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Pitfalls with GP premises leases

James Atkins offers tips on avoiding legal snags that can arise from the terms of your surgery lease.

Leasing practice premises hides significant business risks that can impact on the partners personally (Photograph: Pete Hill)
Leasing practice premises hides significant business risks that can impact on the partners personally (Photograph: Pete Hill)

GPs may not realise it, but leasing practice premises can hide a number of significant business risks that can impact on the practice as a whole and on the partners personally.

This is the case whether you are moving to new premises or renewing an existing lease, or whether the lease is under the NHS LIFT scheme or offered by a third party developer.

The best time to minimise or avoid the pitfalls is at the outset when the practice is negotiating what are called the 'heads of terms' for its lease.

Tight deadlines
Negotiations often take place against a tight deadline to ensure the premises are available on time, particularly in the case of LIFT developments. At this stage, when the pressure is on, GPs often find themselves trapped between the interests of a commercial landlord or developer and their primary care organisation (PCO).

Developers generally want to grant long leases, 20 or 25 years in many cases, which will maximise the value of their freeholds, while PCOs wish to steer clear of premises risk.

Termination or expiry of the practice's NHS contract - whether it is for GMS, PMS or APMS - will not usually bring your lease to an end. The tenant(s) named in the lease will continue to be liable for payment of rent, service charges, insurance premium and all other lease costs until the lease expires or is otherwise ended.

This could be many years later but when your contract ends, so too will rent reimbursement from your PCO (see worst case scenario below).

Worst case scenario

A GP partnership with an APMS contract takes a long lease on practice premises for 20 years at an annual rent of £50,000 plus VAT, subject to upwards only rent review. After five years, the contract is terminated by the PCO.

 

The partners will continue to be liable for the premises costs for the remainder of the lease. So here, they would be personally liable for a further 15 years: £750,000 altogether plus service charges, insurance premiums, dilapidations costs, VAT and other expenses.

Twenty years is a long time for a PCO's organisational structure and policy mark time. Government policy has focused on one-stop primary care centres, but this could well change.

Inherent risks
You should be cautious about taking on long leases as you cannot be sure general practice services will be required from your premises for a long period.

The risks inherent in leasing can be reduced by any or a combination of the following tactics:

  • Insisting on break clauses.
  • Requiring the PCO to take on the lease if the contract ends.
  • Refusing to give personal guarantees.

The most useful break clause is one the tenant can invoke at any time after an initial period if the practice's GMS, PMS or APMS contract is terminated or not renewed.

Commercial landlords will not agree to this but local authorities or PCO landlords might be persuadable. It depends on the premises, the GPs' bargaining strength and the overall project. Practices are more likely to succeed in negotiating break clauses every three or five years, so that the lease can be ended at certain fixed points.

If you are not able to agree any or sufficient break clauses, opt for a short-term lease. If the practice can negotiate for the lease to be within the tenure provisions of the Landlord and Tenant Act 1954, it will have the right to remain in the property when the term ends and to be offered a new lease.

The landlord can only refuse in certain limited circumstances. A short lease combined with security of tenure shortens the odds of having to pay for premises that are no longer used for providing primary care.

The PCO will often ask for the right to take over the lease if it wants to do this if a practice's contract ends. Far preferable for the tenant is an obligation on the PCO to take over the lease.

Personal guarantees
If the premises lease is with a limited company owned by the partners, resist giving personal guarantees. If no personal guarantees are given, only the tenant company will be liable for the lease costs. If things go wrong it may mean the end of the limited company, but the GPs involved will avoid personal liability.

Where the lease is granted directly to the partnership, ensure its terms provide that, on retiring, partners are released from their obligations under its terms.

  • James Atkins is assistant solicitor, commercial property, at RadcliffesLeBrasseur www.rlb-law.co.uk
Assigning a lease

If the partnership (or the GPs' limited company that the lease is with) is left with practice premises and no NHS contract, it might be possible to 'assign' the lease. Tenants can pass on their liability by transferring an unwanted lease to a third party. However, demand for purpose-built practice premises no longer required for medical purposes is likely to be low.

 

If someone can be found to take over the lease, the assignment will incur costs and the out-going tenants will usually be asked to guarantee the obligations of the incoming assignees.

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