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Negotiating Alternative Care Site Occupancy Agreements

April 7, 2020

The COVID-19 pandemic and the governmental responses have had swift and severe impacts socially and economically.  In many states, governments have issued mandates requiring individuals to stay at home and many businesses to close.  Travel has also been severely curtailed, and conferences and other events nationwide have been postponed or cancelled.  As a result, the hospitality industry is one of the hardest hit.  Many hotels are struggling with single-digit occupancy rates and several have closed entirely.

However, the burgeoning need for additional hospital beds and housing for medical staff and patients has created a unique opportunity for hotels, many of which are offering, or have been asked to provide, space or services to medical institutions in this time of need.  Agreements for these types of sites, often called “alternative care sites,” raise a host of considerations and challenges for the parties involved.  Here is a review of some of these considerations and challenges:

Defining the Agreement.  There are differing opinions on how agreements for these alternative care sites should be structured.  Is it most appropriate to treat the arrangement as a lease, a license, an occupancy agreement, or even something else?  The characterization of these agreements will define the rights and remedies of the parties during the term and upon default.

Franchise and Brand Concerns: Hotel owners should review brand standards and operating requirements in their franchise agreements and management agreements, and also determine what restrictions may exist on entering into third party leases, licenses or occupancy agreements. They should also consider how management fees, franchise fees and other amounts owing under these agreements are to be addressed during the term of the lease, license, or occupancy agreement.

Lender Concerns.  Loan agreements should also be reviewed to determine what restrictions exist with respect to conducting operations, and whether lender consent is required for entering into an alternative care site arrangement. 

Employment and Staffing.  The hotel owner will need to decide how to staff the hotel during the term of the agreement and who should staff it – the hotel owner or the medical provider.  What about housekeeping, food and linen service? The safety of employees, payment of wages, and logistics for operating the hotel should all be carefully considered. 

Furniture, Fixtures and Equipment.  Should the hotel owner or the medical provider provide the furniture, linens, and other inventory for use during the term of the agreement?  Depending on the use of the hotel, it may be advisable to have any such items owned by the hotel removed prior to occupancy by the lessee, licensee, or occupant.  In other situations, hotel owners may offer to leave such items for use by the medical provider.  If so, the parties should agree on how these items will be maintained, the condition in which they must be returned, and the circumstances under which they must be replaced. 

Vacating and Sanitizing at the End of the Term.  In what condition should the hotel be surrendered at the end of the term of the arrangement?  Hotel owners may want to require that the lessee or licensee sanitize the hotel, including any personal property left for their use, or pay for a mutually agreeable third party to perform the sanitization.  Hotel owners should also consider what damages will be incurred if a lessee, licensee, or occupant does not vacate at the end of the term.  At some point, this too shall end and hotels will reopen to paying guests.  A clear understanding of each party’s rights and obligations upon termination of the arrangement is crucial, along with consequences for failure to adhere to the terms of the agreement.

Insurance.  Hotel owners should ensure that their lessees, licensees, and occupants are maintaining the appropriate coverage for their operations.  This may include commercial general liability insurance, medical malpractice insurance, worker’s compensation insurance, or other forms of insurance.  Minimum limits will depend on the specific use of the hotel.  Hotel owners should similarly consider their own insurance coverage and reevaluate whether any changes to coverage or limits need to be made in light of the specific use of the property.

Healthcare Regulatory Concerns.  Generally, the lessee, licensee, or occupant will be responsible for ensuring that their operations at the hotel are in conformance with all applicable healthcare rules and regulations.  Traditionally, healthcare providers have been extremely regulated in where healthcare services may be provided.  However, in light of the COVID-19 pandemic, many regulations are being waived or relaxed in order to provide healthcare providers the flexibility they need to treat the influx of patients.  The Centers for Medicare & Medicaid Services, which is the nation’s largest health insurer, has issued numerous temporary regulatory waivers allowing hospitals and other health systems to deliver services in unconventional locations.  These changes, coupled with a growing need for offsite treatment centers and housing, make hotels an easy choice for alternative care sites.  

Real Estate Concerns.  Hotel owners may need to examine restrictions applicable to the real estate to ensure the new use does not violate any applicable restrictions or regulations (i.e., zoning ordinances and recorded use restrictions).  Although strict compliance with zoning regulations may be waived in particular instances during this emergency, such waivers will be specific to the applicable jurisdiction and should be examined on a case-by-case basis.

Asking the right questions and drafting these alternative care site arrangement agreements carefully will be critical to successful relationships between hotel owners and medical care providers.  Honigman is available to assist in helping hotel owners and operators navigate these complex arrangements.  Our team includes experienced attorneys in key related practice areas, including real estate, hospitality, healthcare, insurance, tax and employment.  If you or your company are considering such an arrangement, please reach out to any member of your Honigman team to learn more.