The 10 Biggest Legal Mistakes Physicians Make in Negotiating Subleases from or to Other Doctors

Excerpted from The Biggest Legal Mistakes Physicians Make: And How to Avoid Them
Edited by Steven Babitsky, Esq. and James J. Mangraviti, Esq. (©2005 SEAK, Inc.)

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Executive Summary

Physicians should address the following issues in the lease if they will be subleasing space in an existing health care office. Both the sublandlord and the subtenant should consider these issues.

 

Mistake 1        Failing to Review the Lease

Sublandlords often assume that they are permitted to sublet a portion of the premises in question. If the lease contains a prohibition against subletting (and most leases do), and the leaser sublets without first getting the landlord’s permission, the leaser may be required to evict the new subtenant or at least pay a sum of money to the landlord.

If the leaser is required to evict the subtenant, the subtenant could sue the leaser for damages sustained (e.g., loss of income and the cost of having to get new office space).

 

Action Step     Physicians should be familiar with the terms of the lease.

 

Mistake 2        Failing to Get a Copy of the Underlying Lease

The sublandlord and the subtenant often enter into a short written agreement (if they enter into any written agreement at all) concerning the terms of the tenancy. The subtenant is unaware of any of the terms involving the sublandlord and the landlord. The subtenant should review the existing lease (often referred to as the underlying lease) between the sublandlord and the landlord because the subtenant should know whether the sublandlord is permitted to sublet space. Even if the sublandlord is permitted to sublet the space, the subtenant’s lease will be subject to the terms of the lease between the sublandlord and the landlord. Therefore, it is in the subtenant’s best interests to find out exactly what those terms are. If the subtenant is evicted because the sublandlord had no right to sublet the premises without first obtaining permission, the subtenant may sue for damages but would still be out of business for a period of time. Also, the subtenant would need to find adequate space again.

 

Action Step     When it comes to real estate, physicians should always get the terms of the deal in writing.

 

Mistake 3        Having a Lease That Fails to Clarify What Services the Sublandlord Will Provide the Subtenant

A common term in short subleases between doctors is that the sublandlord will provide customary services to the subtenant. A problem could arise when the subtenant and the sublandlord have differing opinions about what constitutes customary services. Therefore, each party to the transaction should ensure that both the sublandlord and the subtenant agree to the following issues:

  • Will the sublandlord take telephone calls and book appointments for the subtenant?
  • Where will the subtenant’s charts be kept?
  • Does the subtenant have sufficient storage for supplies both within the office and in storage bins (if available) in the building?
  • What provisions will be made for the subtenant’s signage?
  • What security is provided for the subtenant’s records, supplies, and other materials? Keeping records secure is imperative under the Health Insurance Portability and Accountability Act (HIPAA).
  • Does the subtenant have access to a waiting room?
  • Is the space Medicare-approved?
  • Is there emergency access to the office space?
  • Are the elevators (if any) operational 24 hours a day?
  • Is there access to parking 24 hours a day? If the building has parking, can the subtenant obtain discount parking validations for patients?
  • Are the exam rooms soundproofed to maintain patient confidentiality?
  • Will other doctors be permitted to lease space in the office?
  • Is the subtenant personally liable under the terms of the lease?

Action Step     Physicians should make no assumptions about the services to be provided.

 

Mistake 4        Failing to Comply With Federal and State Self-Referral Rules

The federal government and most states have rules against self-referrals. To avoid a self-referral violation, physicians should make sure the lease is in writing, has a period of no less than one year, and the rent that is being charged is fair market value. “Fair market value” rent is rent that is commonly charged in the community for the type of space being renting. Under no circumstances should the amount of rent charged be based on the volume or value of referrals. A self-referral violation does not require intent. This means that even if the physicians never intended to be involved in a self-referral situation but it turns out that they are, the parties could be liable to pay a substantial fine.

