By Allison Nelson
The healthcare industry is not immune to the adverse economic impacts of COVID-19. Hospitals have had to halt elective surgeries, some non-essential specialty care providers have had to suspend operations, and patients have chosen to defer routine care with primary care providers. It is not surprising that healthcare landlords, like landlords with retail or restaurant tenants, are receiving requests for rent concessions.
Many commercial landlords are granting concessions, rather than forcing companies into bankruptcy and ending up with vacant shopping centers or office buildings. One favored solution is to defer rent by one to three months and then tack the deferred rent onto the end of the term or amortize it equally over the term. Other landlords convert abated rent into loans, decrease rent payments, or defer rent in exchange for a longer lease term. For most commercial landlords, granting concessions is a business decision, constrained only by loan provisions which require lender approval.
Landlords who are healthcare providers or suppliers, however, must take into consideration healthcare laws, such as the Stark law (“Stark”) and the anti-kickback statute (“AKS”), which require payments between certain healthcare providers to be, among other things, at fair market value and paid in compliance with a written agreement. Deviations from the written contract terms could be deemed to violate Stark and/or the AKS. Therefore, these healthcare landlords should develop a process for evaluating concession requests that takes into consideration these compliance issues.
Under Stark and the AKS, rent abatement or other concessions may be permitted if allowed by an existing provision in a compliant contract. For instance, if the force majeure provision of a lease allows for rent abatement when pandemics or national emergencies interrupt use of the premises and the tenant requesting the abatement actually experienced an interruption, then abatement may be appropriate, depending on the facts. Unfortunately, as many tenants are now discovering, very few force majeure provisions anticipated a pandemic. Even if the force majeure provisions do address pandemics, there are often carve-outs that require payment of rent.
If a contractual right to rent abatement or other relief does not exist, then the parties must assess the risk of providing a concession. It is not clear whether regulatory agencies will pursue rent concessions as fraud and abuse. Indeed, there are limited instances in which rent concessions would not lead to sanctions. On March 30, 2020, the Center for Medicare & Medicaid Services (CMS) issued blanket waivers, retroactive to March 1, 2020, exempting providers from sanctions in violation of Stark pertaining to a physician’s payment to a health care entity of below market rent, provided that several extenuating circumstances exist. The Office of Inspector General subsequently released a policy statement stating it would not pursue sanctions under AKS for arrangements covered by the blanket Stark waivers.
Whether the blanket waivers apply to particular rent concession is highly fact-specific. The parties must enter the arrangement temporarily for a “COVID-19 purpose,” which includes addressing interruption of a medical practice or business to maintain availability of medical care for patients and the community. CMS guidance provides examples, such as a hospital using space in a physician practice’s office at below fair market value to separate non-COVID patients from COVID patients, or a physician using office space in a hospital-owned property prior to entering into a written agreement. Rent concessions are not specifically addressed in the list of examples, but offering concessions arguably provides the economic relief necessary for a healthcare company to continue administering services to the community.
If a healthcare company relies on a blanket waiver to grant rent concessions, it should follow a few protocols:
- Implement well-crafted policies regarding the availability of rent concessions, including types of available concessions, eligible parties, qualifying circumstances, and duration.
- Apply policies consistently.
- Document any concessions, reliance on waivers, and corresponding agreements. While there is no requirement to provide CMS with notice before using a waiver, CMS encourages keeping records. Documentation should include the rationale and relevant facts for each concession.
Healthcare providers are urged to speak with legal counsel prior to granting concessions in order to best protect both parties from potential compliance issues.
Allison Nelson, Co-Deputy Chair of Akerman’s Real Estate Practice Group , focuses her national practice on representing healthcare systems in complex real estate transactions and mergers and acquisitions. In the healthcare sector, Allison negotiates compliant sales and acquisitions, joint venture developments, and leases, ground leases, and subleases.