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Ambulatory Surgical Center Lease Agreements

April 18, 2019 (39 min read)

By: Alan B. Gordon, Paul A. Kiehl, and Timothy R. Loveland, McGuireWoods LLP

WHILE NEGOTIATION OF LEASE AGREEMENTS FOR MOST healthcare providers involves the same issues presented by most commercial lease agreements, this article deals with leases for ambulatory surgical centers (ASCs), which present unique issues that must be identified and negotiated by the attorneys representing the landlord and the ASC tenant. (For purposes of this article, all references to “tenant” shall mean an ASC tenant.) ASCs are healthcare facilities that provide single or multi-specialty outpatient surgical care in the same day, which may include diagnostic and preventative procedures. Given the number of unique economic and non-economic issues that must be addressed, ASC leases can be quite complicated.

Along with discussing key ASC lease provisions, this article offers practical tips for drafting and negotiating an ASC lease from both the landlord’s and the tenant’s perspectives. This guidance can be used to draft an ASC lease for an entire building or a portion thereof and focuses on the following considerations:

  • Predrafting structural considerations (e.g., regulatory environment)
  • Rights and obligations with immediate impact (e.g., tenant improvements, utilities, signage, other physical space issues, landlord access to the leased premises, and regulatory compliance issues)
  • Those provisions that may not concern the parties until later in the term (e.g., assignment and subletting, permitted and exclusive uses, landlord waivers, and subordination, non-disturbance, and attornment agreements (SNDAs))

Though the main federal and state laws and regulations impacting ASCs are discussed below, the potential impact of state and municipal laws and specific ASC accreditation standards is beyond the scope of this article. Before entering into a lease every prospective investor, landlord, or tenant should consult with a healthcare attorney about potential regulatory risks.

Regulatory Environment and Lease Structure

The healthcare industry is heavily regulated and even minor shifts in laws and regulations can impact lease structure. Landlords and tenants must grapple with restrictive federal and state laws and regulations proscribing kickbacks, rebates, or division of fees between and among physicians and nonphysicians, prohibiting the corporate practice of medicine by non-physicians, and prohibiting the offering or receipt of remuneration as an inducement to refer patients. The principal regulatory focal points for landlords and tenants related to ASC leases involve:

  • Understanding the regulatory risks for each party
  • Allocating such risks appropriately
  • Structuring key provisions of the lease in compliance with applicable regulatory requirements
  • Ensuring the lease reflects fair market value based on regulatory guidelines

ASC Lease Referral and Kickback Considerations

When entering into a lease or sublease with a healthcare provider who makes or receives patient referrals from another healthcare provider (particularly for items or services that may be reimbursed by Medicare, Medicaid, or other government healthcare programs), there are a number of federal and state regulations which, if not complied with, present significant risks for civil and criminal liabilities. Due to the nature of these risks, landlords and tenants frequently attempt to obligate the other party to incur some or all regulatory compliance obligations pertaining to the lease. Counsel for both parties should understand the regulatory risks and carefully structure covenants to mitigate such risks. In addition, the lease should contain specific termination provisions triggered by violations of federal or state regulations relating to the provision of healthcare services, loss of requisite licensure, permits, and certifications of the tenant, and breaches of specific covenants (as well as remedies and damages related to violations thereof).

Key Regulations 

In recent years, federal and state government agencies have substantially increased their scrutiny of healthcare providers and have also dedicated more resources to investigating and prosecuting violators of fraud and abuse laws, specifically the Federal Anti-Kickback Statute (Federal AKS),1 the federal selfreferral prohibition (Stark),2 and various state law prohibitions on kickbacks, rebates, division of fees, and self-referrals. Explanations of each of these laws as well as tips for managing related liability risks follow.

Federal AKS

The Federal AKS prohibits the knowing and willful solicitation, receipt, offer, or payment of any direct or indirect, monetary or nonmonetary remuneration (including kickbacks, bribes, or rebates) in return for or to induce or reward the referral, arrangement, recommendation purchase, or lease of items or services that may be reimbursed, whether in whole or in part by Medicare, Medicaid, or other government healthcare programs.3 The Federal AKS is an intent-based statute but does not require actual knowledge or specific intent to violate.

An ownership interest, discount, or opportunity to invest in the underlying property governed by a lease may constitute remuneration to the landlord and/or the AKS tenant and may implicate the Federal AKS. Federal courts have repeatedly held that the Federal AKS may be violated if even one purpose of an arrangement is intended to induce or reward referrals, purchases, leasing, or orders of such items or services, even if there are other legitimate purposes.4 Violations of the Federal AKS may result in criminal liability and civil and administrative penalties, including mandatory exclusion from participation in Medicare, Medicaid, and other government healthcare programs.5 Violation of the Federal AKS is a felony, punishable by imprisonment of up to five years, fines of up to $25,000, or both.6

Stark Law

Stark prohibits, with exceptions, a physician who has (or whose “immediate family member” has) a financial relationship with an entity from referring patients to that entity for the provision of designated health services (DHS) if payment for those services may be made by Medicare or Medicaid.7 A financial relationship for purposes of Stark includes both compensation arrangements with, and ownership or investment interests in, the entity to or from which referrals are made.8

A lease may constitute a compensation arrangement under Stark because it involves ownership or investment remuneration between a physician and an entity for which referrals DHS may be made.9 However, as bundled ASC surgical and ancillary services are specifically exempted from the definition of DHS, a threshold consideration in determining application of Stark to an ASC lease is whether referrals are being made for any DHS not included in the ASC bundle.

