Healthcare Leasing Pitfalls for the Non-Healthcare Attorney

Before agreeing to any of these types of provisions, landlords should be aware that HIPAA violations can carry substantial penalties ' up to $1.5 million for each requirement violated ' making indemnification provisions for HIPAA violations and other risk-sharing provisions risky for landlords who are not aware of HIPAA's requirements. Even in the absence of penalties for violations, certain provisions of HIPAA can involve substantial compliance costs. For example, HIPAA requires written notification to be mailed to patients, along with mitigation of any harmful effects, if their unencrypted health records are accessed or used in a manner that poses a significant risk of financial, reputational, or other harm to the individual.

The healthcare entity has some discretion in determining whether the access or use constitutes a “significant risk.” If the access or use can be attributed to the landlord or its agents and the lease contains a provision stating that the landlord will pay for any of the healthcare tenant's costs associated with violations of HIPAA, the healthcare tenant may be more likely to determine that the access or use constitutes a significant risk than if it would be required to bear the cost of notifications and any mitigation of potential harm. Considering that breaches involving electronically stored data can involve thousands, sometimes millions, of patient records, mailing and mitigation costs alone can be substantial, even if no penalties are imposed. A recent report based on a 2010 benchmark study of 51 organizations that had experienced data breaches across different industry sectors stated that the average cost per compromised record for data breaches for those organizations in 2010 was $214. Ponemon Institute, 2010 Annual Study: U.S. Cost of a Data Breach 5 (2011), available at www.symantec.com/about/news/resources/press_kits/detail.jsp?pkid=ponemon.

Even though the study was sponsored by a company that provides data security services, with obvious incentives to report a high average cost per compromised record, it nevertheless shows how costly data breaches can be. Counsel for landlords presented with HIPAA compliance provisions proposed by tenants should carefully review the proposed provisions to determine the risks and commitments involved and ensure that their clients understand that landlords are not required, under HIPAA, to agree to these types of provisions. If a tenant insists on including HIPAA compliance provisions in the lease, counsel for landlords should consider negotiating provisions requiring the tenant to take certain measures to increase security of protected records. For example, a landlord could require encryption of any patient data stored on electronic devices to reduce the risk that access to the information would require costly notification and mitigation.

Lien Provisions

HIPAA requirements can also complicate a landlord's lien provision in a commercial lease when the property securing the interest includes computers and other electronic equipment that store patient records. Tenants may risk HIPAA violations if foreclosure of the lien by the landlord results in seizure and sale of assets containing patient records and may attempt to exclude those assets from the landlord's lien under the lease. The tenant's computer equipment may represent a substantial portion of the tenant's salable assets such that its exclusion could severely impair the landlord's security interest. Instead of agreeing to exclude the equipment from the landlord's lien under the lease, counsel for landlords should consider negotiating provisions obligating the tenant to remove the patient data from any electronic equipment prior to the sale of the assets and indemnifying the landlord from any costs to the landlord associated with the tenant's failure to remove the data.

Obligations Imposed by Broadly Worded
Compliance Requirements

Healthcare tenants and their attorneys are generally accustomed to adjusting their practices to the various regulatory requirements affecting the healthcare industry. Healthcare regulations are continually changing, requiring continuous monitoring and implementation. In response to these changes, healthcare entities often include provisions in their contracts requiring all parties to comply with any revised regulations. Commonly, these provisions are either included as stand-alone provisions in the section of the contract containing boilerplate provisions, or incorporated into typical boilerplate provisions such as a further assurances clause. These types of provisions should be carefully reviewed by counsel to ensure that their landlord clients are not obligated to continue an arrangement when regulatory requirements create unanticipated burdens for the landlord.

By way of example, in CNR Healthcare Network, Inc. v. 86 Lefferts Corp., 59 A.D.3d 486 (N.Y. Ct. App. 2009), an option agreement for a 50-year lease for a long-term care facility required the owner to make modifications to the lease agreement as necessary to comply with HUD regulations for long-term care facilities, provided that the owner would not be required “to agree to any modification which materially increases his obligations or reduces the rents or Owner's other entitlement or benefits or any other sums payable to the Owner pursuant to the Lease.” HUD regulations required a clause in the lease subordinating any mortgage on the fee interest in the property to the lease. When the potential tenants requested inclusion of the HUD-required clause in the lease agreement pursuant to the further assurances provision of the option agreement, the owner claimed that such a clause materially reduced his entitlements or benefits and proposed either a clause subordinating the lease to any mortgage on the fee interest, but requiring a non-disturbance agreement with the mortgagee or termination of the option agreement. The potential tenants sued for specific performance of the option agreement, requesting that the court require the owner to enter the lease agreement containing the HUD-required subordination clause, relying on the further assurances provision of the option agreement. The trial court held that the proposed HUD subordination clause materially reduced the owner's entitlements or benefits and dismissed the claim for specific performance of the option agreement. The court of appeals, however, reversed, finding that there was no evidence in the record showing how the owner's interests were materially reduced by the subordination clause.

