GP Surveyors discuss the issues and challenges facing practice managers with premises leasing and the best ways to keep practices profitable. Here is your essential guide to GP practice premises.

Practice managers often have questions about premises and how to get the most out of them. These include enquiries about notional rent and NHS rental reimbursement, whether an owner-occupied property or held under a lease; how to manage ownership issues and GP partnership change where disputes can arise; and advice on pharmacy installation, rent reviews and lease renewals. The role of practice managers is evolving at a significant pace. Some have a share in the practice and most are key influencers in the business, advising and supporting owners and partners on what they should consider with regard to premises.

What are the challenges for Practice Managers in maintaining and profiting from the premises?

Practice Managers are not qualified valuers and premises are generally only covered briefly in their training. A Practice Manager we represented in another matter (notional rent) had installed a pharmacy but came to us after the deal was agreed and this resulted in a reduction in notional rent that would have been avoidable had she taken appropriate specialist advice earlier.

NHS rental reimbursement letters advise practices to appoint a suitable surveyor, so understanding is increasing. With finances being squeezed, maximising the building to its best advantage is essential for most practices. We are seeing additional challenges in primary care with regards to recruitment, Care Quality Commission standards, and clinical excellence. Practice Managers do not come into the profession to be premises experts and there are training and support available from organisations such as the Royal College of GPs and the British Medical Association but this tends to be more of a clinical nature and practices require more support in relation to premises.

Is there a crisis facing GP practice premises?

There is always a need for investment in GP practice premises but the legal intricacies around NHS rental reimbursement and the NHS approvals process to carry out improvement works can be slow and difficult. Since the inception of NHS England and NHS Property Services in 2013, there has been a slowdown in new premises developments. That in itself is not necessarily an issue if the investment is being made into the existing premises stock. However, there can be a lack of a cohesive strategy as to need, value and where funds would be best spent. Any building that is not suitable for ongoing care for more than five years needs a strategy in place now, setting out how it is going to be replaced or redeveloped to meet the patient’s needs for ongoing care. As GPs are separate contractors they need to be brought on board to the larger vision. Changes in the GP work profile, succession and a lack of GPs are all contributing to the crisis currently facing general practice. When we talk to GPs, one of their major concerns is taking on large loans for buying their share of the premises under the practice agreement.

Many incoming GPs also do not want to sign up to the commitment of a long lease and this, in time, may lead to a situation where the NHS starts leasing the buildings directly and subleasing them to the GP practice for a shorter term. Some GPs seem to want the benefits of occupying a building but not the corresponding liabilities that accompany the benefits. A typical case for us was where two partners who owned the building had retired and wanted to release their equity from their property. The incoming partners did not want to buy into the practice and were occupying the building under a business tenancy; thus, the solution was to create a mutually agreeable lease with NHS England approval. This allowed the retired GPs to release their equity and the occupying GPs to secure their NHS rental reimbursement for the duration of the lease, being entered into. We see leases becoming more common year on year, and with press releases suggesting that a large proportion of the GP workforce want to retire in the next three to five years we expect this trend to continue.

What does the future hold for GP practice premises?

Most problems in general practice relate to succession and having enough GPs to do the work. Some of the promised investment is great and will benefit practices once they have obtained it through what can be a notoriously difficult application process. Many investors are willing to build new, state-of-the-art GP practice premises, but they require the support of clinical commissioning groups for service provision and NHS England for rights to receive recurring premises costs on the property whether owned or leased. The promised investment will help, but whether it goes far enough only time will tell. To attract improvement funds from the NHS, GP contractors must provide a building that is secured and the only way to do that is to own it or occupy it under a lease. If you are in a building that you do not own and you apply for NHS funds to improve the property you should fail the application criteria if you have not secured it for a five- 10- or 15-year term, as the NHS investment would need to be offset under the abatement calculation within the Premises Cost Directions.

Can you explain a bit about lease negotiation and renewal?

The most important aspect by a huge margin is that any lease must be approved by NHS England before it is completed and signed by the GP partners. The partners have an obligation to get any lease whether new or varied approved by NHS England. Satisfying this NHS England approval process secures an undertaking from NHS England to reimburse that practice under the terms of the lease for the duration of that lease. We would advise practice managers to seek suitable advice to ensure the NHS approval criteria are met and that the lease is value for money and contains no unusual landlord-friendly terms.

What about notional rents and renegotiation?

