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Premises reimbursement: moving from cost to notional rent

James Williams explains how practices can ensure a smooth transition to notional rent when their cost rent scheme ends.

Hire your own valuer to negotiate the notional rent (Image: iStock)
Hire your own valuer to negotiate the notional rent (Image: iStock)

Cost rent is paid by primary care organisations (PCOs) to some GP practices that own their building to reimburse the borrowing costs they incurred when developing a new surgery premises or considerably modifying an existing building.

However many cost rent schemes are now coming to an end and the cost rent system itself has been generally phased out and replaced by notional rent, which is based on market rental values.

The duration of cost rent payment approved by the PCO is based on the length of the period for which the practice agreed to borrow the money to fund its building scheme.

Many practices historically took out loan agreements for in excess of 20 years and, in a lot of cases, unless the practice has refinanced, the original loans are now naturally expiring.

Informing the PCO

In many cases, PCOs are not able to tell GP practices when their cost rent is due to expire. The onus is therefore on the practice to notify the PCO when their surgery loan arrangements change or the debt owed is soon to be repaid.

When the PCO has been notified, it will usually send a representative to the surgery premises to carry out a valuation for notional rent reimbursement purposes. This is because when the cost rent ends, the system of premises reimbursement shifts over to notional rent.

The PCO’s representative will issue a notional rent figure to the GP practice which should ask a specialist surveyor for a second opinion. Valuations are partly based on valuers’ perceptions and opinions so can differ extensively. 

By not asking its own valuer to negotiate with the PCO’s valuer, the practice could potentially miss out on the opportunity to maximise the notional rental figure.   

The process of transferring from cost rent to notional rent can take a long time. Therefore, good communication with the PCT and notifying them in advance of the Cost Rent coming to an end is advisable

Notional rent lower

Some GPs are reluctant to inform the PCO when their cost rent is due to end as they believe that their notional rent may be lower. However, failure to inform the PCO may mean that it will claw back possibly large sums of money from the practice in the future.

Moreover, the transition from cost rent to notional rent can sometimes result in an overlap where the PCO continues to pay cost rent until the notional rent valuation has been agreed.

In this situation, it is in the practice’s best interests to encourage a speedy resolution with the PCO and to set aside any reimbursement overpaid as it will have to be repaid.  

However, as a general rule, if a long term cost rent has come to an end naturally, in most cases the notional rent for the premises tends to be higher.

Nevertheless, all cases should be assessed on an individual basis and factors such as location, and historically very high interest rates can have a significant impact.

Transferring early

If a GP surgery’s approved borrowing costs are not due to come to an end for another few years, then the GP might still consider investigating whether they would be better off financially moving over to the notional rent system.

A specialist healthcare surveyor can undertake a valuation of the premises and make recommendations as to which option is most appropriate: staying on cost rent or electing to switch to notional rent.  

If it seems likely that notional rent for the property will less than 10% more than cost rent, I would generally recommend that a practice remains on cost rent to ensure that it does not lose out.

Even if a previous assessment showed that the surgery should remain on cost rent, I would still recommend a new valuation to assess the current situation.

Earlier this year GP Surveyors reported average negotiated notional rent increases of 10%, so it could be that the notional rent is now considerably higher than the previous assessment.

Tips and warnings
  • If a GP practice is paying off a variable rate loan, rather than a fixed rate loan, they must ensure that the PCT is fully aware of all the arrangements so that the cost rent payments alter in line with interest rate changes. Practices must not profit from cost rent as they are entitled to reimbursement of only their actual costs.
  • If a practice re-negotiates its approved borrowing costs with the lender, or indeed repays the debt early, they must tell the PCO. If they don’t they may have to pay back significant sums of money.
  • If cost rent is paid for the entire building, it is important that the practice does not rent out space for other purposes without first consulting the PCO. Whether a practice receives notional or cost rent, the PCO can only reimburse for accommodation that is used, and has been approved for, GMS or PMS purposes. 
  • If a practice wants to review the premises reimbursement element within its GMS or PMS contract, it should get specialist advice. Obviously, with a rewrite of the GMS contract set to happen, practices need to keep an eye on how this may affect their reimbursement.
  • In England when PCTs are abolished in April 2013, it is important for practices  to keep in contact with the authority in charge of premises reimbursement.
  • If, following cost rent expiry, the practice is told the notional rent will be lower it should seek a second opinion and attempt to limit the reimbursement reduction through local negotiation.
  • When a practice elects to transfer from cost to notional rent, it cannot revert to cost rent system.
  • At the point when a practice officially elects to switch over to notional rent, it should have told the PCO if it plans to challenge the notional rent figure that has been given to them. Waiting until later could mean the PCO refuses the practice's right to challenge.

 

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