While the CNR Healthcare Network holding may have been avoided by presenting sufficient evidence showing that the owner's interests were materially reduced by the subordination clause, measures taken at the drafting stage such as obtaining a greater understanding of HUD's requirements for long-term care facilities or including a provision in the option agreement giving the landlord discretion for termination of the option may have helped the owner avoid litigation. When broad regulatory compliance or further assurances provisions are proposed by healthcare tenants, counsel for landlords should carefully review such provisions and consider adding provisions requiring costs for compliance to be shared or borne by the tenant or giving the landlord the opportunity to terminate the lease if the landlord determines, in the landlord's sole discretion, that such regulatory compliance increases obligations or reduces benefits to the landlord.

State Laws

Most attorneys are aware that state laws regulate the provision of healthcare services, such as physician licensing and Medicaid laws, but some of these laws also contain provisions that affect entities engaged in transactions with healthcare providers. With respect to commercial leasing, lease provisions that influence the professional judgment or professional practice of a medical professional may violate state laws regulating such medical practices.

For example, in Forte v. Wal-Mart Stores, Inc., 2011 WL 1740182 (S.D. Tex. May 4, 2011), a jury awarded a group of opticians who had leased space from Wal-Mart nearly $4 million in civil penalties after holding that Wal-Mart had violated the Texas Optometry Act by including a provision in their leases for the opticians to list their office hours. The Texas statute “prohibits a retailer of ophthalmic goods, such as Wal-Mart, from directly or indirectly controlling or attempting to control the professional judgment, manner of practice, or practice of an optometrist.” The jury found that Wal-Mart's inclusion of a representation of hours for the opticians was a form of controlling the manner of practice of those opticians and was, therefore, a violation of the statute. The statute provided for statutory penalties, up to $1,000 for each day of violation, and the jury awarded the maximum. On a motion by Wal-Mart for remittitur, the court reduced the penalty to $400 per day, per optician, for a total of $1.4 million.

While Forte may represent an extreme example of liability for landlords under a state's healthcare laws, it illustrates the importance of awareness that state laws governing medical professionals could result in liability for landlords. Counsel for landlords should carefully review lease provisions that could be seen as influencing the practices or professional judgment of medical professionals, such as hours of operation, in conjunction with state laws that regulate those medical professionals.

Conclusion

Although it would be impossible to identify every potential provision in a lease with a healthcare entity that could lead to liability for a non-healthcare landlord, this article is intended to point out some potential pitfalls and raise awareness among real estate attorneys that special issues may be involved in leases with highly regulated healthcare entities. Frequently, non-healthcare landlords are not directly subject to the laws and can avoid burdensome contractual requirements with careful drafting. When landlords are directly subject to the healthcare laws by virtue of leasing to healthcare tenants, it may be beneficial for real estate attorneys to consult with healthcare attorneys for guidance. In many cases, knowledgeable counsel and careful drafting can help to avoid some of the potential pitfalls of leases with healthcare tenants.

Elizabeth A. Siemer is an associate in the corporate department of the St. Louis office of Lewis, Rice & Fingersh, L.C. Ms. Siemer's practice involves general corporate representation, healthcare law, insurance law and licensing, and employee benefits law. She advises both healthcare and non-healthcare entities in a variety of transactions including acquisitions, general contracting, and regulatory matters.

In these continuing uncertain and challenging economic times, many landlords are considering expanding their leasing to healthcare tenants, as stable tenants in a sector that is still experiencing steady growth in spite of the current economy. Healthcare entity landlords and their attorneys are generally aware of significant laws that affect the terms and structure of a lease with healthcare entities on both sides (e.g., the federal Stark law and federal Anti-Kickback Statute) as well as other provisions unique to healthcare leasing. They are also likely to seek advice from a healthcare attorney on the terms of their agreements. Non-healthcare entity landlords and their attorneys, however, should also be aware of certain common provisions in leases with healthcare tenants that could lead to substantial liability for landlords.

