Sale and leaseback transactions are currently a popular way for partnerships to release equity from practice premises and deal with potential succession issues. They may even provide an opportunity for improving the premises and enhancing your working environment.
In the current economic environment, new partners may have little appetite for borrowing capital to acquire a share of the practice premises or lending may not be available for those that have already borrowed to buy their homes. Recruiting new partners can be easier if the practice leases its premises rather than owning them outright.
In a sale and leaseback transaction, the freehold of the practice premises is sold to an investor and a lease is granted back to the practice for it to continue occupying the building. Instead of receiving notional rent as the owners of the building, the practice begins to receive rent reimbursement of its lease payment from NHS England and the transaction will often be revenue neutral. Any existing mortgages can be paid off and remaining equity released to the selling partners.
NHS England approval
Since 1 April 2013, NHS England approval has been needed prior to agreeing a sale and leaseback in order for recurring premises funding to continue. This is a critical step in the sale and leaseback process and information needs to be provided to the area team at the right time and in the right manner for approval to be secured.
The sale and leaseback process
In our experience, the most appropriate procedure for effectively managing a sale and leaseback transaction is as follows:
- Speak to the area team right at the outset to let them know what you are considering. It will help the process later on.
- Engage a surveyor with particular expertise of the GP sale and leaseback market to value the building and advise you on the lease terms that you can expect to agree with the buyer. The building needs to be suitable for a sale and leaseback, which generally means that it needs to have a long-term future in primary care and the proposal needs to work financially for the property owning and non-property owning partners.
- Consider all of the tax and other financial implications of the arrangement and make a resolution as a partnership to go ahead with the marketing of the property. It is important that all of the partners are engaged in the process, to prevent difficulties further on. The partners should also consider their partnership arrangements and whether their existing partnership agreement (if they have one) will be suitable for governing their relationship once the development is built. The agreement should be updated, if necessary, or a new one prepared.
- Market the property via your chosen surveyor, who will have access to investors interested in the primary care market. It is particularly buoyant at the moment.
- Agree a purchase price and other outline terms with the buyer and pay particular thought to who will be responsible for repair and maintenance of the building. The proposed lease term should also be considered carefully because often a sale and leaseback will only be available where the practice agrees to enter into a lease of 25 years or more.
- Have the heads of terms approved by your local area team and deal with any queries that they have at an early stage. It is also sensible to make sure that the heads of terms are acceptable to the buyer’s lender at this stage.
- Instruct solicitors who have experience of primary care sale and leaseback transactions to prepare the documents. It can be useful and save time and money to use documents that have been acceptable to NHS England and investors before.
- Present the final documents to the area team for final approval and confirmation that rent reimbursement will be paid.
- Complete the property sale and the lease.
Sale and leasebacks will not be suitable for all surgery buildings or all practice profiles, but in some cases they can offer a solution to difficult succession issues in a manner that can be cost neutral to the NHS. They might even provide the opportunity, in some circumstances, for new investment to be made to the state of repair and condition of the building.
If a practice does decide to consider a sale and leaseback the implications need to be considered in full at the outset and the Area Team of NHS England must be engaged in the process. Ultimately, NHS England approval will be needed in all cases.
- James Atkins is senior real estate lawyer at Capsticks Solicitors