State Law Kickback and Referral Restrictions

Leases may also implicate state kickback, rebate, and/or selfreferral prohibitions, which may similarly restrict ASC lease activity and which may also apply to commercial and other payor sources. In addition, state law may restrict ownership in health facilities by non-physicians through its corporate practice of medicine restrictions. States may even go so far as to restrict leasing to certain providers or for certain express purposes. The scope and enforcement of state laws can vary significantly, and the state’s regulatory environment should be carefully considered before entering into a lease transaction.

Managing Liability Risks

There are a number of ways for a landlord and tenant to reduce risks associated with implicating fraud and abuse regulations, including:

  • Divestiture. The landlord or tenant may take steps to divest an ownership or investor interest in the property attendant to certain self-referral risks or to prohibit referrals by certain owners or investors in the property to the tenant. However, such steps may not altogether eliminate Stark and state self-referral regulatory risk and will not likely eliminate most risk under Federal AKS and stricter state kickback laws.
  • Use of statutory exceptions and safe harbors. As discussed further below, the lease can be structured to fit within the Stark space rental exception and the safe harbor provided by Federal AKS (and applicable state) regulations.10 Recent Stark guidance has added a new exception relative to timeshares;11 however, this exception does not apply to ASC entities.12
  • Setting rent at fair market value. If the lease does not fit within the Federal AKS (and applicable state) safe harbor and does not violate Stark, the parties should ensure that the base rent is at fair market value and take additional prophylactic measures recommended by the Office of the Inspector General (OIG), albeit with significantly higher risk under the Federal AKS.

Space Rental Exception and Safe Harbor

The general requirements under the Federal AKS safe harbor and the Stark exception share many of the same features. To satisfy both, the arrangement must:

  • Be set forth in writing
  • Be signed by both parties
  • Describe the specific space to be leased
  • Establish a term of at least one year
  • Be for an aggregate rent amount set over the term of the lease
  • Be consistent with fair market value
  • Satisfy a commercially reasonable business purpose
  • Not be determined in a manner that takes into account the volume or value of referrals
  • Be commercially reasonable in the absence of any referrals
  • Be for the lease of only such space as is reasonably necessary to accomplish the commercially reasonable business purpose of the rental
  • Any holdover month-to-month rental following the initial one-plus year term must meet the same conditions as above13

Fair Market Value in Lease Arrangements

The critical issue for tenants and landlords is whether the base rent and any build-out costs are consistent with fair market value (FMV). The Centers for Medicare & Medicaid Services (CMS) defines FMV in a lease as “the value of a rental property for its general commercial purposes.”14 CMS has provided guidance indicating several key restrictions on this general value, including:

  • The amount may not take into account the property’s intended use.15
  • The amount may not be upwardly adjusted to reflect the value that either the prospective tenant or landlord places on the property as a result of its proximity to sources of referrals or other business.16 In other words, a landlord may not seek or charge a commercially unreasonable rent for an ASC located near a medical office park or hospital because such proximity may generate additional referrals.
  • While the landlord may take into account additional costs for leasehold improvements for development or upgrading of the leased premises, the landlord may not provide capital improvements and build-outs that are more valuable than those that would be provided to any other tenant unless such costs are properly allocated to the tenant.17 Under an ASC lease, any build-out costs for imaging services or operating rooms should be borne by the tenant. CMS has opined that the determination of whether any costs of capital improvements should be allocated over the useful life of the improvements or be passed on in their entirety to the tenant will depend on the facts and circumstances of the case.18
  • The base rent should be fixed in advance and should not vary with volume or value of referrals or be based on a percentage of revenue raised, earned, billed, collected, or otherwise attributable to the services performed on any business generated through the use of the space. The OIG does not view per-unit compensation relationships to be set in advance under the Anti-Kickback Statute. In essence, the annual aggregate rent must be determined and reflected in the lease to be considered set in advance for purposes of meeting the space rental safe harbor.