HIPAA

The Health Insurance Portability and Accountability Act of 1996 and the Health Information Technology for Economic and Clinical Health Act of 2009, and regulations promulgated thereunder (collectively, HIPAA) impose substantial privacy and security compliance requirements on healthcare entities. For example, healthcare providers may not use or disclose patient health information except as provided under HIPAA. Healthcare providers must also have policies and procedures in place to protect the security of any patient health information stored electronically. Non-healthcare entity landlords should be aware that HIPAA does not impose direct obligations on them in their role as landlords to healthcare entities. Healthcare tenants, however, may have developed internal HIPAA compliance policies that require the inclusion of HIPAA provisions in their leases, imposing contractual obligations on the landlord. A healthcare tenant may, for example, request a provision requiring the landlord to conduct training for its workforce on privacy and security obligations under HIPAA or restricting access to the leased premises by the landlord and its agents in order to protect against potential breaches of the privacy or security of patient health records, particularly to locations where patient records are held. A tenant may also request a provision where the landlord agrees to indemnify the tenant for any costs under HIPAA attributable to the landlord's or its agents' access to protected records.

Before agreeing to any of these types of provisions, landlords should be aware that HIPAA violations can carry substantial penalties ' up to $1.5 million for each requirement violated ' making indemnification provisions for HIPAA violations and other risk-sharing provisions risky for landlords who are not aware of HIPAA's requirements. Even in the absence of penalties for violations, certain provisions of HIPAA can involve substantial compliance costs. For example, HIPAA requires written notification to be mailed to patients, along with mitigation of any harmful effects, if their unencrypted health records are accessed or used in a manner that poses a significant risk of financial, reputational, or other harm to the individual.

The healthcare entity has some discretion in determining whether the access or use constitutes a “significant risk.” If the access or use can be attributed to the landlord or its agents and the lease contains a provision stating that the landlord will pay for any of the healthcare tenant's costs associated with violations of HIPAA, the healthcare tenant may be more likely to determine that the access or use constitutes a significant risk than if it would be required to bear the cost of notifications and any mitigation of potential harm. Considering that breaches involving electronically stored data can involve thousands, sometimes millions, of patient records, mailing and mitigation costs alone can be substantial, even if no penalties are imposed. A recent report based on a 2010 benchmark study of 51 organizations that had experienced data breaches across different industry sectors stated that the average cost per compromised record for data breaches for those organizations in 2010 was $214. Ponemon Institute, 2010 Annual Study: U.S. Cost of a Data Breach 5 (2011), available at www.symantec.com/about/news/resources/press_kits/detail.jsp?pkid=ponemon.

Even though the study was sponsored by a company that provides data security services, with obvious incentives to report a high average cost per compromised record, it nevertheless shows how costly data breaches can be. Counsel for landlords presented with HIPAA compliance provisions proposed by tenants should carefully review the proposed provisions to determine the risks and commitments involved and ensure that their clients understand that landlords are not required, under HIPAA, to agree to these types of provisions. If a tenant insists on including HIPAA compliance provisions in the lease, counsel for landlords should consider negotiating provisions requiring the tenant to take certain measures to increase security of protected records. For example, a landlord could require encryption of any patient data stored on electronic devices to reduce the risk that access to the information would require costly notification and mitigation.

Lien Provisions

HIPAA requirements can also complicate a landlord's lien provision in a commercial lease when the property securing the interest includes computers and other electronic equipment that store patient records. Tenants may risk HIPAA violations if foreclosure of the lien by the landlord results in seizure and sale of assets containing patient records and may attempt to exclude those assets from the landlord's lien under the lease. The tenant's computer equipment may represent a substantial portion of the tenant's salable assets such that its exclusion could severely impair the landlord's security interest. Instead of agreeing to exclude the equipment from the landlord's lien under the lease, counsel for landlords should consider negotiating provisions obligating the tenant to remove the patient data from any electronic equipment prior to the sale of the assets and indemnifying the landlord from any costs to the landlord associated with the tenant's failure to remove the data.

Obligations Imposed by Broadly Worded
Compliance Requirements

Healthcare tenants and their attorneys are generally accustomed to adjusting their practices to the various regulatory requirements affecting the healthcare industry. Healthcare regulations are continually changing, requiring continuous monitoring and implementation. In response to these changes, healthcare entities often include provisions in their contracts requiring all parties to comply with any revised regulations. Commonly, these provisions are either included as stand-alone provisions in the section of the contract containing boilerplate provisions, or incorporated into typical boilerplate provisions such as a further assurances clause. These types of provisions should be carefully reviewed by counsel to ensure that their landlord clients are not obligated to continue an arrangement when regulatory requirements create unanticipated burdens for the landlord.

