HEALTH CARE BASICS FOR BANKRUPTCY LAWYERS

IX. REAL PROPERTY LEASES WITH HEALTH CARE PROVIDERS

A. Lessor's Rights Upon Termination of a Hospital Lease

Hospital buildings are usually single purpose structures and are not useful for any other business. Furthermore, they are usually constructed for use by a particular kind of hospital. Many hospitals and nursing home facilities are owned by real estate investment trusts that acquired the facilities in sale/leaseback transactions. In order to protect the landlord's investment and minimize the possibility that the landlord will be left with an empty and useless building at the end of the lease term or upon the tenant's default, the lease will typically have provisions designed to enable the landlord to operate the hospital at the expiration of the lease term. For example, the lease may require the tenant to continuously operate the leased premises as a hospital of a designated type through the end of the lease term. The hospital lease may give the landlord an option to acquire all of the tenant's personal property, including furniture, fixtures, equipment, contract rights and perhaps even its name, at either market value or less depending on whether the tenant is in default. The option may also require the tenant to use its best efforts to assign all contracts related to the operation of the hospital to the landlord, including its licenses and certificate of need. Although the landlord cannot purchase and the tenant cannot sell the right to treat patients and employ hospital personnel, if the hospital must be operated on the leased premises in the ordinary course of business through the term of the lease, it may be reasonable to assume that the patients and doctors will elect to stay in the premises if the landlord is going to continue uninterrupted operations. These lease terms clearly contemplate the landlord simply stepping into the tenant's shoes and operating the facility to protect the landlord's investment. Similar provisions are often found in other leases of single purpose facilities.

If such an option exists and is exercised during a bankruptcy proceeding, the following practical and legal issues would exist for the landlord:

1. Will the option be enforced by the bankruptcy court if the landlord is not paying anything for the "going concern value" of the business, but is only paying the market value of used furniture and equipment?
2. Was the option written so that it could be exercised if the lease expired because of a default or because of the tenant's failure to assume the lease in bankruptcy? If so: When must the option be exercised? When does the lease terminate?
3. Is the landlord ready to take over operations? Will the landlord be able to obtain necessary certificates and licenses to begin operating the hospital after termination of the lease?
4. Will the bankruptcy court enjoin a debtor from discontinuing operations prior to the expiration date?
5. Are the landlord's rights to acquire property used in connection with the operation of the hospital broad enough to include such items as the hospital name, patient files and records, supplier contracts, non-patient payor and third party payor contracts, accreditation and certifications, access to data processing and employee records?
6. Has the landlord secured adequate insurance to cover the landlord and/or medical staff from medical malpractice claims that arise after the termination date from incidents that occurred before the termination date?
7. What kind of orders can be obtained from the bankruptcy court to require the debtor to provide the landlord with necessary access to the records, contracts, insurance policies, staff and premises, as necessary to enable the landlord to get the necessary licenses ready to take over operations upon termination of the lease?

The tenant that is a debtor under a hospital building lease that contains a purchase option for the benefit of the landlord, also has a number of issues to deal with, including the following:

1. Is the option enforceable?
2. Does the debtor have anything left to reorganize?