Health Law Pointers - Volume VIII, No. 2

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The Joy of a Written Agreement

 

            Too many professional practices fail to document their contractual relationships or sign contracts that are poorly drafted. A well drafted agreement clearly sets forth the parties duties and responsibilities, will advance the project under consideration and provide for a more effective and amicable business relationship.

 

Why a written contract?

 

                        *          Integrate the deal into a single document.

                        *          Eliminate ambiguity.

                        *          Limit the potential for disputes.

 

Key Terms?

 

                        *          Parties to the transaction.

                        *          Effective Date.

                        *          Term; Renewals.

                        *          Duties and responsibilities of each party.

                        *          Compensation and payment arrangements.

                        *          Termination provisions; penalties.

                        *          Right to indemnification.

                        *          Insurance requirements.

                        *          Dispute resolution procedures.

 

            Many contracts extend for two or more years, and the principal actors involved may change. Having a written agreement documents the arrangements and offers some assurance that the original intent of the parties will be preserved regardless of any changes in management/ownership, or imperfect recollection due to the passage of time.

 

New Rules in the Formation of

New York Limited Liability Companies (LLCs)

 

            For some time, persons wishing to form a limited liability company or professional service limited liability company in New York State have been required to notify the public of the formation of the LLC by publishing a Notice of Formation in 2 newspapers designated by the County Clerk once the Articles of Organization have been filed with the Secretary of State.

 

            Effective June 1, 2006, there are new publication requirements in connection with the formation of LLCs that impose new penalties for noncompliance with this requirement and may increase the costs to the public of the formation of these business entities.

 

            The key amendments are as follows:

 

*          Notice must be published in at least one newspaper of daily circulation (e.g. Buffalo News). Though the period of publication has been reduced from 6 weeks to 4 weeks, the cost of publication overall may increase.

 

*          The Notice must disclose the identity of up to 10 of the founding members (thus eliminating the value of having an agent serve as the LLC organizer).

 

*          Failure to comply with the amended publication requirements will result in the “suspension” of the LLC’s authority to conduct/transact business in New York State.

 

            A transition rule applies to pre-existing LLCs that did not comply with the publication requirements prior to June 1, 2006.

 

 

Medical Office Leases

 

            When physicians lease medical office space, there are so many details to be dealt with in a short amount of time that the last thing some physician tenants consider is the Lease document itself. Often, the broker or other representative of the Landlord will present a Lease agreement for signature almost as an afterthought - a mere formality. It's described as a "standard lease" or the Landlord's "standard form" - with the implication that it's non-negotiable; that the many pages of provisions are just legal "boiler plate" and are not important, and that the only important things are the spelling of your name, the amount of the rent and the length of the term. Nothing could be further from the truth.

 

             A commercial lease is a complex legal document containing binding terms and conditions which govern all aspects of the relationship between the Landlord and Tenant. The form presented almost always favors the Landlord in every respect. A careful review of the Lease will reveal the entire cost of the deal. Leases can and almost always should be negotiated and the result is often a much more balanced agreement where the rights of the Tenant are protected.

 

            Here are a few of the more important points to consider to make sure the Tenant's expectations are met:

 

Tenant Improvements

 

            The build-out of the office space is often the primary focus of pre-lease discussions. While the color of the carpet in the reception area and the location of sinks in the examining rooms are important, such items are just the tip of the iceberg. Careful plans and detailed specifications developed by an architect or other design professional are critical. If the Landlord is doing the build-out, the Tenant should make sure that the offered allowance for Tenant improvements is adequate. For example, say the Landlord offers $100,000.00 for the build-out. Included in its estimate are an allowance of $10.00 a square yard for carpeting; $3,500.00 for lighting fixtures, and $6,000.00 for cabinetry and countertops. All of these allowances must be carefully examined. The quality of $10.00 a square yard carpeting may be far inferior to what the Tenant expects; the lighting allowance may be insufficient to provide adequate light in all needed areas; and the quality and number of cabinets and counters provided are far less than needed. If the Tenant is responsible for "extras" over allowances, the Tenant must make sure the allowances are realistic.

 

            While the Tenant improvements allowance is usually provided by the Landlord as an incentive to enter into the Lease, some Leases provide for the Landlord "recovering" the cost of Tenant improvements over the life of the lease. Using that same $100,000.00 improvement allowance, a Lease could provide that the Tenant will reimburse the Landlord for that expenditure by paying $20,000 over the five year term at a rate of $1,666.66 of additional rent each month. That's obviously a different deal than the Lease which does not allow the Landlord to "recover" the cost.

 

Rent and "Additional Rent"

 

            Basic rent is the calculation of the rental rate per square foot times the square footage of the office and the resulting annual amount is payable in monthly installments. As with the above example of "additional rent" where the Landlord recovers the cost of Tenant improvements, there are other aspects of "Additional Rent."

 

            The most common are so-called "CAM" charges, i.e. common area maintenance charges. Landlords typically charge office Tenants for their pro rata share of the Landlord's operating expenses for the building. These usually include real estate taxes, insurance premiums, common area utilities, maintenance and repair costs and other expenses. First, for the calculation of the Tenant's pro rata share, it is important that the Tenant's percentage is determined by taking the actual square footage of the leased premises and dividing it by the total amount of leasable space in the building. You must be careful that the denominator is the leasable square footage as opposed to the leased square footage or the Tenant's percentage of the whole can increase dramatically if there are vacancies.

 

            Some Leases provide that Tenants pay their pro rata share of all CAM charges. Others provide that the Tenant will pay their pro rata share of increases in the Landlord's common area and maintenance expense over a "base year", usually the year prior to the commencement of the lease term. Obviously, paying your pro rata share of increases over a base year is far less than paying your pro rata share of the entire expense.

 

            Some CAM charges include a "management fee". This is often a fee paid to an affiliate of the Landlord and it may or may not be appropriate depending on the percentage charged and the services provided for the fee.

           

            It is important to have a real clear idea of all elements of "Additional Rent" so that the total monthly outlay - the true cost of the Lease, can be determined.

 

Maintenance and Repair Obligations

 

            Depending on the length of the Lease and the type of building, many Leases require Tenants to perform maintenance and repairs within their leased premises. The exact language must be examined carefully. Under some Leases, a Tenant could be required to purchase an entire new HVAC system if it stops working during the term. While it may be reasonable for the Tenant to repair and maintain such a system, you should be careful that the Lease does not require you to "replace" such systems.

 

            As the above examples illustrate, just signing a "standard lease" can result in many surprises and hidden expenses to the Tenant. A thorough review by the physician tenant and discussion of the lease provisions with an attorney or other real estate professional are essential.

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