Over recent years the need for practices to have a lease in place to regulate the occupation of the surgery building has increased, due in part to partnership succession issues, such as new GPs reluctance to buy into the premises. GP Surveyors explain the circumstances under which a GP practice requires a lease, how the lease approval and rent review process works and how to avoid a lease rent dispute and the associated costs.
When does a practice require a lease?
Many practices are unaware of when a lease is required to be put in place. A simple rule of thumb is that a lease is usually required when there is an uncommon party. An uncommon party is a GP partner that has retired or left the practice while retaining an ownership share in the property and/or a GP partner that has joined a practice but has no intention of purchasing a share in the property (usually an incoming partner has a degree of protection under the partnership agreement).
Avoiding a GP Practice Lease Rent Dispute
The key factors to a GP Tenant and Landlord avoiding a lease rent dispute are for all parties to be suitably represented in lease negotiations and obtain NHS England approval of the lease. When these steps are undertaken, rental disputes between Tenants and Landlords are uncommon. In the event that a rental agreement is not reached with District Valuer Services, the lease should protect GP Tenants from dispute costs. The lease should include clauses stating that the practice must give consent to the Landlord, allowing them to refer a rental dispute to NHS Resolution at the Landlord’s cost.
NHS England lease approval process and the Premises Cost Directions
It is crucial that before a GP tenant agrees to a lease with the premises’ owners (Landlord), the GP contractors must apply to NHS England for financial assistance towards their rental costs, under the proposed unsigned lease (Part 5 Section 31 of The NHS General Medical Services Premises Costs Directions 2013).
NHS England will then review the proposed lease and should issue a value for money report to the GPs. This report should either confirm acceptance of the proposed lease or suggest variations that NHS England believes would render the lease acceptable to them. If the lease is varied it should be re-submitted to the NHS, until accepted in writing.
It is important that GP contractors are suitably advised throughout the process by independent specialist Surveyors and Solicitors, to ensure their interests are protected. Without such advice the implications of NHS England’s suggested variations could be easily misunderstood and adopting variations suggested could change the rental calculation. Specialist advice will also ensure NHS England’s suggested variations are within their remit and linked to value for money.
NHS England should only fail a lease on the following grounds. Firstly, if the proposed rent is deemed excessive. In such a case NHS England should provide their alternate opinion of appropriate rent under the lease, that would be acceptable to them. Secondly, NHS England should fail a lease on the basis that the valuation adjustments made for the commercial terms within the lease are either insufficient or excessive and provide their opinion of appropriate adjustment that they would approve to reflect these terms. Under no circumstances should NHS England fail a lease because they dislike a commercial term that is included in the proposed lease.
NHS England’s valuation advice on these matters is usually supplied by the District Valuer Services. Any decision made by NHS England concerning rental valuation figures or adjustments are usually opinions expressed by District Valuer Services and can be challenged by the practice, as the decision is a contractual matter.
Once a lease is approved by NHS England, a practice should be reimbursed actual rent, (per Schedule 2 Part 1 and 2 of The NHS General Medical Services Premises Costs Directions 2013) for as long as the practice continues to provide contracted medical services from the property.
The Directions also allow a practice to apply for financial assistance towards stamp duty costs (Section 30) and grants towards surrendering a lease early (in the last 5 years) with the support of NHS England (Section 28). Such decisions are usually linked to either merging estates or new improved premises that are deemed to be in the wider public and patient’s best interests for future care provision.
Appointing suitably experienced Solicitors and Surveyors is essential to establishing a robust lease and ensuring your lease has the standard protection mechanisms required.
The Leased Rent Review Process
A practice’s NHS approved lease should set out the rent review process in full and this process should always be followed. It is important to remember this rent review process has been approved by the NHS, so any references by the NHS to standard (or local) policies can be misplaced.
Usually, the rent review process is instigated by the Landlord (owners) serving a rent review notice upon the Tenants (occupiers). What happens next will depend upon the stipulations within the individual lease. Some leases require that this notice be forwarded to the NHS within a set timescale and some require that the Landlord and Tenant engage to agree on the rent and complete a rent review memorandum before this is sent to the NHS for ratification. The latter scenario usually requires appointing a suitably experienced surveyor.
Effectively, if the lease was drafted correctly there should be protections in place to cover the rent review process. Whereby, the NHS rent reimbursement should always cover the rent paid out to the Landlord under the lease.
The lease and the NHS rent reimbursement are separate contractual arrangements with different parties and as such, they have different mechanisms to regulate them. Usually, the only crossover is concerning the lease rent and the NHS rent reimbursement payments. In this scenario, there should be a protective clause stipulating that the GP practice cannot pay a higher rent than agreed with District Valuer Services or determined by NHS Resolution, following a dispute application. This assumes that the lease is approved by the NHS and has been drafted appropriately.
As a GP Tenant or Landlord, it is of paramount importance to use suitably experienced representatives and obtain NHS approval for the lease before signing and completing it. A fit for purpose NHS England approved lease should protect the GP Tenant at rent review and mitigate risk associated with rental and other property disputes between Tenant and Landlord.