It is a common occurrence. One medical practice is a tenant in a building. Another medical practice or other health care provider enters into an agreement with the tenant to use some of the tenant’s examination rooms a couple of days a week in the mornings: not much time or space. Maybe the parties want just a handshake or a simple one-paragraph agreement. However, it is not enough. Such an occupancy arrangement could put the tenant in default under its lease and could put both the tenant and other health care provider in violation of federal anti-kickback laws.
Default Under Tenant’s Lease
In most leases, a landlord will prohibit a tenant from assigning or subleasing space without the consent of the landlord. The assignment and subleasing provisions in leases often are written to include any type of transfer of the tenant’s right to occupy the premises. Even sharing office space a couple of mornings a week would need the landlord’s consent. When a medical practice permits another health care provider to use space it is leasing without the landlord’s consent, that medical practice violates its lease and runs the risk of defaulting under its lease.
Before entering into any agreement with a health care provider to occupy any part of the leased premises for any portion of a day, the medical practice should first review the provision in its lease pertaining to assignment and subleasing to see if the landlord’s consent is required. However, the best time to address this issue of landlord’s consent is before entering into a lease. If office sharing is something a tenant thinks it may want to do in the future, the tenant should use the negotiation process to try to exclude office sharing from the assignment and subleasing prohibition. A well drafted office-sharing provision limiting the scope of the occupancy (e.g., providing for the maximum amount of shared premises) often is acceptable to the landlord at the lease drafting stage.
Federal Anti-Kickback Laws
Even if the medical practice tenant has the landlord’s permission to allow another health care provider to use some of its examination rooms some of the time, the tenant and the other health care provider still must draft an agreement that will permit such occupancy under the Anti-Kickback Law (42 U.S.C. Sec 1320a-7b(b) and the Stark Law (42 U.S.C. Sec. 1395nn). These statutes prohibit referrals by one health care provider to another health care provider if there is a financial relationship between the two. Under these laws, leasing arrangements are a financial relationship. Violations of these statutes could subject the medical practices to civil and criminal liabilities and exclusion from participation in the Medicare program.
For a leasing arrangement to comply with these two federal laws, it must fall within the exception to the Stark Law and the safe harbor provision of the Anti-Kickback law. The sublease, license, office sharing arrangement or whatever else the parties would like to call their agreement must meet the following requirements:
• The agreement is in writing and signed by both parties;
• The agreement specifies premises that will be used;
• The term of the agreement is for at least one year;
• The health care provider does not lease from the tenant more than it reasonably needs;
• If the health care provider uses the space for periodic intervals rather than on a full time basis, the agreement must specify the exact schedule of such intervals, their precise length and the exact rent for such intervals;
• The rent charges must be at fair market value and must not take into account the volume of referrals between the parties; and
• The agreement would be commercially reasonable even if the parties made no referrals to each other.
Office-sharing arrangements among health care providers are often a way for a provider to expand its service to its patients and expand the area where it can service new patients. These arrangements offer the providers the flexibility to operate their businesses in a changing health care environment. However, both parties need to have the agreements for these arrangements drafted with a careful analysis of the underlying lease and the business and operations of both parties. Without this, an agreement that was supposed to be simple and convenient could be costly and snare the parties in a web of liabilities.
Ann Marie Mehlert is a real estate attorney at Lerch, Early & Brewer in Bethesda, Maryland who represents landlords and tenants in negotiating, documenting, and closing commercial leasing transactions. For more information on successfully leasing and sharing medical space, contact Ann Marie at (301) 907-2803 or ammehlert@lerchearly.com.
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