In determining FMV, CMS provides that documentation of comparable public transactions may be a commercially reasonable method for establishing reasonable base rent per square foot (subject to additional adjustments for capital improvements by landlord).19 However, due to the substantial investment often involved in building out an ASC space, which may subject an ASC lease to additional scrutiny, the best practice is to obtain an independent third-party appraisal. Although an appraisal is not expressly required by Stark or Federal AKS, the parties should consider engaging a qualified and independent third-party valuation firm with experience appraising ASC space rentals to ensure FMV is paid. CMS has indicated that it believes internally generated appraisals to be particularly susceptible to manipulation and may subject such internal surveys to additional scrutiny that might not otherwise apply to an independent third-party valuator.20

 ASC Licensure and Certificate of Need (CON)

Attorneys for both parties should ensure that their clients also thoroughly understand applicable state regulatory requirements prior to entering into the lease, with particular attention paid to any contingencies in the lease related to CON requirements. Many states require that an ASC obtain a CON through a market-restrictive process demonstrating that the proposed ASC fulfills public need for and requirements of state health planning boards. If a state requires CON approval for establishment of an ASC, a tenant and landlord may seek to make the effective date of the lease contingent on approval of a CON (or other requisite licensure), with delivery of possession of the leased premises to the tenant subject to this condition. Any such contingencies must be carefully drafted to provide limits on how long a landlord may be subject to hold the premises prior to delivery. Certain states may also impose notice and other requirements in the event of a proposed closure of an ASC and the attorney for the tenant should ensure that the lease is drafted to reflect and comply with any such requirements.

Most states also license ASCs and promulgate extensive practice restrictions and physical facility requirements in addition to those provided in Medicare or accreditation standards. The Accreditation Association for Ambulatory Health Care and The Joint Commission, whether acting as deemed status surveyors or accrediting an ASC, often have further physical layout requirements that may exceed state requirements. Some states do not place ASCs in the licensure category and instead regulate them as hospitals or office-based surgery practices or clinics. A state may also restrict entry to an ASC market by and through a legislative or administrative moratorium. For example, New Jersey continues to have a regulatory moratorium on the establishment of new ASCs in the state, subject to certain exceptions.21

ASC Space Sharing Arrangements

Subleases by tenants and block leases permitting the sublease of a portion of a facility are common among healthcare providers where space sharing is permitted, but, in an ASC context, landlord’s counsel must be careful to ensure that space sharing is, in fact, permitted and, if so, the times and scope meet all ASC space sharing requirements. As discussed below, tenants are reluctant to limit their assignment and subleasing rights because they may wish to enter into a space sharing arrangement that reduces fixed-cost buildout and investments, reduces personnel, administrative, and equipment overhead, and endeavors an additional medical tenant to cover a portion of the rent.

Federal Space Sharing Requirements

The federal Conditions for Coverage do not generally require that an ASC be housed in a separate building from other healthcare facilities or practices. However, an ASC is defined by federal law as a separate and distinct entity that operates exclusively to provide surgical services (State Operations Manual (SOM), Appx. L, § 416.2), and which must be separate and distinguishable from any other healthcare facility or practice (SOM, Appx. L, Pt. II, Q-0002) either (1) physically or (2) temporally. Thus, under federal law (subject to some restrictions), a physically or temporally separated ASC may share space with another entity.

The Medicare SOM notes that (1) a physically separate, “distinct entity” must be separated from other facilities by a wall meeting certain fire proofing requirements, and (2) a temporal distinction permits an ASC to share the same physical space insofar as the ASC and other entity “are separated in their usage by time” (SOM, Appx. L, § 416.2). In other words, an ASC operating four days a week as a single specialty nephrology ASC and one day per week as a vascular access center or extension of the same or as other interventional nephrologists’ practice(s) would satisfy these requirements. But the same ASC could not lease, during its hours of operation, clinical space to the physician or practice to operate concurrently, as such entities would not be “separated in their usage of time.”

Additional Space Sharing Considerations

When assessing the propriety of an ASC space sharing sublease arrangement, there are a number of additional considerations. State law may substantially restrict or proscribe outright an ASC space sharing arrangement under its licensure or other applicable regulations. Where not outright proscribed, states often do so by limiting operation of more than one license in a particular location. For example, in New Jersey, an ambulatory surgery facility is defined as “licensed as an ambulatory surgery facility, separate and apart from any other facility license. . . . The ambulatory surgery facility may be physically connected to another licensed facility, such as a hospital, but is corporately and administratively distinct.”22 This provision has been interpreted by state regulators to proscribe ASC space sharing in the state.

Even where states permit space sharing arrangements, tenants and landlords should notify state and accreditation surveyors of the hours of operation for each supplier. If a holder of interest in the space sharing entity or practice also has an investment interest in the tenant or the landlord and is in a position to make referrals to the ASC, this will likely implicate fraud and abuse regulations and potentially render the lease in violation of applicable federal and/or state law. Direct and indirect ownership, investment, and/or referral arrangements may subject a tenant to higher scrutiny under any sublease arrangement unless the arrangement is carefully structured in accordance with an exception or Federal AKS (and applicable state) safe harbor. 

