Aged care facility leases – 10 important tips

Aged care facility leases – 10 important tips | Moores

As the demand across Australia for aged care grows, the market is responding with supply.  To preserve capital, some aged care providers are opting for a leasehold model for new aged care properties.  A lease for an aged care facility is not a ‘standard’ lease.  Whether you’re talking about a ground lease, development lease or other arrangement, here’s some things you should consider in any leasehold aged care facility.

1. Long tenure   
   Make sure that the lease provides a tenure long enough for both landlord and tenant to justify their investment.  If the tenant is looking for the flexibility that comes with options, also consider the alternative of providing ‘break clauses’ at key dates during a long fixed term lease.
    
2. Works required for compliance   
   Building regulations and accreditation requirements are likely to change over time.  The lease should allocate responsibility for those works.  Typically, building regulation issues should be a landlord responsibility.  Accreditation issues should be a tenant responsibility.  It is sensible to allow the tenant (aged care provider) to undertake any works required for compliance without permission – just include a notification requirement assuring the landlord of the need for the works and that the works comply with all relevant laws.
    
3. Retail Leases legislation   
   An aged facility is likely to fall within the definition of a ‘retail premises’ in some States of Australia (although I’m yet to see a definitive case on point).  Make sure that the lease does not offend some of the strict retail leasing rules.  Some lease arrangements will be exempt – look closely at any exemptions and consider asking for a definitive ruling on that point, if possible.
    
4. Redevelopment or refurbishment  
   An aged care facility is likely to need a ‘face lift’ at least once during the life of the lease.  The tenant will want the ability to refurbish (or maybe even redevelop the site) without too much interference from the landlord.  Unless the tenant is certain it can keep the place looking good, it may be less inclined to proceed. 
    
5. Enforcement   
   In the event of a tenant default (rent or other), eviction or ‘lock out’ is unlikely to be the first step.  There might be 100+ elderly residents whose care needs to be considered.  Default provisions in the lease need to contain suitable escalation clauses and a mechanism that allows the landlord to enforce the lease without compromising resident care.
    
6. Security   
   Make sure that the size of security deposit is appropriate considering factors like: rent default, costs of leasing to another operator, making good or making safe tenant works and the costs of arranging resident care or management of the facility in the event of lease termination.  To protect both landlord and tenant, take any security deposit in the form of a bank guarantee rather than a cash deposit.
    
7. Option / first right of refusal   
   A tenant may wish to secure its long term future by purchasing the property.  Consider whether the lease should contain either an option for the tenant to purchase the facility or at least a first right of refusal to purchase the property from the landlord.
    
8. Selling the business / assignment  
   Assignment provisions in a lease typically contain requirements about solvency and business experience.  Make sure the lease assignment provisions can handle the possibility of things like Commonwealth Department approval, compliance with sanctions and other matters specific to aged care.
    
9. Bed licences   
   Some aged care leases require the bed licences to be ‘tied’ to the property (tenant must transfer the bed licences to the landlord or its nominee if the lease is ending).  This should be assessed on a case-by-case basis and should include a consideration of the impact on the tenant’s business model and obligations to financiers.
    
10. Recent VCAT advisory opinion   
    If you’re using an existing lease document, make sure that it is consistent with VCAT’s recent advisory opinion in relation to essential safety measures and cost recovery for repairs and maintenance.  Although the opinion doesn’t technically carry the weight of law, ignore it at your peril.

If you would like further advice on aged care facility leases, please don’t hesitate to contact us.