Office Lease Stark Law: The Rental Exception Guide (42 CFR § 411.357(a))

The Stark Law prohibits physicians from referring Medicare patients for designated health services (DHS) to entities with which they have a financial relationship, unless a regulatory exception applies. One of the most frequently relied-upon exceptions is the office space rental exception under 42 CFR § 411.357(a). For small practices, ensuring that office leases meet this exception is critical to avoiding Stark Law violations, repayment exposure, civil monetary penalties, and potential exclusion from federal healthcare programs.

CMS auditors and enforcement agencies closely examine lease arrangements for written documentation, fair market value (FMV), commercial reasonableness, exclusive use, and minimum term requirements. Understanding and applying these requirements allows small practices to structure compliant leases and withstand audit scrutiny.

Office space leases are often among the largest recurring expenses for small medical practices. When a physician leases space from a hospital, health system, or another referral source, the arrangement creates a financial relationship under Stark Law. If the lease does not satisfy the office space rental exception at 42 CFR § 411.357(a), any Medicare referrals made by the physician during the noncompliant period may be prohibited.

Stark Law is a strict liability statute. Intent is not required. A lease that fails to meet any element of the exception is noncompliant regardless of good faith. For small practices, careful structuring and documentation of lease terms are therefore essential.

Understanding Office Lease Compliance Under 42 CFR § 411.357(a)

The office space rental exception permits certain lease arrangements only if all regulatory conditions are met. Failure to meet even one requirement invalidates the exception.

Core Requirements of the Office Space Rental Exception

Under 42 CFR § 411.357(a), an office lease must meet the following conditions:

1. Written Agreement
    The lease must be set out in writing, signed by the parties, and specify the exact premises covered.

2. Minimum Term of One Year
    The lease must have a duration of at least one year. If terminated early, the parties may not enter into a new lease for the same space during the first year.

3. Exclusive Use
    The space must be used exclusively by the lessee during the times it is being used by the lessee, except for permissible use of common areas.

4. Fair Market Value Rent
    Rental charges must be set in advance and consistent with fair market value.

5. No Referral-Based Compensation
    Rent may not take into account the volume or value of referrals or other business generated between the parties.

6. Commercial Reasonableness
    The arrangement must be commercially reasonable even if no referrals were made between the parties.

Leases that fail any of these elements do not qualify for the exception.

• Centers for Medicare & Medicaid Services (CMS) administers and enforces Stark Law compliance.

• Department of Justice (DOJ) may pursue False Claims Act actions based on Stark violations.

• Office of Inspector General (OIG) may impose administrative remedies, including exclusion, in appropriate cases.

Important clarification:
 Stark Law violations do not automatically result in civil monetary penalties or exclusion. Enforcement outcomes are fact-specific and determined through applicable statutory and regulatory processes. However, noncompliant leases may taint Medicare claims, resulting in repayment obligations and additional enforcement exposure.

The Role of OCR in Lease-Related Compliance

While Stark Law enforcement rests primarily with CMS and DOJ, the HHS Office for Civil Rights (OCR) may become involved when lease arrangements intersect with HIPAA compliance, including:

• Physical safeguards for protected health information (PHI) in leased space

• Access controls in shared or multi-tenant facilities

• Record storage and confidentiality protections

Practices leasing space must therefore ensure that Stark compliance and HIPAA safeguards operate together, particularly in shared office environments.

Step 1: Execute a Written Lease Agreement

• Ensure the lease is written, signed, and clearly identifies the leased premises

• Retain executed copies in compliance files
   (42 CFR § 411.357(a)(1))

Step 2: Confirm a Minimum One-Year Term

• Structure leases with an initial term of at least one year

• Avoid informal or rolling month-to-month arrangements
   (42 CFR § 411.357(a)(2))

Step 3: Establish Fair Market Value Rent

• Obtain independent appraisals or use reliable commercial benchmarks

• Document FMV determinations and retain supporting materials
   (42 CFR § 411.357(a)(4))

Step 4: Document Commercial Reasonableness

• Document why the leased space is necessary for practice operations

• Avoid leasing excess or unnecessary space
   (42 CFR § 411.357(a)(6))

Step 5: Ensure Exclusive Use

• Confirm that the lessee has exclusive use of the space during leased hours

• Clearly allocate shared common areas and usage times
   (42 CFR § 411.357(a)(3))

Step 6: Align with HIPAA Privacy Requirements

• Verify physical and administrative safeguards for PHI

• Document privacy protections in lease agreements where applicable

Noncompliant Lease Arrangement

A small orthopedic practice leased office space from a hospital at below-market rates without a written agreement. CMS determined that the arrangement failed the office space rental exception because it lacked a written lease, did not reflect fair market value, and was not commercially reasonable.

Outcome:

• Medicare claims associated with the arrangement were deemed noncompliant

• The practice repaid approximately $200,000

• Ongoing compliance monitoring was imposed

Compliant Lease Arrangement

A dermatology clinic leased space from a medical office building under a one-year written lease supported by an independent FMV appraisal and exclusive use provisions. During a CMS review, the clinic produced complete documentation supporting compliance.

Outcome:

• No enforcement action

• Medicare participation preserved

Common Pitfalls to Avoid

• Verbal or informal lease arrangements

• Month-to-month leases without a compliant master agreement

• Below-market or referral-adjusted rent

• Leasing excess or unused space

• Failure to reassess FMV upon renewal

Each of these issues can invalidate the Stark exception.

• Use standardized lease templates reviewed by healthcare counsel

• Engage qualified appraisers for FMV determinations

• Reassess leases annually for continued compliance

• Centralize lease documentation in compliance files

• Coordinate Stark and HIPAA compliance reviews

Lease compliance should be integrated into the practice’s overall compliance program. Assigning responsibility, training leadership and staff, and maintaining transparent documentation ensures that lease arrangements remain defensible over time.

The office space rental exception under 42 CFR § 411.357(a) provides a clear framework for compliant physician lease arrangements. For small practices, ensuring that leases are written, fair market value, commercially reasonable, exclusive, and at least one year in duration is essential to avoiding Stark Law violations.

Consistent documentation and periodic review are the most effective safeguards against audit and enforcement risk.

An effective way to reinforce compliance is through a regulatory platform. Such systems track evolving requirements, generate ongoing risk insights, and ensure your practice remains audit-ready, minimizing liabilities while strengthening patient trust.

• 42 CFR § 411.357(a) Office Space Rental Exception
  

• Medicare Program; Physicians’ Referrals to Health Care Entities With Which They Have Financial Relationships
  

• Healthcare Compliance Guidance
  

• False Claims Act Enforcement