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Premises Cost Directions 2013: the practical issues one year on

Billed as interim, the Premises Costs Directions 2013 have raised a variety of issues that NHS England should now address, writes Andrew O'Dowd.

The 2013 Premises Cost Directions preclude 'alternative use' valuations (image: iStock)
The 2013 Premises Cost Directions preclude 'alternative use' valuations (image: iStock)

It has now been a year since NHS England released a revised version of the Premises Costs Directions in April 2013. These govern the notional rent reimbursement of GP surgeries in England and replaced the 2004 version of the directions, being billed as ‘interim’.

One year on, we have had time to see how the new directions work in practice. This has highlighted a number of issues that we hope NHS England will take into consideration when carrying out their assessment of this ‘interim’ document:

Alternative use valuations

Issue: The Premises Costs Directions 2013 prevent the use of ‘alternative use’ valuations.

‘Alternative use’ valuations are most common where practices are located in a row of high value houses, offices or retail parades. In these circumstances, GP premises should be valued by looking at comparable office, residential or retail rents rather than comparable GP surgery rents.

This is a widely accepted method of valuation in the commercial property market and applies to many GP surgeries in the London area.

However, the revised Premises Costs Directions 2013 specify that GP surgery premises can no longer be valued on an ‘alternative use’ basis. This means that the Notional Rent of some GP Surgeries could be as much as halved.

NHS England should change this clause because it may be too financially challenging for these GP surgeries to continue to operate. Moreover, the owners of these surgeries would be much better off selling their premises and cashing in on the high value of the alternative use.

Given that GP surgeries are under increasing pressure to offer a wider range of primary care services, this would be extremely damaging in the busy urban areas, where maintaining GP surgeries is even more important than ever.

At GP Surveyors, we have a number of ‘alternative use’ cases at the moment that have been taken to appeal and we are awaiting an outcome.

Tandem parking (double parking)

Issue: The Premises Costs Directions 2013 prevent the inclusion of tandem car parking spaces in notional rent valuations.

NHS England used to reflect tandem car parking spaces when calculating Notional Rent. However, this is now categorically excluded, causing reductions in reimbursement.

It would seem that this only amounts to a reduction of a few hundred pounds per year (depending on the location of the surgery and the number of tandem spaces) however this mounts up over the three year notional rent period.

Tandem car parking spaces are most common in busy cities and normally only apply to staff parking. It is a practical solution where parking is limited and has previously been accepted by NHS England as a fair and reasonable approach.

Air conditioning

Issue: The Premises Costs Directions 2013 prevent the inclusion of air conditioning in notional rent valuations

Premises Costs Directions 2013 (schedule 2, paragraph 3, sub section (e)) states: ‘where improvements have been made to the practice accommodation and those improvements are designed solely to reduce the environmental impact of the premises, such as the installation of solar panels, air conditioning, or replacement windows or doors, those improvements must be disregarded for the purposes of assessing the current market rent’.

In general, the district valuers are now excluding air conditioning from their valuations. However, my interpretation of the above extract would be that air conditioning should only be excluded if it reduces the environmental impact of the premises, ie where the air conditioning reduces the running costs of a building and its carbon footprint. For example, this could be lowering the energy costs, reducing future maintenance costs or using materials which are produced using less energy.

I cannot see circumstances in which an air conditioning unit could reduce the running costs of a building. Emphatically, it increases the carbon footprint of the building. There are circumstances in which the installation of a cooling or heating system could be to rectify a design defect, such as areas with lots of glazing, but this does not reduce the environmental impact of the building.

Because air conditioning is no longer included in notional rent calculations, many GP practices across England are seeing their reimbursement reduced.

Air conditioning is a feature introduced into many surgeries to improve comfort for staff and patients and it stands to reason that it should add value to the premises and therefore be included. 

It is also standard practice in the commercial property market to consider value-adding elements such as air conditr and subject to commercial business rates. It therefore seems inequitable that GP surgeries should be valued differently and lose out.

Premises improvement grants

Issue: Improvements designed solely to reduce the environmental impact of premises (ie, solar panels, replacement windows, doors or facades) can no longer be funded with premises improvement grants.

It is disappointing to see the NHS taking such an adversarial role in encouraging practices to become green in their approach to utilities when the government has a duty to encourage institutions to be energy-efficient. They are clearly working at odds with each other.

According to this legislation, GP practices that actively attempt to reduce their carbon footprint by installing double glazing and new doors will no longer be supported, even though these upgrades will also boost the quality of the surgeries and enhance patient experience.

Practices in leased premises

Issue: The Premises Costs Directions 2013 have changed, fundamentally, the way in which GP practices in leased premises must approach their notional rent reviews.

Previously, GP tenants had little involvement in the rent review process. However, these tenants now need to negotiate a rent with their landlord and sign a memorandum recording this, before a Notional Rent reimbursement application is made. This means that a landlord cannot simply issue a rent which is the same as the notional rent.

This new process means there is now a risk that GP surgeries that are not proactive and do not seek the help of a surveyor, could receive a notional rent which is less than their actual rent, leaving them with a financial shortfall.

Board approvals for development and sale and leaseback projects

Issue: The new directions emphasise that financial assistance will definitely not be granted for development work or sale & leaseback agreements if it has not been approved by the board beforehand.

This new stipulation is not necessarily an issue as it makes sense that development work or new sale and leaseback arrangements should be pre-approved by the NHS because this activity could have a direct impact on the care that a surgery provides and NHS finances.

However, the problem comes with the length of time that it takes for the NHS to sign off on activity.

In most cases, practices choose sale and leaseback in order to boost flexibility, for example, recruiting new partners is easier as they do not need to take on sizeable loans; retiring doctors no longer have the hassle of selling their share; and, in certain situations, some of the responsibility for the up keep of the premises is transferred to the landlord.

A slowed-down process is frustrating, damaging for morale and has a detrimental effect on the enthusiasm of the investors.

We hope NHS England will consider these points when further revising the Premises Costs Directions to ensure that notional rent reimbursement is calculated fairly. However, we do not have evidence that any permanent directions are set to be released.

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