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Surgery premises and your partnership agreement

A recent legal case shows that non-property owning partners can be vulnerable if the partnership does not have a formal lease in place, explains Bryn Morgan.

Non-property owning partners should ensure that they are part of a formal lease for the premises (Picture: iStock)
Non-property owning partners should ensure that they are part of a formal lease for the premises (Picture: iStock)

A recent Court of Appeal decision, Lie v Mohile, has highlighted the importance of partners ensuring they have an up-to-date partnership agreement and robust documentation relating to the occupation of the surgery premises.

The case arose from a partnership dispute between the principals in a two-partner practice. Dr M was the sole owner of the surgery premises, which were occupied by both himself and Dr L.  In the absence of any formal documentation, the surgery was deemed to have been leased to himself and Dr L on a rolling basis known as a ‘periodic tenancy’. The partners held a PMS contract under which they were required to practise from the surgery.

Disagreement

When the partners fell out with one another, Dr M attempted to dissolve the partnership. At the same time he served on himself and Dr L jointly a notice under s25 of the Landlord and Tenant Act 1954, to terminate the periodic tenancy and, with it, Dr L’s rights to practice from the surgery.

As a consequence of the terms of the partnership agreement, Dr M’s attempts to dissolve the partnership were in fact unsuccessful. However, a battle ensued over the surgery.  

Dr L applied to court for and attempted to claim for himself a new lease under the 1954 Act. Dr M argued Dr L’s application was invalid on the basis that, as they were joint tenants, Dr L could not apply for a new lease on his own.

The law had been changed some years ago to protect partnerships from losing security of tenure over their premises where not all the joint tenants wanted to apply for a new lease. So the fact Dr L was applying alone was not in itself fatal to the application - and indeed, he was able to satisfy three of the four requirements necessary to claim a new lease.

However, unfortunately from Dr L’s perspective, he failed on the fourth requirement – namely that no other part of the surgery may be occupied for the purposes of a business carried on by the other joint tenant. In this case Dr M was still practising from the surgery and so Dr L’s claim was defeated on this one, somewhat strict, interpretation of the statute.

On this basis, Dr M was able to exclude Dr L from the surgery, with the end result that he alone was in a position to continue in practice from the surgery and therefore to retain the PMS contract.  

Non-property owning partners

The case highlights how vulnerable a non-property owning partner’s position can be in the event of a falling out with the property owning partner(s) in circumstances where the appropriate steps have not been taken to protect their interests.

The partners here had a partnership agreement but, in the absence of formal property arrangements, and by virtue of him being the sole property-owning partner, Dr M had ultimate control over the practice.

Of course Dr L’s position would have been far more secure had he purchased a stake in the premises and held an equal interest with Dr M. However, even in the absence of buying a share, his position would have been better protected had a formal lease been granted by Dr M (as landlord) to the two partners (as tenant) for a fixed term.  

Ultimately, all Dr L had was a rolling periodic tenancy which, as it transpired, Dr M was able to terminate unilaterally, which simultaneously denied Dr L the right to practice from the partnership premises.

Cautionary tale

This should serve as a cautionary tale for all GP practices to ensure they not only have in place a partnership agreement, but also robust property agreements, which provide long-term stability for the partnership as a whole.   

Furthermore, where a practice operates out of premises owned by some, but not all of the partners, a lease not only offers protection to the non-owner partners, but can boost the investment value of the surgery for the owning partner(s). Most banks will insist that, where the surgery is occupied by a combination of owning and non-owning partners, a lease is put in place as a condition to lending against the surgery.  

If you need to review or put in place such arrangements, you should always consult a specialist healthcare surveyor and solicitor. However, by taking these relatively simple steps you can ensure, so far as is possible, the practice is operating on a level playing field which strikes a balance between the interests of the owners on the one hand and the occupying partnership on the other hand.

  • Bryn Morgan is an associate in Hempsons’ Practitioners Team

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