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Improving leasehold premises

John Hearle looks at the options for tenant GPs if their building does not meet current standards.

GP tenants are reluctant to spend their own money on improvements (Picture: iStock)
GP tenants are reluctant to spend their own money on improvements (Picture: iStock)

When GPs occupy brand new premises under a fairly standard lease with a term of 20 years, all is fine. The practice enjoys premises of the correct size, fully fitted up to latest NHS standards and all spatial requirements in line with the current guidance.

However, guidance over the last ten years has changed significantly. Before 1999, the only guidance for the specification of a doctors’ surgery was found in four pages within the old Red Book. The first real guidance came in 1999, which itself was reviewed and republished in 2002.

There then followed ‘The Primary and Social Care Premises – Planning and Design Guidance 2004’. Major changes were made with the introduction of HBN11 in 2009, but this has now been superceded by ‘Facilities for Primary and Community Care Services – Planning and Design Manual 1183:0:8 England’ published in September 2011.

Therefore if you are in a property 10 to 12 years old, it is almost certain to fall down on a number of the current guidance requirements. Added to this, the 2004 Directions contain minimum standards for a surgery and, with the advent of CQC registration, these are likely to be more stringently followed.

Tenants’ improvements

If you own your own premises, you can look at getting grants or invest your own capital, but what if you are a tenant?

The NHS Directions do allow tenants to undertake ‘tenants’ improvements’. If the tenants undertake and pay for the improvements, then the tenant not the landlord would get the additional rental value created from that improvement.

To help such projects, tenants can also apply for improvement grants, although of course the rental increase would be abated to take account of those grants. Furthermore, with NHS cutbacks grant monies are not readily available.

The use of tenants improvements is not widely adopted and partnerships tend to be uneasy about investing in property that is not their own.  Furthermore, such a route may not be the best value for money for either the GP tenants, PCT funder or the landlord and all these parties should be looking at what landlords refer to as ‘asset management’.

Asset management

Investors, especially the specialist healthcare investor, want a portfolio of good quality property that will impress either shareholders or funders. They also want to maximise investment value, which is not determined by rent alone, but equally by market yield.

Market yields are driven by quality of premises, quality of covenant and long-term security of the investment. In short, if a landlord can improve medical premises and increase the length of term of that investment, the increased level of rent that they require may in some instances be minimal.

The market is now currently seeing a number of cases of ‘asset management’ where leases coming towards the end of their term are being renewed in return for the landlord fully refurbishing the premises and bringing them up to current standards.

This is good for all parties as, from the doctors’ point of view, they are provided with the better quality premises they desire, from the PCT’s point of view there may well be a slight increase in the rent but it will inevitably be out of line with the substantial increase in the quality of the property. Finally, the investor gets his return by way of an increased portfolio value.

No need to wait until lease expires

The system of ‘asset management’ can be greatly improved. At present, it tends to occur at the end of a term often leading to an element of forced and panicked negotiation as the end of a lease looms.

Furthermore, if no works have been implemented over 20 years, the alterations and updating is likely to be substantial, which leads to more notable rental increases. It would be far more sensible to adopt a gradual and more planned approach.

There is no need to wait until the end of a term before renegotiating a lease and GPs should seriously consider discussing with their landlords (and the PCT) what improvements are needed to leasehold premises after 10 years.

It could well be that for agreeing to a 10-year extension of the lease, the landlords will be prepared to fully refurbish and update the property bringing it back towards the current guidance for a small increase in rent, but primarily justified by the greater investment value of a longer term.

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