Preventative Care – Starting Your Retail Medical Lease off on the Road to Good Health

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Medical services found in traditional retail shopping centers (which are often referred to as “medtail”) are on the rise.  In addition to the COVID–19 pandemic, which made the need for readily available medical care all the more evident, a confluence of factors, such as the aging U.S. population and increasing lifespans, rising medical costs, new medical technologies/outpatient procedures, and insurance companies’ push for outpatient care in an effort to reduce costs, has caused an increase in demand for medical services outside of the traditional hospital and medical office settings. 

As a result, medical services are increasingly found in shopping centers and other retail establishments alongside more traditional retailers.  The medtail services being provided today are far broader than just typical urgent care centers. Shopping centers are seeing an increase in, for example, dental offices, specialty medical and wellness services such as holistic and alternative care centers, cosmetic practices, skincare, acupuncture, occupational and physical therapy, and veterinary services.

The increase in medtail leasing is changing the traditional notion of healthcare delivery by merging the everyday convenience of a shopping center experience with the critical services provided by the medical profession.  This reflects a change in consumer expectations, and many landlords are eager to work with medtail operators in order capitalize on the benefits found in healthcare services being delivered in a retail setting.

While most landlords’ standard retail lease forms are well crafted to address the issues and challenges presented by typical retail uses, those forms might not adequately address some of the unique issues and challenges presented by medical uses.  Shopping center owners and medtail operators are both well advised to ensure that their medtail lease documents address these unique issues and challenges, including the more notable issues described below.

Is medtail allowed at the shopping center?

In general, when preparing a new retail lease, it is important to confirm that there are no existing exclusive use rights that will prevent the intended use under the new lease.  While that is true as well with medtail leasing, as a threshold matter it is just as, if not more, important to confirm that medical uses are allowed at the shopping center.  Medical uses have long been frowned upon in retail settings due to perceived incompatibilities between retail and medical uses, and there are often regulations and other restrictions in place that prohibit medical uses.  Both shopping center owners and medtail operators should review the applicable zoning regulations and any recorded agreements (such as covenants, conditions, and restrictions) to ensure that the intended medical use is not prohibited.  Additionally, it is not uncommon for many of the leases with larger “anchor” tenants to include lists of uses that are prohibited in the shopping center; such lease restrictions should be carefully reviewed as well.  If the proposed medical use is restricted, then the parties will need to take steps to either amend the applicable document or to obtain the approval and/or waiver of the applicable third-party tenant or parcel owner. 

It's not just hazardous materials, but medical waste that needs to be addressed.

Almost all retail leases include a prohibition on the tenants’ use of hazardous materials.  While such prohibitions are desirable, they may not adequately address the concerns raised in a medtail operation with respect to medical waste.  It’s not a matter of trying to prohibit medical waste since most medtail operations, by their very nature, will generate medical waste.  Instead, the parties should clearly define what medical waste is, and then delineate the obligations relating to the collection, storage, and disposal of all medical waste (which is typically done by the tenant) and the liabilities and indemnification requirements due to a failure to meet those obligations.  The parties should also require that all medical waste be handled in accordance with applicable laws and disposed of separately from the usual trash generated by the other, more typical retailers in the shopping center.  If the medtail operation is anticipated to generate significant amounts of medical waste, the parties may want to consider conducting an initial “baseline” survey of the medtail premises to establish what, if any, medical waste is present at the commencement of the lease, followed by a survey and appropriate decommissioning of the medtail premises at the end of the term of the lease.

Utility infrastructure and the initial build-out of the medtail premises.

Medtail operators tend to be heavy users of utilities, especially electricity and water.  For example, diagnostic equipment may have specific cooling needs that require more cooling equipment (along with a corresponding increase in the amount of electricity used) than a typical retail operator would use.  Also, if the medtail use includes multiple exam rooms, additional plumbing will likely be required to supply the necessary water to each exam room.  While most retail leases will place the responsibility for the cost of the electrical and plumbing infrastructure within the medtail premises on the tenant, both parties should also confirm whether or not the electrical and plumbing infrastructure providing utilities to the medtail premises is of a sufficient capacity and/or size to provide the desired amount of such utilities.  If not, the lease should address the obligation to upgrade those utilities, whether that obligation will fall on the landlord or the tenant, and the allocation of any resulting costs. 

Additionally, the build-out of medtail tenants’ initial improvements are usually more intensive (and more expensive) than the initial improvements found in typical retail space.  Accordingly, it may be more expensive to remove the additional infrastructure and other improvements installed in a medtail premises, and to return the medtail premises to its original condition, at the end of the lease.  As a result, the medtail lease should clearly delineate all of the medtail tenant’s removal and restoration obligations.  Moreover, given the target clientele of many medtail operations, landlords should be aware of the likely focus on ADA compliance issues, not just within the medtail premises, but also in the common areas of the shopping center. 

Landlord access rights.

As with other retail leases, a landlord will have the right to access the medtail premises for various reasons, including inspections and the performance of maintenance and repairs.  However, with medical uses come patients, and with patients come patient confidentiality rights.  So while the obligation to ensure patient confidentially and compliance with HIPPA requirements and other privacy standards should ultimately fall on the tenant, the parties should carefully structure the landlord’s access rights to minimize the risk of a violation of patients’ protected health information.  This might include, without limitation, the establishment of a “secured” area within the medtail premises where the landlord will not (outside of an emergency) have access rights without being accompanied by a representative of the tenant, and incorporating reasonable parameters surrounding the landlord’s ability to access the medtail premises during normal business hours.

Stark Law and anti-kickback statutes.

The Stark Law is intended to protect Medicare patients from improper referrals for certain healthcare services by parties who have a financial interest in the referral.  The parties should ensure that they (as well as any subsequent assignees and subtenants) do not have a patient referral arrangement that would violate the Stark Law, and that the corresponding medtail lease includes an acknowledgement it does not require the medtail tenant to refer or admit any patients to any hospital or medical facility owned or operated by the landlord.

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