Subject to state law, federal regulations also permit temporally distinct entities to share waiting rooms, reception areas, restrooms, staff break rooms, and other common areas. A space sharing tenant may allocate some shared common area costs (including build-out costs therewith) to the other entity insomuch as the allocation does not exceed the person or entity’s proportional use of the ASC premises. However, not all space may be shared. The lease or sublease should include additional prophylactic measures to ensure compliance with all applicable laws and regulations. For example, the lease should require that signage be changed out on the days the tenant is not operating as an ASC so as to meet applicable state licensure and marketing requirements. The lease should also provide that medical/administrative records and electronic health records must remain physically separate from and inaccessible to the sharing entity so as not to run afoul of the Health Insurance Portability and Accountability Act (HIPAA) or the Health Information Technology for Economic and Clinical Health (HITECH) Act or applicable state medical records requirements regulating the disclosure and security of medical records.

Prior to or during lease negotiations, the landlord and the tenant must also narrowly define both common and restricted space because a facility’s physical space layout can significantly alter the attendant regulatory analysis.

Negotiating Key Provisions in ASC Leases

Permitted and Exclusive Uses

The permitted use provisions of an ASC lease are often the subject of heavy negotiations by the parties. Landlords generally try to limit the permitted uses to be very specific, particularly where the ASC will be leasing space in a multi-tenanted building. The permitted use provision must accurately capture the tenant’s intended use of the leased premises, without being overly narrow, so as to prohibit the tenant from using the space for purposes incidental to the operation of an ASC on the leased premises. Moreover, the tenant needs to consider the likelihood of later assigning or subletting all or some of the leased premises, as a permitted use provision that is drafted too narrowly may ultimately prevent the tenant’s ability to assign or sublet space to a third party.

Whether or not the tenant has an exclusive use right is a business point that is also typically heavily negotiated by the parties. Landlords are typically reluctant to give an exclusive use right, while tenants will want assurances that no other ambulatory surgery or treatment centers will be operated on the property. Accordingly, if the landlord agrees to give a tenant an exclusive use right, the language must be narrowly and precisely drafted to provide the tenant with adequate protection without unduly restricting the landlord’s ability to operate and lease space to other tenants in the same and adjacent property and must also avoid infringing on any the exclusive use rights of any existing tenants.

If the landlord and/or its affiliates own or control other properties in close proximity to the leased premises, the tenant may also desire a radius restriction, which prohibits the landlord and its affiliates from permitting any other tenant or occupant of such properties to operate an ambulatory surgery or treatment center. The tenant’s motivation is both to (1) minimize regulatory risks, as discussed above; and (2) avoid losing patients and business for the ASC due to other, competing providers operating nearby the ASC premises. Before agreeing to such a restriction, the landlord must consider not just the current tenants of its and its affiliates at nearby properties, but also the ability to lease available space to suitable tenants in the future.

Hours of Operation

Unlike medical practices and general commercial tenants, an ASC’s hours of operation need to be more flexible to allow for (1) performance of surgical and pre-operative procedures before ordinary business hours and (2) extended recovery time and other post-surgical care that may need to be furnished after ordinary business hours (potentially including weekends). Therefore, when representing a tenant, it is critical that the attorney understands the required hours of operation for the ASC to conduct its business. Moreover, the attorney representing the landlord must verify whether it is feasible for the landlord to provide required services during extended hours of operation and that the other tenant’s rights of use will not be unreasonably interfered with or disturbed prior to agreeing to accommodate the tenant’s requested operational schedule.

Tenant’s Right to Make Alterations, Additions, and Improvements

The alterations provision of the lease sets forth the tenant’s 22. N.J. Admin. Code § 8:43A-1.3 (emphasis added). ability to make changes to the leased premises during the lease term. In general commercial leases, the typical alterations provision requires the landlord’s consent to make alterations other than purely decorative and cosmetic changes that are nonstructural or cost less than a certain amount (e.g., $5,000) in any one instance. However, in the context of ASC leases, the alterations provision is often the subject of heavy negotiations between the parties, as the installation of surgical equipment and the other specific improvements and alterations, many of which involve structural alterations, will be necessary for the operation of an ASC, particularly if the leased space has been designed or previously used for another purpose. Accordingly, it is generally best for the parties to agree on a specific plan for the initial build-out, improvements, and installation of equipment in the leased premises before executing the lease.

Because tenants will likely need to (1) replace existing surgical equipment, (2) install new surgical equipment during the lease term, and (3) make other alterations to the space during the lease term to account for business needs or comply with legal or accreditation requirements, the parties need to negotiate an alterations provision that takes this into account and provides sufficient protection for both parties. The tenant will want reasonable assurances that the landlord will timely accommodate these needs without unreasonably withholding necessary approvals, while the landlord will want the right to review and approve the tenant’s proposed alterations, particularly those with structural implications or that will require costly alterations to re-let the property to non-ASC tenants at the end of the lease term.

