Whether you are in the process of negotiating a new lease or you are conducting an internal review of leases in preparation for a transaction or otherwise, below are five tips to help ensure that your lease arrangements are compliant with the federal Stark Law. These tips will help you avoid some of the issues that we frequently see when reviewing leases as part of due diligence in health care transactions.
But first, do you need to be reading this? Before we get to the tips, figure out if your lease arrangement is subject to the Stark Law. That is, is one party a designated health services entity (“DHS Entity”) and is the other party a referring physician*? If not, the arrangement is outside of the Stark Law, and you can disregard the tips below. But, you should still proceed with caution, as the federal Anti-Kickback Statute (and state fraud and abuse laws, if any) may still apply. If you are unsure, or if the arrangement involves a series of complex relationships in which one or more physicians and DHS Entities are potentially involved, you should seek the advice of health law counsel.**
Tip 1: A Stark Law compliant lease explicitly defines the leased space. If a complete space/unit is being leased, state the full address of the space, including the unit/suite number, if applicable. If less than a complete space/unit is being leased, attach a floor plan as an exhibit to the lease that clearly marks the leased space. Always state the square footage of the leased space.
Tip 2: If equipment is being leased in addition to space, the equipment needs to be specifically described. The best way to do this is to attach an inventory list as an exhibit. The list can include a “general office” category for small items that do not make sense to list individually.
Tip 3: The lease should state that the lessee has exclusive use of the leased space (and, if applicable, the equipment) during the lease period, and it is essential that the lessee actually have exclusive use of the leased space (and equipment) during the lease period. (That said, it is okay to share common areas, e.g., waiting rooms, elevators, hallways, bathrooms.) Note: This does not prohibit a correctly structured time-share arrangement.
Tip 4: A DHS Entity should never lease space from a physician for which it has no current use or which it will hold empty. For a lease to meet the office space rental exception, the Stark Law requires that the lease arrangement: 1) be commercially reasonable, and 2) not exceed that which is reasonably necessary for legitimate business purposes. A space lease for which the DHS Entity has no current use or which will be held empty most likely fails to meet these requirements.
Tip 5: Be very careful about using holdover language in a space lease. The Stark Law office space rental exception automatically provides for lease holdovers if the parties continue to operate on the same terms and conditions (that are Stark Law compliant). This provides protection for parties who forget to renew leases or enter into new leases before the term ends. It is unclear whether the parties can avail themselves of this protection if a lease has language explicitly disallowing holdovers. Another issue can occur if the lease allows for a holdover but provides for penalty payments for the holdover period. If a holdover is allowed subject to a penalty amount but the penalty amount is not enforced, that, arguably, is a change in terms of the lease and the Stark Law holdover protection would not be available. Further, the failure to enforce the holdover penalty amount might be considered to be debt forgiveness, which creates a separate financial arrangement between the parties that must meet a Stark Law exception.
*For purposes of this article, a referring physician would include an individual referring physician, a physician organization of which there are referring physician owners (it would not include one with referring physician employees or contractors only because this article does not address indirect compensation arrangements), potentially any legal entity whose sole owner is a referring physician, and any Immediate Family Member (as defined in the Stark Law) of a referring physician.
**This article does not address indirect compensation arrangements, which could also be created by lease arrangements, and the requirements of the indirect compensation arrangement exception.