Landlord’s Lien Can Pose Problems In Healthcare Leases

The unique aspects of healthcare leasing may elude the general facility manager. Outside of the statutory and regulatory hurdles, a facility manager must be aware of numerous other unique issues facing his or her tenant clients in the healthcare context. One such issue is landlord’s lien.

First for a definition: A landlord’s lien gives the landlord/owner the right to seize and sell a tenant’s assets if the tenant fails to pay its rent.

Jurisdictions differ, but in states where a landlord’s lien is statutory — or in leases where it is included — it is important for a healthcare tenant to consider two complications a landlord’s lien will cause.

• Equipment Cost and Financing. A landlord’s lien on a hospital tenant’s equipment is arguably excessive and certainly problematic. This is because most of a hospital tenant’s equipment is significantly more expensive than standard desks and chairs. I’m talking about CT scanners, MRI units, and other large equipment, and much of this equipment may be leased with existing financing, which further complicates the existence or granting of a landlord lien.

Even in states where a landlord’s lien isn’t statutory, many landlords will include a consensual lien as part of the lease. If you’re working with a landlord who doesn’t do a lot of medical leasing, his standard lease agreement may simply describe the property (i.e., equipment, furniture, inventory, etc.) in broad terms. For a healthcare tenant, a waiver of lien for healthcare equipment needs to be included.

• Protected Health Information. Any protected health information must be — not should be but must be — specifically excluded from the landlord’s lien.  If protected health information is not specifically excluded, then there is the risk of a potential HIPAA violation.

As a reminder, HIPAA (the Health Insurance Portability and Accountability Act) requires that “Covered Entities” (i.e., the healthcare tenant) establish policies and procedures to safeguard the confidentiality of individuals’ protected health information. The burden and obligations of securing this information falls solely on the tenant. To make sure a tenant is covered in the event of a foreclosure, a healthcare tenant’s leases also needs to include specialized language regarding no lien on any protected health information.

In cases where a landlord lien is not specifically included within the language of the lease, a tenant may be assuming a statutory landlord lien. Either way, from a negotiating standpoint, the healthcare tenant would want, in order of priority:

1. Waiver of the landlord lien.
2. Subordination of the landlord lien.
3. Negotiation of the landlord lien with the foregoing issues addressed.

This is the sixth part of a 10-part series on healthcare leasing issues. Remaining parts will appear monthly throughout 2015.

Brooks Smith is a commercial real estate and finance attorney for Bradley Arant Boult Cummings. He regularly represents healthcare clients in all aspects of commercial real estate development, acquisition, disposition, leasing and financing. Connect with Smith on LinkedIn or through Bradley Arant Boult Cummings’ website.

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