A crucial aspect of the alterations provision is what alterations and improvements, if any, the tenant will be required to remove at the termination or expiration of the lease. This concern is particularly acute in the ASC lease context, as the improvements and alterations required to operate an ASC are often not conducive to general commercial use of the space, can be very costly to undo, and result from the ASCs’ installation of expensive surgical equipment in the leased premises that may be subject to third-party financing. Therefore, it is critical that the parties agree up front as to:

  • What alterations and improvements the tenant will be required to remove, if any
  • Whether the tenant is required to restore the space to a condition more suitable for general uses at the end of the lease term
  • If the tenant is required to restore the space, who will bear the associated costs and expenses

Tenant’s Signage Rights

The lease should set forth the tenant’s signage rights. To comply with applicable laws and regulatory and accreditation requirements, as well as for general business purposes, tenants will typically want the right to (1) install and maintain signage on the exterior of the building and the property, any monument or pylon sign for the building, and on the doors and interior of the building; and (2) have the ASC and its associated physicians listed in any directory for the building or property. Depending on what the parties negotiate, the tenant will typically pay for some, if not all, of the expenses of the signage and its installation. Such signage (including its design and placement) is almost always subject to the landlord’s prior approval. However, the tenant will typically want the landlord to agree in the lease to the ASC’s proposed signage package, which is often attached as an exhibit to the lease. The tenant will usually also want the ability to change or install additional signage during the lease term (with the landlord’s consent), and thus may want to restrict the amount of time the landlord has to review and approve proposed signage, which approval should not be unreasonably withheld, conditioned, or delayed.

Additionally, due to the importance of having visible signage for an ASC, the tenant should consider negotiating (1) a prohibition or restriction in the lease on the landlord’s ability to install structures that block the visibility of the tenant’s signage and (2) a provision that requires the landlord to install temporary signage and take other mitigating actions to limit disruption for the limited and temporary periods (such as construction and repairs) where it is unavoidable. Furthermore, the lease should clearly delineate which party is responsible for removing signage installed by the tenant at the end of the lease term and for paying the associated costs and expenses.

Landlord’s Access to the Premises and Landlord’s Repairs and Improvements

By nature of the sensitive medical procedures performed at an ASC, the lease should clearly spell out who, when, and under what circumstances the landlord has the right to access the ASC premises, whether to conduct repairs, maintenance, inspections, or improvements. Unexpected interruptions or interference by the landlord or its agents could have serious, and even potentially deadly, consequences. Accordingly, the tenant will want to make sure that the landlord’s right to enter onto the premises and to conduct repairs, maintenance, or improvements within the premises is conditioned on at least 24 hours prior notice (except in cases of emergency), in a manner that will minimize any disruption or interference with the tenant’s use and operation of the premises for surgical procedures. To do so, the parties should build some flexibility into the lease to allow the landlord access to the premises both during and outside of the ASC’s normal business hours, depending on the reason the landlord needs access and the potential disruption or interference with the ASC’s operation. Similarly, a tenant will also want to negotiate reasonable rights to restrict (or at least, to have to consent to) the landlord’s performance of certain types of improvements, inspections, maintenance, and repairs in other areas of the building or property near the ASC premises, as byproducts such as noise and dust can adversely affect the performance of surgical procedures and furnishing of patient care at the ASC.

Additionally, the tenant’s attorney must be cognizant of the requirements imposed under HIPAA, HITECH, and related state medical records privacy and security laws when negotiating what rights the landlord will have to enter onto the ASC premises. The tenant will need sufficient prior notice from the landlord in order to provide the ASC with adequate time to take precautionary measures to protect, safeguard, and restrict access to patient records and other confidential materials on the premises from unauthorized access or removal from the premises. Moreover, the tenant may want reasonable assurances from the landlord that any personnel and agents with access to the premises understand and have received instruction on the privacy and security requirements to which the ASC is subject. The tenant should also seek the right to indemnification from the landlord in the event that the ASC incurs any liability for noncompliance with those legal requirements due to the acts or omission of the landlord, or its personnel or agents, as a result of their access to or presence on the premises.

Assignment and Subletting

Assignment and subletting provisions are some of the most heavily negotiated provisions in any commercial lease and are often even more critical for an ASC lease. Due to the inherent nature of the ASC business, the physicians who own or are affiliated with the ASC may change frequently during the lease term and fundamental transactions (such as mergers, consolidations, and sales of the ASC or substantially all of its assets) are commonplace. Moreover, ASCs often like to sublet or share space with both affiliated and third-party physicians and practices. For example, an ASC may want to sublet one of its operating rooms to another practice on a full- or part-time basis, or may wish to sublet a dedicated portion of the leased premises to an affiliated physician, practice, or management company for their exclusive use as office space. Therefore, the tenant will want to make sure the lease provides sufficient flexibility, while the landlord will want to ensure that any occupants of the space are high quality and have sufficient financial means to pay rent and perform all other obligations required under the lease.

Typically, the tenant should be permitted to, without the landlord’s consent, assign the lease or sublet the premises to an affiliate, subsidiary, or successor in connection with a merger, acquisition, or consolidation of the ASC or a sale of all or substantially all of the ASC’s assets, so long as:

  • The tenant is not in default under the lease.
  • The tenant remains liable under the lease.
  • The successor tenant’s or subtenant’s financial position is at least substantially comparable to that of the tenant prior to such event.