By way of example, in CNR Healthcare Network, Inc. v. 86 Lefferts Corp., 59 A.D.3d 486 (N.Y. Ct. App. 2009), an option agreement for a 50-year lease for a long-term care facility required the owner to make modifications to the lease agreement as necessary to comply with HUD regulations for long-term care facilities, provided that the owner would not be required “to agree to any modification which materially increases his obligations or reduces the rents or Owner's other entitlement or benefits or any other sums payable to the Owner pursuant to the Lease.” HUD regulations required a clause in the lease subordinating any mortgage on the fee interest in the property to the lease. When the potential tenants requested inclusion of the HUD-required clause in the lease agreement pursuant to the further assurances provision of the option agreement, the owner claimed that such a clause materially reduced his entitlements or benefits and proposed either a clause subordinating the lease to any mortgage on the fee interest, but requiring a non-disturbance agreement with the mortgagee or termination of the option agreement. The potential tenants sued for specific performance of the option agreement, requesting that the court require the owner to enter the lease agreement containing the HUD-required subordination clause, relying on the further assurances provision of the option agreement. The trial court held that the proposed HUD subordination clause materially reduced the owner's entitlements or benefits and dismissed the claim for specific performance of the option agreement. The court of appeals, however, reversed, finding that there was no evidence in the record showing how the owner's interests were materially reduced by the subordination clause.

While the CNR Healthcare Network holding may have been avoided by presenting sufficient evidence showing that the owner's interests were materially reduced by the subordination clause, measures taken at the drafting stage such as obtaining a greater understanding of HUD's requirements for long-term care facilities or including a provision in the option agreement giving the landlord discretion for termination of the option may have helped the owner avoid litigation. When broad regulatory compliance or further assurances provisions are proposed by healthcare tenants, counsel for landlords should carefully review such provisions and consider adding provisions requiring costs for compliance to be shared or borne by the tenant or giving the landlord the opportunity to terminate the lease if the landlord determines, in the landlord's sole discretion, that such regulatory compliance increases obligations or reduces benefits to the landlord.

State Laws

Most attorneys are aware that state laws regulate the provision of healthcare services, such as physician licensing and Medicaid laws, but some of these laws also contain provisions that affect entities engaged in transactions with healthcare providers. With respect to commercial leasing, lease provisions that influence the professional judgment or professional practice of a medical professional may violate state laws regulating such medical practices.

For example, in Forte v. Wal-Mart Stores, Inc., 2011 WL 1740182 (S.D. Tex. May 4, 2011), a jury awarded a group of opticians who had leased space from Wal-Mart nearly $4 million in civil penalties after holding that Wal-Mart had violated the Texas Optometry Act by including a provision in their leases for the opticians to list their office hours. The Texas statute “prohibits a retailer of ophthalmic goods, such as Wal-Mart, from directly or indirectly controlling or attempting to control the professional judgment, manner of practice, or practice of an optometrist.” The jury found that Wal-Mart's inclusion of a representation of hours for the opticians was a form of controlling the manner of practice of those opticians and was, therefore, a violation of the statute. The statute provided for statutory penalties, up to $1,000 for each day of violation, and the jury awarded the maximum. On a motion by Wal-Mart for remittitur, the court reduced the penalty to $400 per day, per optician, for a total of $1.4 million.

While Forte may represent an extreme example of liability for landlords under a state's healthcare laws, it illustrates the importance of awareness that state laws governing medical professionals could result in liability for landlords. Counsel for landlords should carefully review lease provisions that could be seen as influencing the practices or professional judgment of medical professionals, such as hours of operation, in conjunction with state laws that regulate those medical professionals.

Conclusion

Although it would be impossible to identify every potential provision in a lease with a healthcare entity that could lead to liability for a non-healthcare landlord, this article is intended to point out some potential pitfalls and raise awareness among real estate attorneys that special issues may be involved in leases with highly regulated healthcare entities. Frequently, non-healthcare landlords are not directly subject to the laws and can avoid burdensome contractual requirements with careful drafting. When landlords are directly subject to the healthcare laws by virtue of leasing to healthcare tenants, it may be beneficial for real estate attorneys to consult with healthcare attorneys for guidance. In many cases, knowledgeable counsel and careful drafting can help to avoid some of the potential pitfalls of leases with healthcare tenants.

Elizabeth A. Siemer is an associate in the corporate department of the St. Louis office of Lewis, Rice & Fingersh, L.C. Ms. Siemer's practice involves general corporate representation, healthcare law, insurance law and licensing, and employee benefits law. She advises both healthcare and non-healthcare entities in a variety of transactions including acquisitions, general contracting, and regulatory matters.