Occupational Leases in the Healthcare Sector

Sale and leasebacks of healthcare assets and long leases of healthcare facilities have been a popular structuring feature in recent years. Private and institutional investors in Irish real estate are therefore increasingly becoming landlords of healthcare facilities, whether operated by public or private healthcare providers.

The additional activity in this area may arise from increasing complexity, commercialisation or specialisation in the healthcare sector in Ireland. It may also be a result of changes in the Built Environment sector in Ireland, with many more healthcare facilities, including hospital facilities, being located in multi-use developments and therefore operating alongside residential, office and retail space.

Leases of these properties will be tailored and bespoke to their location, and each one may vary substantially depending on various matters such as the requirements of the operator and the needs of the related development. We have, however, noted some common themes and issues in occupational leases of healthcare facilities.

We examine some of the issues we see arising in occupational leases in the healthcare sector and offer some tips as to how to avoid issues delaying transactions or causing problems in the future.

Tenant fit-outs and tenant works

Tenant fit-outs and works and the related contractual commitments of the parties are often matters of negotiation and perceived risk in occupational leases. This is particularly the case in mixed-use developments where landlords may have concerns as to how tenant works will affect the wider development.

Healthcare fit-outs are typically particularly complex and expensive. This brings the risk of blockages or negotiation issues arising in this area.

The clear lessons for landlords and tenants is to get as much detail and certainty on these matters as early as possible in the transaction. Parties should ensure that the necessary professionals (architects, contractors, engineers and other specialist advisers) have been included in the project early to avoid issues arising at a later stage.

Tenant equipment

In addition to the works carried out by the tenant, the tenant may bring medical equipment on to the property. This equipment may be far more technically complex and valuable than equipment installed in office or retail developments.

Landlords in particular should consider how this equipment might affect their insurance obligations under the lease and how it would be treated in the event of damage to the property by an insured risk. Landlords should also consider the risk of damaging this equipment as part of normal landlord works and landlord inspections.

Exclusivities

Healthcare operators often seek exclusivities from landlords. An exclusivity generally limits the landlord’s legal right to grant leases for the same use to other parties in the same development. This is particularly common in the case of pharmacies.

These clauses can be problematic because landlords may breach them by inadvertently granting leases with similar permitted use clauses or with permitted use clauses that are too broad. This can occur for example when a party buys a building with an existing exclusivity.

Landlords should pay particular attention to any obligations and take care when putting in place new leases which could be deemed to breach the exclusivity.

Car parking arrangements

Medical facilities commonly have a high requirement for car parking spaces, both to service staff and members of the public attending at the facility. As regards members of the public, the availability and affordability of car parking spaces can be particularly a sensitive and important issue for medical facilities.

In many developments this will not be an issue. But in developments with more limited car parking capacity or where there is already very high usage, this may become a very important point for landlords and tenants.

Tenants may seek a large number of exclusive spaces or minimum availability requirements and the issue of charging for car parking may also have to be addressed. Tenants in particular should consider both the current arrangements and any future potential changes the landlord could make, such as for example the introduction of paid parking.

Security of tenure

Similar to retail occupiers, healthcare tenants will often be particularly focused on ensuring that, if their venture is successful, they will have rights to obtain a new lease at the end of their term. Having built up goodwill and a patient or client base in a particular area, a healthcare provider will not want to be faced with potentially being removed from the property at the end of the term of their lease.

Commercial tenants will acquire statutory renewal rights in certain situations when they have been in occupation of a business premises for a period of five years or if they have carried out significant improvements to the property. Landlords will often seek to have a commercial tenant execute a deed of renunciation of these right at the outset, essentially waiving any such right of renewal.

Both landlords and tenants should consider the potential importance of these issues in negotiations.

Sustainability

Sustainability and energy efficiency is an increasingly dominant theme in commercial lease negotiations generally at present. We previously examined the many benefits of green lease clauses for both landlord and tenants and key considerations for entering a green lease here

This is likely to be particularly the case in the healthcare sector because in October 2022 the Health Service Executive (HSE) published its Infrastructure Decarbonisation Roadmap. The Roadmap outlines their approach to achieving the public sector targets set out in the Government's Climate Action Plan.

The Roadmap confirms that whilst the energy related emissions from fuel and electricity used by leased buildings is classified as a scope 3 emission by international standards, it is considered and treated as a scope 1 and scope 2 emission by the Irish Government’s Climate Action Plan and by the HSE. Scope 1 and scope 2 emissions relate to direct and indirect energy related emissions from fuel and electricity used in owned buildings. As a result, a lease of a building involving the HSE to provide healthcare services will need to incorporate specific green lease clauses.

For more information on occupational leases and their impact on your organisation, contact a member of our Real Estate team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.