Notional rents are based on a set of hypothetical lease terms and are the district valuer’s opinion of what someone should pay in annual rent on a building based upon those terms. The contractor has the right to challenge the district valuer’s opinion but will require a surveyor to provide the factual and evidential comparables that underpin the challenge. Your surveyor will negotiate with the district valuer on your behalf and should provide reasoned advice that is always in your best interest.

If discussions fail, an application for determination under a contract dispute can be made to the NHS Litigation Authority and an RICS expert will be brought in to advise the NHS Litigation Authority on matters of valuation before making an overall judgement.  Applications for dispute resolution are still unusual and your surveyor should make best efforts to reach a local agreement.

What are the benefits of sale and leaseback?

Sale and Leaseback depends on the individual circumstances of the GPs in the practice. No surveyor should come in and say it is definitely the right strategy for you – as this is one option to be considered in certain circumstances and its suitability will depend upon the desires and needs of the individual GPs involved. There are benefits and liabilities with both owning a building or occupying one under a lease, they are just structured differently. If GPs do not want to buy into a property or other GPs want their money out, creating a lease can be a shared solution.  Consideration should also be given to the partnership agreement as any departure would have to be universally agreed between the parties or a situation can be forced by any GP who is unhappy. Often the partnership agreement compels the outgoing partner to sell and the incoming partner to buy and thus agreeing to set up a lease instead (and then perhaps sell the building with a lease in place) must be agreed by all.

How can Practice Managers get the most from their GP practice premises?

It is important to seek advice from a specialist. Every building is different and practice managers need to make sure they have someone check their notional rent and get a specialist to do valuations for partnership change and retirement. Have a look at whether the building is fully utilised. Can an alternative use be put to some of the rooms; for example, can a secondary care service be brought in?

The NHS needs to be more accessible and the emphasis is on providing better care for patients, but there are issues around GP practice premises and regulations that can make new service provision difficult. Therefore, practices should seek advice as to how any premises changes will impact on NHS rental reimbursement and other income streams.

An issue currently receiving a lot of attention is economies of scale, collaboration, mergers, and of course the rollout of Primary Care Networks. If practice managers and partners are considering these options, the estate needs to be on the agenda from the start. For example, in a merger of five practices, each of the five buildings will have a different value and everyone will have different shares, loans, and equity. In many cases, the merger is in name only and the whole does not become one equitable entity. We would recommend that mechanisms are put in place at the start to make everyone equal partners as we see this as the most likely route to a successful collaborative venture.

We receive lots of calls from people who should have taken steps earlier to equate shares and draw up a coordinated strategy to move forward as a collective to avoid conflict in the future. A surveyor can discuss the options available, and provide a plan to move forward, which can be hard for practices to do by themselves.

If you have any questions regarding our essential guide to GP practice premises, feel free to contact the team.

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What should your practice expect if it is considering a ‘sale and leaseback’ of the practice premises? Paul Conlan explains the process, plus a case study showing how this worked for one surgery.

The sale and leaseback of a GP surgery premises is increasingly becoming an option of choice for many GP partnerships. However, this option is dependent on individual circumstances and the succession plan of the owning GP partners.

The decision to sell and lease back should not be taken lightly. If the property owners proceed and sell, they will be giving up their main financial asset in the practice (bricks and mortar).

From the outset, it is critical that the practice appoints specialist advisers to help guide it through the process. These include:

• Property surveyors
• Legal (solicitors)
• Medical accountants
• Tax advisers

What is sale and leaseback?

In a surgeries sale and leaseback transaction, the freehold or leasehold of the GP premises is sold to an investor and a lease is granted back to the practice partners for them to continue occupying the building and providing medical services.

Dependent on the age profiles and retirement plans of the continuing GPs, some may be reluctant to sign a lease for say 20 or 25 years. This should be considered carefully and expert advice should be sought on the proposed terms of lease and obligations before signature.

