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Leasing and sub-leasing in healthcare property

Leasing a healthcare property requires the landlord, tenant and any sub-tenant to consider requirements and conditions that may not be familiar to landlords in traditional office leasing spaces. Signing a lease with unfavourable terms or terms that do not adequately address circumstances that are unique to health care services can have significant long-term consequences.

In the first part of this blog, we will outline the key items that should be considered by both landlord and tenant when negotiating a lease for a healthcare property. We will finish by outlining additional considerations that should be had for sub-leases.

Restrictive covenants & Planning Considerations

Is the proposed use authorised and lawful? Use of premises as a healthcare property will either be allowed as a right without a planning permit, with a planning permit or, it may be prohibited depending on the planning controls and zoning affecting the property.

It is also important to consider any restrictive covenants that may be registered on the title to the land that can restrict the way you use and develop the land.

Planning due diligence is critical to ensuring that there is no prohibition on using and/or developing the land as a healthcare property or for your intended purpose.

Additionally, car parking and signage requirements should be addressed separately to the use and development requirements, from a planning perspective.

Permitted Use

The permitted use as defined in the lease is important as it defines what types of businesses can and cannot be operated at the premises. From a tenant’s perspective, the broader the definition of the permitted use, the more flexibility the tenant will have on how the premises are used and this is an important consideration for the future for example, where the premises may be later assigned or sub-leased. In contrast, it may be more beneficial for a landlord to seek to narrow the permitted use so that it has more control over what the premises are used for and has sufficient grounds to not consent to a transfer of lease or assignment at a later date.

For example, a tenant may wish to conduct a dental practice from the premises. There are various ways in which the ‘permitted use’ in the lease could be defined, including the following:

  • Dental practice
  • Medical centre
  • Offices (including but not limited to a dental practice)

Subject to the planning requirements of the premises, each of the above definitions would effectively allow the tenant to undertake it’s proposed business of a dental practice from the premises. The first would be the most narrow definition, followed by the second, with the latter being the broadest definition. There are pros and cons to adopting each, and we would recommend legal advice prior to finalizing any lease documentation to ensure that it achieves the intended goal.

To use ‘dental practice’ as the permitted use, for instance, would restrict any later assignment to that permitted use, or a variation of the lease would need to be sought and approved by the landlord. If it was the case that the tenant wished to assign the premises to a physiotherapist, it would not fall within the permitted use of dental practice, and would not be allowed without the landlord’s consent and variation. A physiotherapist would fit within the definition of ‘medical centre’ or ‘offices’ as the permitted use, and the proposed transfer of the lease would be easier to achieve, provided the other lease and any requirements under the Retail Leases Act are addressed.

Rent

The rent during the initial term of your lease and any further terms will be entirely dependent on what is negotiated at the outset and what is ultimately provided for in your lease agreement. Your lease should specify the way in which the rent is reviewed, whether that be an increase or decrease. A fixed increase occurs where rent increases at a fixed rate or percentage, usually on a yearly basis. Rent may also be based on an annual or periodic market review. This means that the tenant and the landlord can negotiate on the proposed ‘market rent’. If agreement cannot be reached, a market valuation will usually be required by an expert valuer and a procedure is ordinarily set out in your lease agreement. A rent review may also be based on an evaluation of Consumer Price Index (‘CPI’). The CPI is a measure of inflation and applies according to a formula contained in the lease.

Increases in rent can have serious implications on the cash flow of any business and careful consideration will need to be had to the way rent is to be reviewed.

Renewal and options

As a healthcare provider, you will rely heavily on your patients, referrals and good will that has accumulated over time to ensure that your business is profitable. Usually, a significant amount of money has also been expended at the start of the lease and maybe even during the lease on fitting out the premises. Ensuring that the lease is negotiated so that you have options to renew is extremely important to give you a mechanism to continue running the business from the same premises and provide security of tenure. This means that you can focus on establishing and running your business rather than thinking about finding new premises.