The parties should also consider negotiating a threshold percentage change in the ownership or voting interests in the tenant, such that the landlord’s consent is not required for any changes thereto over a continuous period (e.g., 12 months) that does not exceed the agreed-upon threshold. Additionally, the tenant may want the lease to specify certain parties (or types of entities and individuals) to which the ASC may assign the lease or sublet space, particularly when the tenant reasonably anticipates a likely need to do so during the lease term.

Generally, the tenant’s attorney should seek to ensure that any right of the landlord to consent to an assignment or sublease should not be unreasonably withheld, conditioned, or delayed, while the landlord’s attorney should try to include terms in the lease that specify the information that the tenant will need to provide in connection with a proposed assignment or sublease and the applicable time frame. The tenant may want to negotiate inclusion in the lease of a specific, limited list of reasons for which the landlord may permissibly withhold consent (put another way, where the landlord’s withholding of consent would be reasonable), although the landlord will often try to insist that any such list not be exclusive. The tenant’s attorney should also consider negotiating a provision to the effect that if the landlord fails to respond to a subleasing or assignment request within a specified time frame, the landlord’s consent will be deemed given. The landlord’s attorney should also consider negotiating a lease provision that requires the tenant to pay the landlord’s reasonable costs and expenses (or, alternatively, a specific, negotiated fee) in connection with the landlord’s evaluation of a proposed assignee or subtenant.

Landlord Waivers, SNDAs, and Estoppel Certificates

Due to the high costs of procuring and installing the necessary surgical equipment and operating an ASC, ASCs are typically highly reliant on third-party financing arrangements, especially when the ASC will be required to bear the considerable expenses of converting general commercial use space for the specific needs of operating an ASC. Whenever possible, a tenant should ideally negotiate the terms of any necessary financing prior to (or at least, contemporaneous with) negotiation of the lease and, to the extent possible, arrange for the lender to be actively involved with and participate in the lease negotiation. Although specific requirements may vary by lender, lenders often require execution of the following:

  • A landlord waiver, whereby the landlord agrees to waive (or agrees to subordinate in favor of lender) any lien on or security interest in the tenant-borrower’s leasehold improvements, equipment, and other assets located on the leased premises, and which grants the lender the right, on reasonable prior notice to landlord, the right to enter onto the lease premises and repossess the tenant/ borrower’s assets
  • A collateral assignment of the lease, whereby the tenant/ borrower pledges its rights in, to, and under the lease as collateral security to the lender for repayment and the lender has the right to assume the tenant/borrower’s rights in, to, and under the lease as of (but, generally, not prior to) the date of the tenant/borrower’s default in its obligations to the lender
  • A short form memorandum of lease between the landlord and the tenant, which is recorded in the local land records of the leased premises’ jurisdiction and puts subsequent parties on notice of the existence of the lease and the landlord’s and tenant’s respective rights and interests thereunder

Because landlords often dislike these types of agreements and because their negotiation can be both time consuming and expensive, it is best to negotiate these agreements and any other requirements of the lender simultaneous with, or prior to, the execution of the lease. If the lease must be executed before the ASC obtains necessary financing, the tenant’s attorney should consider, at a minimum, negotiating adequate provisions in the lease that require the landlord to execute documents reasonably required for the tenant to obtain required financing. Better yet, the tenant’s attorney should include mutually agreed-upon form documents as exhibits to the lease, which the landlord is required to execute on request. What the tenant’s attorney wants to avoid, if at all possible, is a situation where a lease is executed without adequately providing for lender requirements, as the landlord will likely insist on costly concessions from the tenant in exchange for what amounts to a giveaway of the landlord’s rights with little to no value to the landlord.

Meanwhile, the landlord’s attorney also needs to be mindful of preserving the landlord’s rights regarding current and future financing arrangements and future sales of the property when negotiating an ASC lease. The landlord’s lender will (and a prudent tenant also would) require execution of an SNDA by and among the lender, the landlord, and the tenant, whereby, generally:

  • The lender agrees that, even if the landlord defaults on its mortgage and the lender forecloses, the lender will respect the tenant’s lease on its terms (Non-Disturbance)
  • The tenant agrees and acknowledges that, subject to NonDisturbance, the tenant’s lease rights are subordinate to the landlord’s mortgage in favor of the lender (Subordination)
  • The tenant agrees to, subject to Non-Disturbance, pay rent, and otherwise honor the terms of the lease notwithstanding foreclosure by the lender (Attornment)

To avoid potentially lengthy and costly negotiations, it is in the best interest of both the landlord and the tenant to include (1) sufficient language in the lease that requires the parties to execute an SNDA on the landlord’s or its lender’s request with agreed-upon terms, and (2) a mutually agreed-upon form SNDA as an exhibit to the lease. Better yet, if the landlord has existing financing in place to which the ASC premises is subject, the landlord’s attorney should seek to attach the lender’s approved form of SNDA as an exhibit to the lease.