 

Action Step     Physicians should have an attorney ascertain whether there is a prohibition against self-referral in their state. If there is such a prohibition, they should find out if there are any safe harbors; if there are any safe harbors, they should make sure that the lease is in compliance with them.

 

Mistake 5        Failing to Comply With Federal and State Self-Anti-Kickback Rules

The federal government and most states have rules against kickbacks. To avoid a kickback violation, physicians should make sure that the lease is in writing, has a period of no less than one year, and the rent being charged is fair market value. This safe harbor is essentially the same as the safe harbor for self-referrals described in Mistake 4. Again, under no circumstances should the amount of rent charged be based on the volume or value of referrals. Unlike self-referral violations, however, an anti-kickback violation requires “intent.” Intent means that a person who had no intention to pay or be paid a kickback cannot be found liable; if, however, that person is found guilty, he or she could be subject to jail time.

 

Action Step     Physicians should have their attorney determine if there is a prohibition against kickbacks in their state. If there is such a prohibition, they should find out if there are any safe harbors and, if so, make sure that the lease is in compliance with them. Since an anti-kickback violation is very serious, physicians should make sure that the lease does not inadvertently place them in such a situation.

 

Mistake 6        Failing to Investigate

When subletting space to or from another doctor, physicians may neglect to find out who the other doctor is. They should make sure to do so: If the doctor has been in trouble with state or federal authorities, it is most likely that these authorities would take a close look at the subletting physician too. The subletting physician may have nothing to hide, but why invite such scrutiny?

Action Step     Many sites on the Internet provide information about whether a doctor has been excluded from a federal program or has been censured by a state regulatory agency. Physicians should make use of these sites before they enter into the lease.

 

Mistake 7        Failing to Describe the Fee for Management Services If Provided Under the Lease

If the sublandlord is going to provide management services, physicians should make sure they are paying fair market value prices for such services and try to get a breakdown for each service provided.

 

Action Step     Physicians should call a management company in their community and ask how much it charges for such services. Then, they should compare this amount to the price the sublandlord is charging.

 

Mistake 8        Failing to Describe the Fee for Billing Services If Provided Under the Lease

If the sublandlord is providing billing services, physicians should make sure these services are paid for at fair market value and not a percentage of the total, particularly if the billing company is determining the codes that are billed. Physicians should remember that they are ultimately responsible if billing or coding is done incorrectly.

 

Action Step     Physicians should conduct a random review of the billing company, as well as have an independent coder check the bills to make sure that the bills being sent to third-party payers accurately reflect the services being provided.

 

Mistake 9        Failing to Provide for a Secure Environment

Many doctors leave files unattended on desks, have signature stamps out in the open, keep checkbooks in unlocked drawers, and use unsecured computers. Such behavior in an office that has subtenants and other workers who are not part of the staff is an invitation to trouble. Physicians should make certain to have an area to which only they have access and that they keep their valuables there when they leave the office.

 

Action Step     Physicians should get keys to their file cabinets; keep signature stamps and checkbooks under lock; use their own computer, and make sure that their password is not easy to guess.

 

Mistake 10                  Failing to Personally Inspect Bank Records

Subtenants often let the sublandlord’s office manager or bookkeeper handle bank records. This is an excellent way of having funds embezzled. Physicians should make sure to check each statement that arrives. If they discover a discrepancy, the bank will be liable if it is notified immediately. If there have been discrepancies over a period of several statements and

 

the bank has not been notified, the physician would be considered negligent and the bank would not be required to make good on the loss.

 

Action Step     Physicians should keep control over the checking account. They should review statements monthly, check signatures on checks, make sure that they are familiar with the names of their vendors and what they usually charge.

 

Conclusion

Physicians who are involved in a sublease should avoid these mistakes. Failure to do so could result in serious trouble.

 

Written by:

Deborah A. Green, Esq.

Peer reviewed by:

Marc G. Epstein, Esq.

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