Handover Date

‘Handover Date’ is different from the ‘Commencement Date’ of the lease and refers to when the premises is provided to the tenant. If, as a tenant, you intend to complete any works on the premises, an important consideration is negotiating access to the premises well before you intend to operate. Whether the tenant pays rent from the Handover Date is up to the parties to negotiate. Often, the landlord will provide a rent-free period as an incentive for a new tenant taking up a lease of the premises and in consideration of the costs of fitting out the premises.

Fit-out of Premises

Both landlord and tenant should consider the scope and costs of any fit-out and any fit-out contribution by the landlord (if any) during the negotiation of the lease.  Healthcare service providers often have unique design requirements that may require additional modifications than your average office commercial space. For example, healthcare provider tenants may require additional plumbing for sinks in examination rooms, floor foundation may need to be structurally reinforced to take the weight of any heavy specialised equipment, lead bonded plasterboard may need to be installed in x-ray rooms and other electrical safety requirements such as earthing will need to be complied with.

It is also important to consider the terms of a lease agreement in relation to the tenant or landlord conducting works at the premises, and any design and specification requirements or approval process, additionally to the costs.

Hours of operation

Many healthcare service providers operate outside normal trading hours. If the premises is within a shopping centre and the tenant intends to operate beyond the typical shopping centre’s hours, the landlord and tenant should negotiate on these terms. The landlord would expect compensation for added costs such as additional security and services.

Medical and hazardous waste

Healthcare tenants may generate medical and hazardous waste. This should be carefully considered against any applicable laws regarding the handling of such waste. Landlords and tenants should allocate the responsibility for any collection, separation, storage and disposal of the waste in the lease. Any mishandling of waste can have serious consequences so it is important to clearly outline the responsibilities and for the landlord to understand where the waste is to be stored and collected, especially if the tenant is located in a high public traffic area such as a shopping center.  For additional protection for the landlord, consideration should be given as to whether the tenant provides an indemnity to the landlord for any mishandling or claims relating to the medical and hazardous waste.

Sub-lease

If you are considering subleasing a healthcare property, it is important to understand the agreement between the landlord and tenant and also take into account all the considerations mentioned earlier in this blog.

Generally, the sub-tenant takes on the same obligations as the tenant under the head lease. Sub-leases are sometimes more restrictive than the headlease to ensure that the tenant is not breaching any obligations of the head landlord.

Sub-tenants should consider additional clauses in their agreement to provide more protection to ensure the leasing space meets their needs, objectives and provide security of tenure should the lease between the landlord and tenant be terminated. Some considerations could include the following:

  • Sub-tenants should do their due diligence to ensure the tenant under the head lease has sufficient financial resources to perform its obligations under the head lease
  • Additional provisions to allow the sub-tenant to take over the head lease in the event the tenant defaults in their obligations under the head lease or, alternatively, a provision that allows the sub-tenant to remain in possession for a specified period if the head lease is terminated for the tenant’s default
  • Consider if there are options to renew and if so, are they equivalent to the ones contained in the headlease

If you have acquired a property with the intention of leasing it to a healthcare provider or are a healthcare provider wishing to lease or sublease a premises, there are several factors you will need to consider that are unique to the healthcare industry. If you require any assistance with reviewing, drafting, or negotiating a lease, please contact one of our Property Lawyers from our Property Division or contact us today on +61 3 9822 8588.

Insight written by Sandra Le and Kristy Muhlhan

Contacts

Kristy Muhlhan

Principal

Kristy Muhlhan

Principal
LL.B (Hons) GRAD DIP. L.P., GAICD.
Since 2014, she has been an owner and Principal of the firm and has mastered a broad range of essential commercial and business skills which go hand in hand with the work she does for...

Sandra Le

Associate

Sandra Le

Associate
LL.B BCom
Sandra is professional and takes exceptional care with every matter she undertakes and is a natural problem solver.

Wendy Toura

Conveyancing Team Leader and Law Clerk

Wendy Toura

Conveyancing Team Leader and Law Clerk
Licensed Conveyancer, BCom
Wendy’s role is primarily in conveyancing.

Emma Dickens

Paralegal

Emma Dickens

Paralegal
Bachelor of Legal and Dispute studies
Emma joined us in 2018 and holds a Bachelor of Legal and Dispute studies. Emma is currently studying for her Advanced Diploma of Conveyancing.

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