Similarly, any potential buyer of the property (and, likely, the potential buyer’s lender), will insist that the landlord-seller obtain from its tenants (or, at least, its major tenants, of which the tenant will likely be one) estoppel certificates. Although the required provisions of estoppel certificates may vary, they often include a statement and acknowledgment from the tenant of all of the following:

  • The lease term, base rent, leased premises, the date through which rent has been paid, and the security deposit
  • That the lease is in full force and effect, and has not been modified or amended except as otherwise specifically stated in the estoppel certificate
  • That there are no current defaults, conditions, events, or circumstances that would lead to a default, by either landlord or tenant
  • That the landlord and tenant have performed all of their respective obligations under the lease to date
  • That the tenant has not paid rent or any other charges more than one month in advance
  • That the tenant has no right to deduct or offset any amount from the rent or otherwise due to landlord
  • That the tenant has no defenses to enforcement of the lease
  • That the tenant has neither received from the landlord nor given to the landlord any notices of default
  • That the tenant has neither made nor currently has any claims against the landlord

To minimize the cost and time of negotiations, it is in the best interest of both the landlord and the tenant to include sufficient language in the lease that requires the parties to execute an estoppel certificate with certain matters to which the tenant must certify on the landlord’s request. Alternatively, the landlord’s attorney should seek to attach an approved form of estoppel agreement as an exhibit to the lease.

Physical Facility Issues

There are myriad certification, state, and accreditation standards related to the ASC’s physical facility and environment that must be discussed by the negotiating parties to ensure that the tenant’s right to make alterations, additions, or improvements is drafted with sufficient breadth to permit the tenant to meet the regulatory requirements to which it is subject. The landlord will want to require transparency regarding the nature and purpose of the intended use of the property, as the tenant will be exposing the property to environmental liability for medical and biological waste, hazardous chemicals, pressurized gases, and controlled pharmaceutical substances, among other items.

As part of the physical facility issues, the landlord’s and tenant’s counsel will want to consider and discuss handling some of the following issues:

Additional Usage

Tenant’s counsel should ensure that the tenant can undertake additional usage of certain utilities and other amenities without disproportionate cost to tenant. The tenant should seek to refine the applicable usage formula to normalize excess allocations. The following is a list of some items that may require additional usage allocations:

  • Utilities. Counsel should anticipate the need of tenants for uninterrupted utility services, excess electrical, water, HVAC, emergency generators for power failure, and other uses of the ASC. ASCs typically require a much more significant use than standard office tenants of electrical, HVAC, and water facilities, due to the higher utilization needs of the ASC’s equipment and hygienic systems. Furthermore, unlike some types of commercial tenants that could temporarily relocate to another office or have their people work from home on a limited basis, the tenant cannot operate, literally, if the utilities and other important building services are not fully and adequately available at all times. Accordingly, the tenant will want to negotiate a provision in the lease that allows the tenant to (1) abate rent if the utilities or other important building services are interrupted or otherwise unavailable for a specified period of time, (2) exercise self-help if the landlord cannot or will not address/repair the problem in a timely manner, and (3) terminate the lease if the problem is repetitive or anticipated to continue.
  • Security. When security for the property is provided by the landlord, additional security related to the tenant’s use of the property may be required for the tenant, particularly in the context where an ASC houses expensive medical and surgical equipment, controlled pharmaceutical substances, patient records, and hazardous chemicals. Additional security costs may include the cost of personnel, fixtures for cameras, and monitoring services.

Additional Build-Out Costs

To ensure that the tenant can meet the requirements of additional build-out costs and financing requirements, the tenant should seek to refine the standard capital improvements provisions in a general commercial lease. The following is a list of some items that may require additional build-out costs:

  • Fire standards. Reinforced floors, walls, and doors that meet local, state, and accreditation standards may require additional build-out, fixtures, and structural improvements for ASC tenants. For example, if an ASC is co-located with another provider, the National Fire Protection Association Life Safety Code requires that ASCs must be separated from other facilities with one-hour fire walls.
  • Emergency generator. ASC tenants require uninterrupted power to certain core systems, such as life support, certain equipment, fire, and utility systems. These requirements necessitate the additional expense of building out emergency backup systems, such as an emergency generator. Elevators may also require additional emergency operation and power failure needs.
  • Americans with Disabilities Act (ADA) requirements. Tenants may require special accessibility needs in and around the premises to comply with ADA requirements to which they are subject.23 Assuming compliance with the requirements is not “structurally impracticable”,24 most landlords should be familiar with basic accessibility features sought by tenants, such as excess door width, handicapped parking, ramps, lift equipment, water fountains, security systems, and many others.
  • Parking. Most ASCs are subject to requirements related to reserved spaces for handicapped access and minimum parking availability requirements related to the size of the facility. In some states, local fire, zoning, curbing, public access, or even canopy requirements can necessitate additional space needed to comply with the tenant’s needs.
  • Entrances and exits. Entrances and exits in an ASC must typically comply with various accreditation, licensure, and local requirements related to fire and ADA safety standards. In addition, access restrictions and security cameras must often be provided at entrances and exits to an ASC, which may require additional fixture build-out.
  • Equipment. Specialized equipment such as imaging equipment used for surgical procedures may require a special build-out and fixturing allocation. Whether the tenant has purchased the equipment at its own cost or through additional financing, the tenant may need a waiver of any rights, lien, or security interest that the landlord may possess with regards to the equipment if the tenant hopes to retain the equipment or return it to the financer following termination of the lease. The landlord may seek to retain some interest in the equipment or other financial assurances in the event that the tenant abandons the property and may attempt to allocate to the tenant the cost of the landlord’s removal of the equipment (including any incidental costs for hazardous materials).