A step-by-step guide to a surgeries sale & leaseback 

During a surgeries sale and leaseback transaction the following should happen, usually in this order:

• Ensure you seek independent advice in the first instance.
• Appoint the right team of experts to support and provide you with advice.
• Understand if your property has any mortgage redemption penalties/restrictions on lease.
• Undertake a market valuation to understand the value of the building and obtain advice on the lease terms based on proposals from potential investors and review what suits the GPs.
• Explore and consider all tax and financial implications of a surgeries sale and leaseback transaction.
• Agree responsibilities and obligations with the GPs (i.e. repair and maintenance of the property). Discuss and agree lease terms.
• Instruct legal representation to prepare transaction documents.
• Draw up heads of terms which will need to be approved by the local area team and acceptable to the proposed investor.
• Ensure the notional rent reimbursement into the practice is the same as the lease payment (revenue neutral). Gain initial approval from NHS England and put the lease in place.
• Your surveyor should market the premises to attract investors within the primary care sector.
• Negotiate and agree purchase prices.
• Present final documents to the area team for approval and confirm that the rent reimbursement will be paid to the practice.
• Complete the sale of the GP premises.
• Review and amend your partnership agreement. The agreement should be updated if necessary.

The above step-by-step list sets out what should happen throughout the process. The case study below from one of our clients explains how this can work in reality.

Case study

“We were a semi-rural practice based with a practice population of around 9,300. At present there are three partners, two salaried doctors, two nurse practitioners, three practice nurses and a healthcare assistant, along with admin and reception staff.

Myself and another partner were the only partners who owned the building. New partners had shown no interest in becoming property owners. I retired from the practice at the end of March 2013 and wanted to sever any involvement with the ownership (although I continue to do locum work there).

A term of our mortgage was that a minimum of two partners had to take on the loan and, because none of the other doctors wanted to take on joint ownership of the building, the only solution was to sell the building under the sale and leaseback scheme.

We contacted GP Surveyors who explained the whole process to us and we decided to go ahead.

The whole process took a very long time before we were in a position to advertise the property. Negotiations with NHS England were particularly difficult right to the very end and we definitely needed the support of expert advisers to help us through that challenging time.

Once a brochure had been produced and the property had been advertised, we had a good response from several interested parties. One buyer was very keen to complete as soon as possible, but after many months of delay caused by intransigence on the part of NHS England, he decided to withdraw from the purchase.

Fortunately we had another buyer who was prepared to go ahead with the purchase at the same asking price and eventually we completed in December 2015, some 21 months after starting the process.”

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The much anticipated, GP Contract has now been unveiled and contains a welcome boost to GP practice funding. While this will go some way to relieving pressures on GP surgeries finances, services, and personnel, it is apparent that many GP premises haven’t seen substantial or sufficient investment for some time. The good news is, there are ways a practice can make the most of their property to boost the GP surgery income. 

What strategies should GP practices consider to boost GP surgery income?

1. Check your Notional Rent Reimbursement

Notional Rent is an estimate of Current Market Rent for GP-owned premises. The Notional Rent is provided by the NHS after valuation advice, usually from the District Valuer.

It is essential to remember that the figure notified is essentially one person’s opinion of the appropriate fair and reasonable Current Market Rent.

GP Contractors using a suitably qualified and experienced Chartered Surveyor are therefore entitled to check, challenge and negotiate the Notional Rent Reimbursement. The challenge must be supported by facts and comparable evidence of rentals prevailing on other primary care medical properties. This evidence is not widely available in the public domain.

The capital value of GP premises is also usually linked to the rental income stream, whether real or notional (RICS Best Practice). A higher notional rent will enhance the sale price of a doctor’s premises at partnership change, retirement and sale (assuming ongoing use as a Primary Care facility).

See more information on our Notional Rent service.

2. Does your GP premises have space for a pharmacy?

Implanting a pharmacy in your building can generate substantial valuable additional income.

Implantation deals can be structured in different ways. Having appropriate specialist advice will ensure the deal represents Market Value irrespective of how it is structured.

Incentives will generally be taxable and result in a reduction in Rent. This reduction in rent will impact upon the Capital Value.

See more information on Pharmacy Implants.

3. Can you generate more rent from an existing tenant?

If you have an existing pharmacy, NHS body or another private occupier under a lease, then it may be possible to generate extra income. Reviewing the arrangement with the tenant and creating, reviewing or renewing a lease can make this possible.

Any occupation in excess of or intended to be in excess of three years should be in writing (usually a lease).

See more information on reviewing or renewing a lease and help boost your GP surgery income.

4. Is it worth introducing new service providers if you have space?

Complementary services should be implanted in space that does not qualify or attract NHS England rental reimbursement wherever possible.

Specialist advice is therefore recommended if you are considering any non-contracted medical service venture from space that currently attracts NHS rent reimbursement.