The unique demands of healthcare operations require a lease framework that supports the agile and efficient provision of healthcare services.
Key Considerations for Operating Healthcare Properties
In the first article in our From Blueprint to Bedside series, we reviewed some of the key considerations in the development and conversion of healthcare property. In this second instalment, we examine the operational complexities that distinguish the use of property for healthcare services from other asset classes.
This article highlights some of the unique challenges associated with leasing part of a multi-let mixed-use building for medical use. These require careful attention as a number of standard office lease provisions are incompatible with the realities of operating a healthcare service.
1. Lease Term and Renewal Rights
The first consideration is the lease term. Given the capex requirements in converting a property for healthcare use, a tenant will need a sufficiently long lease term to recoup its investment, so will likely look for a longer-term lease and stronger renewal protections than a typical office tenant.
2. Alterations
Alterations provisions are another key area. A traditional office lease will give the landlord extensive controls over the alterations a tenant can make. However, a medical provider needs flexibility to move quickly, for example, if an alteration is needed:
- for regulatory or patient safety reasons;
- to offer a new service which may need alterations to the M&E systems; or
- to make structural alterations to bring in a new piece of equipment.
The requirements of the Building Safety Act 2022 also need to be considered. Although hospitals are excluded from the provisions of the Act in the operational phase, alterations to the property can still fall within the scope of the construction phase requirements (even if those alterations are to an operational facility).
3. Rent Review
Rent review is another point requiring early consideration. Are there sufficient market comparables for an open market review, or is an alternative method more suitable? If open market review is used, which use class should the review be based on? Expert advice from rent review surveyors in the relevant market is beneficial.
4. Sharing and Underletting
It is important to consider early in the design process any third parties who will need to share occupation of a property. Due to the way that independent healthcare providers operate, licencing consulting rooms to credentialled independent consultants, flexibility on sharing of the space is needed. In comparison to an office letting, there may also be a longer list of third parties who may need to occupy the space by way of an underlease, such as external laboratory or pharmacy providers, who may need exclusive occupation of an area. Landlords can expect less control than with an office or retail letting.
5. Insurance
Due to the often bespoke nature of the medical fit out, the insurance arrangements (including reinstatement obligations following damage by an insured or uninsured risk) need careful consideration. Standard office lease provisions are unlikely to be appropriate for a medical tenant with a specialist fit out.
6. Landlord Access
Access rights for the landlord may be more restrictive than they would typically be used to, due to the preservation of confidentiality and patient privacy and to comply with regulatory requirements for access to regulated materials.
7. Operational Matters
Operational issues, such as the servicing and delivery strategy, disposal of medical waste and handling of regulated substances, needs early design integration, particularly where the property is part of mixed-use building. Leases typically contain restrictions on the use of hazardous substances which would need to be modified to allow for the use of substances required for the permitted medical use, and the landlord will need to be comfortable that any such materials are handled properly and in line with regulatory requirements. Early engagement on these types of operational issues with the landlord and the local planning authority will be essential for success.
Key Takeaways
This article provides an overview of some of the key issues which need to be considered when leasing space for medical use, particularly in a mixed-use setting. More so than with other uses, in healthcare settings there needs to be an early focus on the operational aspects to ensure a lease framework that supports the agile provision of healthcare services from the property.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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