If you’re a GP in an NHS Property Services Company (PropCo) owned building, then this blog is relevant to you. You may recall that we referred to an imminent NHS Property Services ‘standard lease template’ in our recent blog post on surgery lease negotiation. That lease template has now been published.
If PropCo ask you to enter into their new lease, it is important that you understand exactly what you would be signing up to. To assist you, as the GP tenant, we have reviewed the new PropCo lease template and summarised some of the more important points below.
What we like about the new lease:
- Break clause/flexibility. As a GP tenant, you can break the lease on a no-fault basis, either on the termination of your core contract or in contemplation of not wishing to renew your core contract. This is important to avoid becoming the ‘last man standing’.
- Rent reimbursement. There is a mechanism to ensure that the rent will always equal the rent reimbursement. However, please see our concerns about cash flow below.
- Schedule of condition. The lease contains a schedule of condition which will set out items of disrepair that you will not be responsible for making good at the end of the term. You should complete this schedule very carefully to ensure that it is accurate.
- Simplified rent review memorandum process. The lease neatly resolves the current problem of needing to produce a signed rent review memorandum prior to NHS England considering reimbursement of the increased rent, by permitting an unsigned rent review memorandum to be sent to NHS England. This minimises the risk of a shortfall in rent reimbursement following the rent review process. However, it’s worth noting that the controversial provision in the Premises Costs Directions 2013 is likely to be removed from the imminent updated regulations.
- Rent reviews could give rise to cash flow issues. Whilst the rent review mechanism ensures that over time all rent paid will be reimbursed, in the event that the new rent is not agreed by NHS England it will be challenged, which could result in you paying more in rent than you will be reimbursed during the challenge process. You would have to finance this shortfall yourself until the monies are recovered from NHS England, which could be a long time. Furthermore, interest is payable on any rent arrears payable and this is unlikely to be recoverable from NHS England.
- Potentially high service charges. Although service charges relate in the main to common parts, we see some potential costs which are unpalatable and we would expect to negotiate the removal of some of these.
- Potentially high management costs. Management costs under the lease are likely to be high as the landlord can choose which managing agents to engage and you are obliged to pay a proportion of their charges, which may be calculated as a percentage of the service charge you pay.
- Shared areas rent position unclear. There could be a separate rent payable on the shared areas, but these shared areas are also to be included in the ‘common parts’ and are subject to service charges. How this will be dealt with under the Premises Costs Directions 2013 is unclear. For example, the shared areas won’t form part of your main premises, so will they be reimbursed at all? Will there be a separation of main premises rent and the shared area rent? Could your proportion of the shared area rent go up or down as the shared areas are used in different ways by the occupiers?
- VAT. VAT could be added to the service charge, which may not be considered at the outset of the lease. Both you and NHS England must agree prior to any decision by PropCo to charge VAT on the rent, but if you do so, VAT would also be payable on the service charge. This would likely increase your costs, since it would be surprising if all the service charges were recoverable from NHS England. The lease indicates that this clause is a concession until November 2017. Presumably after this time, PropCo will insist on a clause allowing them to elect to VAT unilaterally, which could be very damaging.
- Landlord's costs. You are likely to be liable for the landlord’s costs in a number of areas, some of which we would advise resisting.
- No say on service providers. There are provisions for the landlord to decide who does repair work, meaning that PropCo can decide who provides the services you pay for via the service charge, and who will carry out your direct obligations as a tenant. You may not even be able to determine who, for example, redecorates the interior of your surgery. This could lead to a dramatic rise in your costs, since the landlord can select the provider but is not responsible for the cost.
As you can see, we regard the template lease as something of a curate’s egg. Presumably PropCo see it the same way, as they are putting in place a number of carrots and sticks to persuade practices to sign up. In addition to the VAT ‘stick’ explained above, we understand they will be making a time-limited offer of reimbursing a tenants’ legal fees and SDLT.
Overall, the template lease is broadly consistent with an ‘ordinary’ commercial lease, but will need to be negotiated carefully. The underlying issue is that many GP practices in PropCo buildings are not on ‘ordinary’ commercial leases to start with, so moving to one is a big and potentially very expensive step. Remember that most PropCo buildings are currently loss making, but an ordinary commercial lease sets out to ensure that this cannot happen.
The most important question for you to ask is, ‘Is it in my interests to enter into a negotiated version of the template lease?’ The answer depends on your individual circumstances, but for many practices the answer may be ‘no’. There is no ‘one lease fits all’ position so we can only reiterate the disclaimer published on the front page of the template lease, namely that you take independent legal and professional advice before you sign anything presented to you.
For more information about the NHS Property Services standard lease and any other related issues, please contact Daphne Robertson on 01483 511555 or email email@example.com