Does letting space to third party occupants in GP premises affect the practice’s rent reimbursement?
This is a frequently asked question, especially in the present climate when practices are being asked to provide a wider variety of services. The short answer is yes. Whether the effect is financially positive or negative depends upon many factors.
Any agreement with a third-party occupant will more often than not affect a practice’s Notional Rent reimbursement and should be carefully planned before being agreed upon. If thoroughly planned and correctly assessed the surgery can ensure a third-party occupant is beneficial to their total rental income or at the very least not detrimental. Seeking advice from a specialist healthcare surveyor would be prudent when making this assessment.
During GP Surveyors’ 20 years in the primary care property sector, we have unfortunately come across numerous instances of practices not seeking guidance. Agreements for third parties to use space have been formalised, only for the practice to discover the detrimental effect on their rental reimbursement when it is too late.
Considerations before third parties let space
As a rule of thumb, if a room is exclusively used by a third party the space is likely to be completely removed from your Notional Rent reimbursement. If additional patients are brought into the practice by the third party and they are using the practices facilities (WC’s, reception, waiting areas, etc) this could also reduce the practices rent reimbursement. In this scenario, the District Valuer (DV) may discount these shared areas and remove a proportion of car parking spaces from your Notional Rent figure.
When considering a third-party occupant in a GP practice two fundamental rules should always be followed. One, their occupation should always be formalised in writing. Two, the third party’s presence should not harm the overall rent the practice receives. The practice should ensure they receive the same or a higher rent, paid under a Lease with a third party, than the Notional Rent that will be deducted for the let space. Please note any rental figure agreed will also depend upon the Lease and the terms agreed, including the rent review pattern.
Calculating Notional Rent
To understand what basis a third party’s rent should be set at, first, we need to examine how a practices Notional Rent reimbursement is calculated. A practices Notional Rent is assessed on a rate per square meter, usually by the District Valuer, and is their opinion of the Current Market Rent (CMR) of the space used for NHS approved Medical Services. The amount paid by the NHS to the practice reflects what the property would let for between a landlord (owner) and tenant (occupier) based on a 15-year lease, with internal repairing obligations and three yearly rent reviews.
Written agreements with a third-party
The rights and obligations of Landlords and Tenants should always be formalised in writing before a third party occupying the premises. This protects the rights of both parties and in the event of a dispute means issues can be resolved more efficiently, saving time, money, and professional relationships.
The type of agreement the Practice chooses is also important, it is highly advisable to seek advice from a specialist primary care solicitor in the first instance.
A Licence is permission for a third party to use the GP premises, with non-exclusive possession rights. This is a personal arrangement between the practice and a third party. A Licence is usually used for a short term let of less than 6 months.
Tenancy at Will
A tenancy arrangement where occupation is regularised but can be terminated at any time by either party. This is a personal agreement between the Landlord and Tenant, usually for a short period of time.
A Lease grants an exclusive right to occupy the premises for a predefined period, usually longer than 6 months. The Tenant has sole use of the area stipulated in the Lease. A Landlord is certain of their income and the Tenant certain of occupation, which may extend to a right to a new Lease at the end of the term.
If a Practice agrees to Lease terms with a third party that are different from those assumed under the Notional Rent reimbursement scheme (stated above), this could affect the rate per square metre and therefore overall rent for the let space. Different terms that need to be considered include the term, rent review pattern, and break clauses.
Practices also need to consider whether a third-party is going to use the practices facilities and or car parking spaces before formalising any agreement. If this is the case, it needs to be factored in via a service charge stipulated in any agreement or a higher rent.
Who occupies space and when?
The time a room is occupied, and the number of separate occupants also needs to be taken into consideration. When a third party occupies a room exclusively the arrangement is usually very straightforward. The space will not be reimbursed under the Notional Rent scheme, and it would be advisable to put a Lease in place, with consideration given to whether the third party utilises any facilities and or car parking.
However, if the use of the space is on a part-time or random basis this is more difficult to assess. For instance, if the practice uses a room for the majority of the time and a third party uses the space part-time, this may not affect the Notional Rent. If a room is utilised by multiple third parties, then this space may be completely removed from the practices Notional Rent.
In these two scenarios, a Licence or Tenancy at Will could be advisable to formalising the agreement. We would however recommend a service charge agreement being put in place to cover the cost of the building services.
Before putting a written agreement in place whether that is a Lease, Licence, or Tenancy at Will you should always consult a specialist primary care Surveyor and Solicitor for advice.
Space removed from Notional Rent reimbursement
Before proceeding with any third-party, practices should be aware that if rooms are removed from Notional Rent reimbursement it may be problematic to have the space reinstated. NHS England may deem that the practice no longer requires the space within the premises for GMS purposes. Therefore, if a third party vacates there could be a period when the rooms are empty and not generating income. In this instance, the practice must put forward a business case to NHS England explaining why the rooms should be reincluded in their Notional Rent reimbursement.
Moving forward with a third-party
Although some of the issues we have covered may seem daunting there is no need to be dissuaded from a third-party occupation of practice premises. With the right planning and specialist consultation, a practice can ensure they utilise space to provide additional patient services and benefit financially.
If your practice is considering taking on a third-party occupier GP Surveyors can advise you on how to ensure your plans are financially viable. Your practice can begin to provide additional services, free from the worry of a reduction in overall rent or being subject to NHS clawbacks of Notional Rent.
Existing third-party occupants
If you currently have third party occupants in your GP premises, then speak to our team before you submit your CMR1 form. We will be able to advise you how to accurately fill in your income from third parties and reduce the chance of any undue Notional Rent deductions or clawbacks being made.
If you have already submitted your CMR1 form and have received a proposed Notional Rent figure, then consult a specialist healthcare surveyor. They will be able to assess whether your rent reimbursement is fair and reasonable and challenge this if there is evidence to the contrary.