Medical Waste and Disposal

Due to the liability risks related to biological and medical waste, the landlord may wish to require, at the tenant’s expense, periodic inspections of the premises by an environmental specialist to ensure compliance with applicable environmental regulations. Often the landlord will allocate the disposal of medical and biological waste to the tenant, with certain prohibitions on the disposal of materials during certain hours or through certain methods (e.g., the sewer systems). The landlord will often also seek to allocate as much risk as possible to the tenant related to the generation and disposal of such waste and may even seek specific requirements related to storage, permitting, and handling of waste that exceed the ASC’s obligations under law.

In addition, the landlord’s attorney may seek to negotiate significant liability disclaimers and indemnifications related to the occurrence of a hazardous spill. In the event of such a spill, the landlord may also wish to be notified and to receive certain assurances that spills will be handled by an agreedupon chemical or biological cleanup company in accordance with requirements applicable to one or both parties. The landlord should require that the tenant surrender the property free of all medical and biological waste and also ensure that the obligations related to cleanup survive the termination of the lease.

Alan B. Gordon is a partner at McGuireWoods LLP. He has a broad background in real estate law and business law. Alan concentrates his practice in real estate transactions and has worked extensively with commercial, healthcare, and industrial clients on a wide array of transactions covering the full cycle of commercial property, including land acquisition, construction and construction financing, leasing, permanent financing, and disposition. Alan’s substantial experience includes negotiating and completing real estate acquisitions and sales, commercial real estate development projects, commercial leasing, and the formation and negotiation of partnerships, joint ventures, and other entities. Paul A. Kiehl is an associate at McGuireWoods LLP. Paul focuses his practice on representing healthcare providers and companies, including hospitals, health systems, physician and dental practices, behavioral health providers, urgent care facilities, laboratories, surgery centers, dialysis facilities, home health providers, durable medical equipment and medical device companies, Medicare- and Medicaidmanaged care organizations, assisted living facilities, healthcare technology companies, and healthcare entrepreneurs, in corporate, transactional, and regulatory compliance matters. He also represents lenders, borrowers, and equity sponsors in healthcare lending transactions, including senior, mezzanine, and junior credit facilities. Timothy R. Loveland, an associate at McGuireWoods LLP, primarily advises healthcare clients on compliance and regulatory matters, including Federal AKS and Stark issues, hospital and medical staff bylaw compliance, state licensure and certificate of need requirements, compliance program preparation and implementation, contract drafting, and post-acute development and reimbursement. Prior to joining the firm, Tim was a healthcare consultant. As a consultant, he advised hospitals and health systems on matters of operations management and regulatory compliance and regularly led teams in the development and integration of new hospitals, freestanding emergency departments, and post-acute venues.

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1. 42 U.S.C.S. § 1320a-7b(b). 2. 42 U.S.C.S. § 1395nn. 3. 42 U.S.C.S. § 1320a-7b(b)(1). 4. United States v. McClatchey, 217 F.3d 823, 835 (10th Cir. 2000); see also United States v. Greber, 760 F.2d 68, 69 (3d Cir. 1985). 5. 42 U.S.C.S. § 1320a-7a. 6. 42 U.S.C.S. § 1320a-7b(b). 7. 42 U.S.C.S. § 1395nn(a)(1). 8. 42 U.S.C.S. § 1395nn(a)(2). 9. 42 U.S.C.S. § 1395nn(h)(1). 10. See, e.g., 42 C.F.R. § 1001.952 and 42 C.F.R. § 411.355. 11. 42 C.F.R. § 411.357(y). 12. 80 Fed. Reg. 70886, 71325–71327 (Nov. 16, 2015). 13. See 42 C.F.R. § 1001.952; 42 C.F.R. § 411.355 14. 42 C.F.R. § 411.351. 15. Id.; see also 66 Fed. Reg. 856, 945 (Jan. 4, 2001). 16. Id. 17. Id. 18. 72 Fed. Reg. 51012, 51045 (Sept. 5, 2007). 19. 66 Fed. Reg. 856, 944–945. 20. See, e.g., Id. 21. See N.J. Stat. Ann. § 26:2H-12. 22. N.J. Admin. Code § 8:43A-1.3 (emphasis added). 23. See Americans with Disabilities Act of 1990, as amended, ADA Amendments Act of 2008, Pub. L. No. 110-325, 122 Stat. 3553 (2008). 24. See 28 C.F.R. § 36.401, 570 (July 1, 2004).