Pathology Sub-Leasing – Key Considerations

1. Offer to lease

Ordinarily during pre-contractual negotiations, you may be presented with an “Offer to lease”, a “Terms sheet”, “Letter of offer” or “Heads of Agreement”. These are just some of the terms used that essentially refer to the same type of document.

Put simply, it is an agreement between the parties (landlord and tenant in these circumstances) to enter into a lease, setting out the key terms. Depending on the drafting of the document, it may be legally binding or it may not be legally binding, although usually there will be at least some terms that are legally binding, such as confidentiality.

Before signing any such document, you should ensure that you understand your rights and obligations under the document, including if it is legally binding and ensure that the terms recorded are a complete record of the agreement reached and not missing any important details, nor including any details which are inconsistent with any head lease that may apply. Once the document is signed, it will be more difficult to negotiate terms in the lease that are already clearly set out in any offer to lease.

2. Market rent - don’t get audited!

Historically, pathology collection centres have attracted rents significantly higher than ‘market rent’ as compared to other commercial uses for the same premises.

However, the Health Insurance Act 1973 (“the HI Act”) contains a number of prohibitions, including with respect to the flow of benefits. In summary:

  • Leases or sub-leases with a pathology provider must not include rent that is ‘substantially different’ from market rent. That is, rent being not more than 20% above market value.
  • The ‘market value’ of property, goods or services is the amount that a willing purchaser would have had to pay to a vendor who was willing, but not anxious, to sell.
  • A benefit (i.e. the rent in this case, or may include outgoings and services), whether actual or a potential benefit, is not permitted in circumstances where it ‘is related to the number, kind or value of requests for pathology services…’ or ‘consists of the provision of staff or equipment at premises of the beneficiary for the purpose of providing pathology services’.

The compliance regime under the HI Act includes developing data analytics tools to identify irregularities in rent or referral rates and undertaking targeted compliance activities. Amongst other things, all leases for Pathology Approved Collection Centres, must be submitted through Health Professional Online Services and, it is through this process that leases may be flagged for further investigation if the rent does not appear in line with market.

A breach of the HI Act or associated regulations, may result in civil penalties of up to $126,000 for individuals or $1.26 million for corporations and, in addition, there are criminal offence provisions punishable by imprisonment of up to 5 years.

The Department of Health The Red Book - Guidance on Laws Relating to Pathology and Diagnostic Imaging - Prohibited Practices provides some guidance on these issues.

3. Know what’s in the Head Lease

It is surprising just how often we are presented with a lease or sub-lease that is inconsistent with a head lease that applies.

A ‘head lease’ (which may be referred to as a lease) is ordinarily an agreement between a landlord and tenant that records the terms of the tenancy for the whole or part of a building or premises.

A ‘sub-lease’ (sometimes also referred to as a lease) is essentially an agreement between the tenant under a head lease and a sub-tenant. For example, the medical centre to the pathology provider. It will record the terms of the agreement to let part of the building or premises.

Some important matters that should be considered in a sub-lease to ensure consistency with the head lease, are as follows:

  • The ‘Permitted Use’: Is the permitted use in the sub-lease consistent with or allowed under the head lease? For example, the head lease may record the permitted use as ‘Medical centre’ whereas the sub-lease may record the permitted use as ‘pathology collection centre’. Whilst inconsistent, the Victorian Planning Provisions define a ‘medical centre’ as including pathology services and so this would fall within the definition and not be contrary to the permitted use in the head lease.
  • The ‘Term’: All too often the initial term in the head lease is not checked and the sub-tenant may be offered a term that is longer than the term in the head lease. This is an issue of concern as, if there are no options for further terms in the head lease or the further term option is not exercised, the tenant will be in breach of the head lease unless agreement can be reached with the landlord. It is important to get this right at the outset and only offer a sub-lease that does not exceed the current term of the head lease and consider providing additional options that are also consistent with the head lease.
  • Consent of landlord: Does the head lease allow a sub-lease by right, or is the consent of the landlord required? It is important to review the terms of the head lease prior to entering into any sub-lease offer to lease and, seek consent where applicable.

If you are a practice manager or owner of a medical centre seeking assistance with an Offer to Lease, Head Lease or Sub-lease with a pathology provider, contact us today on +61 3 9822 8588 or email our team here.

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