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How can practices reduce their service charge liabilities?

Practices that rent their premises should ensure they are actually liable for any service charges before they pay, says Charles Mallinson.

When considering the costs of leasing property, most people will be immediately drawn to the amount they are paying in rent, without considering the additional costs such as service charges.

In extreme cases, services charges may be as high as rental costs, and so greater attention should be given to what constitutes the charge – particularly as these charges may well carry VAT – and neither the base line charge nor the VAT on top is recoverable through the rent and rates reimbursement scheme.

This is even more the case now there is an increased move to ‘costs recovery’ models across the NHS Estate.

In the past, the NHS (as opposed to more commercial landlords who have traditionally operated on this model), has levied only a modest charge towards the running expenses of the surgery premises – or perhaps has collected nothing at all. But in future, the landlord will aim to recover the actual cost of the tenant’s occupation, which may include a management charge to represent the landlord’s time in administering the Estate.

Since the incorporation of these cost recovery models and the move for tenants to bear these costs directly, many tenants are finding that the costs charged to them have increased significantly – and are asking themselves whether or not they have to pay these fees and if so, how can they afford to do so.

While there is no guarantee of a solution, there are numerous options for a practice to consider.

How is your occupancy documented?

The first step should always be to review your documentation. Do you have a written lease or tenancy agreement in place at all? If so, what does it say about the obligations for maintenance?

If the lease is based on an old model (i.e. not costs recovery), you cannot unilaterally be moved over to the new model – and your landlord is contractually obliged to follow its obligations under that old model.

If there is no formal documentation in place, and the landlord is pushing you to formalise your occupancy, don’t feel pressurised to accept terms with which you are fundamentally unhappy.

Depending upon your circumstances, it might be challenging for a landlord to force a lease upon you – and there might well be alternative options you wish to consider in the meantime. For example, is there other accommodation which could be made available to you – possibly as a result of joining forces with another practice? Could your commissioner help? Would cost savings elsewhere make a move attractive?

Are you using the correct space?

In circumstances where you decide to stay put and to negotiate with your landlord, there are a variety of questions you should pose before being prepared to agree to the landlord’s terms.

In many properties, the service charge is likely to be calculated as a proportion of the overall costs based on the proportion of the area of the building you occupy. The first step to take, therefore, is to make sure the area you’re paying for accurately represents the area you’re using. Do the ‘red-line plans’ (i.e. those attached to the lease) correspond with the actual ‘on the ground’ situation?

The use of the NHS estate during the days of the PCT was regarded as being more flexible, with many organisations either using space not demised to them by a lease or not using the space that was demised to them.

If examination of your lease reveals you are actually using less space than was demised to you, is there an opportunity for a reconfiguration to reflect your actual occupancy?

Do the percentages add up? Where you are paying a fixed percentage of costs, how has this been calculated? A small discrepancy in the percentage could lead to huge differences in actual costs.

Are you using your space effectively?

Space utilisation is another huge issue – and where a lease is in place, you should check the terms to identify what you are allowed to do with the property.

Surrender

If you have a room that is unused completely, would it be possible to surrender this room back to the landlord? If so, you could also negotiate a reduction to your payment percentage.

Underlet

Do you know any other medical agencies who may want to take some space in the building? While this won’t reduce the cost you are paying to the landlord, it would enable you to recover some of those costs from your undertenant.

If you can find an undertenant willing to take on that space, and you are confident this won’t adversely affect arrangements with your commissioner (reimbursement or terms of the contract) this could be an attractive option.

Sharing occupation

If the lease prohibits underletting, are you permitted to share possession of the room? This could apply where you still require the use of the space for part of the time, but you could allow someone else to share the use of it with you – for example, with a company providing out of hours services.

Once again, you would need to check whether this is permitted by your lease – but it could potentially present an option to reduce overheads.

What are you paying for?

Service charges usually cover maintenance, cleaning, repairs, reception staff etc. but there can often be other items in there that you don’t benefit from. Have you checked through the service charge statements and are you confident you benefit from each and every item on the list that you are paying for?

If there is even one item on that list from which you don’t benefit, talk to your landlord and seek an explanation from them. This could allow you to negotiate a settlement for lower service charges.

Similarly, if you are being charged a percentage for the whole building in circumstances where other occupiers are benefitting more from the services (e.g. they have an X-ray machine, consuming vast quantities of electricity) ask the landlord to consider invoicing those electricity charges separately to that tenant.

Management charges are often levied in addition, but what do these charges cover? Question your landlord and ask them to justify these additional charges.

VAT

Many landlords charge VAT on their chargeable supplies, which GPs do not have reimbursed and, in the vast majority of cases, cannot recover from HMRC.

It is worth speaking to your commissioner to discuss whether they are willing to meet the tax charge on reimbursable items and if so, how you may benefit from this. See if they will also cover non-reimbursable items.

Commissioner input

In many cases, the commissioner used to pay these costs which are now being passed to you; if these are causing undue hardship, will the commissioner be willing to provide financial assistance to you in meeting these costs?

In fact, the DH recommends that commissioners should take note of any resultant shifts of cost in funding discussions and arrange uplifts to service contracts to mitigate the additional costs that will be charged to occupiers.

Always ask yourself:

  • Am I contractually obliged to make payment?
  • Do the charges cover the space I occupy?
  • Can I better use the space I occupy?
  • What am I being charged for – do the figures add up?
  • Can anyone else help me meet my obligations?

The best advice is, above all, not to rush into agreeing to anything before you have had the opportunity to check it out.  

  • Charles Mallinson is a solicitor at health and social care lawyers Hempsons

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