring, dying or being bought out.
• Shifting ownership percentages among existing owners.
• Moving the lease to a new entity for tax or liability reasons.
• Merging two practices.
• Forming a management company, or moving staff and leases to one.

Keep the lease and the partner agreements consistent. A retirement that is simple under your shareholder agreement can still trip the lease if the clause counts a percentage change as a transfer. The New York Real Estate Journal's guide to medical leases also raises a solo practitioner issue: a single practitioner taking a long lease may want a right to cancel on death or disability, or the right to sell the practice in that event without a recapture.

Holland & Knight's attorneys say landlords now routinely require a personal or corporate guaranty, because the tenant entity may have little to collect against. A guarantee is usually the part of a lease that follows a physician home, so it deserves separate attention from the rent. The firm describes the main structures:

• Full guaranty. Covers all of the tenant's obligations, monetary and non-monetary, with no conditions on the landlord pursuing the guarantor.
• Partial or limited guaranty. May be limited to monetary obligations, capped at a dollar amount, or reduced over time by a burn-off or sunset provision.
• Springing or bad acts guaranty. Becomes enforceable only on a specified event.
• Good guy guaranty. Common in New York City. Liability ends on surrender of the space, with rent paid through that date and advance notice, though some duties such as restoration may survive.

Holland & Knight also warns that limits often depend on the tenant being in good standing, and may require reimbursing the landlord for the amortized cost of tenant improvements and commissions. In a clinic with a large build-out, that carve-back can matter more than the headline cap. Read it closely.

Partners have a further issue among themselves. Attorneys at Davidoff Hutcher & Citron suggest shared guarantees in which each partner covers only a proportionate share, and they recommend that the operating or shareholder agreement address how guarantee risk is allocated among owners. Their article addresses restaurants in New York, but the partner math is similar. Ask your attorney whether guarantees would be joint and several, which is a phrase worth understanding before you sign.

Buyers review leases. Frier Levitt notes that problematic lease terms can delay closings, require costly amendments or reduce valuations. Epstein Becker Green's attorneys, writing about private equity-owned healthcare tenants, recommend negotiating permitted transfers that do not need landlord consent. They say these customarily include transfers to an affiliate, a successor by merger or reorganization, and a buyer of all or substantially all of the assets or a controlling interest.

They expect landlords to attach conditions. Advance notice, assumption of the lease, staying within the permitted use and delivering the transfer document are reasonable by their account. Net worth tests and financial reporting can undermine the right, and should be limited. They also suggest these provisions not apply to guarantor entities, and that recapture rights, profit sharing and administrative fees not apply to permitted transfers.

For transfers that still need consent, they suggest language that the landlord will not unreasonably withhold, condition or delay it, a cap on review fees, and a short decision period with deemed approval. Selling physicians should also ask a plain question: when the buyer takes the lease, what releases our personal guarantee? If the lease is silent, a seller may remain liable for a practice it no longer runs.

If you plan to sell in the next several years, negotiate as though the buyer's lawyer will read this lease, because that is likely.

These are easiest to raise in the letter of intent. TAG can carry the business points in the negotiation, and your attorney drafts the language and coordinates it with your partner agreements.

• ✓Does a change in ownership of the practice count as an assignment, and at what threshold?
• ✓Are admissions, retirements and buyouts among physicians carved out?
• ✓Are affiliates, successors and buyers of the practice permitted transferees?
• ✓What conditions apply to a permitted transfer, and can any be met in practice?
• ✓Must an assignee have privileges at a particular hospital?
• ✓Are recapture rights and profit sharing excluded from permitted transfers?
• ✓Is the guarantee capped, does it burn off, and what could reinstate it?
• ✓Are guarantors liable jointly or for a share?
• ✓What releases a departing partner or a selling physician?
• ✓Do our partner agreements match the lease?