Partnership agreements for medical practitioners
Peter Coats explains why medical practitioners need a partnership agreement and what the agreement should contain.
A well-drafted partnership agreement is essential to establish a clear framework for the running of the practice and the relationship between the partners. Preparing the agreement can be complex and time-consuming but getting it wrong (or, worse still, no agreement at all) can lead to serious problems in the future, so you need to plan carefully and get the right legal advice at an early stage.
Is a written agreement necessary?
The answer is definitely ‘yes’. Without a written agreement, the partnership will be a ‘partnership at will’ and can be dissolved at any time by any partner serving an immediate notice of termination upon the other partners.
This could result in the forced sale of the partnership’s assets (including any premises) and the redundancy of staff, which could have major financial consequences for the partners personally. Moreover, dissolution of the partnership could lead to the loss of your NHS contract. On dissolution, each partner will also be able to go their own way and set up a rival practice, because there will be no restrictive covenants to prevent them from competing with the other partners.
Finally, dissolution of the partnership could result in a messy, protracted and expensive legal dispute between the partners, which will have a very damaging effect on the practice. A properly drafted partnership agreement will not stop partners falling out with each other but it will clarify the partners’ obligations and help to resolve disagreements between them.
You should also bear in mind that a partnership at will can arise between the existing partners and an incoming partner if the new partner joins before signing a formal partnership agreement. You must therefore ensure that the new partner and all the existing partners sign a new partnership agreement or a variation to the existing agreement, before the incoming partner starts working in the practice.
In addition, if you do not have a partnership agreement, the relationship between the partners will be governed entirely by the Partnership Act 1890. Many of the provisions of the Act are cumbersome and unsuitable for modern medical practices.
For these reasons, having no agreement can create instability in the practice, and may cause a result which is not in the best interests of the partners or the practice as a whole.
Updating an existing agreement
All partnerships should review their agreements and update them to reflect the current regulatory framework, including GMS/PMS. An agreement which was prepared before the introduction of GMS/PMS will almost certainly contain provisions which are obsolete, redundant or even conflict with the terms of any NHS contract, which could lead to confusion or even the termination of the contract, which could be disastrous for the practice.
In any event, your partnership agreement should be reviewed on a regular basis to ensure that its provisions genuinely reflect the current working arrangements between the partners.
If you already have a written agreement, you may be able to update it without preparing a completely new document. Instead, you could use a shorter supplemental agreement which changes those provisions of the old agreement that need to be updated, but leaves the rest intact. This approach can be quicker, and less expensive in legal fees but if your agreement needs a lot of changes — especially if it predates GMS/PMS — we recommend that you start again from scratch.
Key provisions of the written agreement
The following are examples of the matters which should be covered by the partnership agreement. Arrangements between partners can vary enormously, so this list is not exhaustive.
- commencement date and duration of partnership
- premises from which the practice will operate
- assets (e.g. property, equipment, surgery, fixtures and fittings owned by the practice)
- valuation of partnership assets
- capital contributions
- income and expenses
- profits and losses
- duties of partners
- holiday and other leave
- maternity, paternity and similar rights
- locum arrangements
- restrictions on partners’ activities
- management and decision-making
- admission of new partners
- suspension or expulsion
- purchase of outgoing partners’ shares
- obligations of outgoing partners
A number of problems can arise if you operate without a partnership agreement, or if your partnership agreement is not properly drafted. The following are some examples:
- Partnership at will: As discussed above, if the partners operate without an agreement, or if new partners are admitted before signing the agreement, a partnership at will can arise, creating an unstable business structure which can be dissolved at any time, thereby damaging the practice.
- Outdated agreement: As also mentioned above, if your partnership agreement becomes out of date, it may cause confusion or even give rise to a breach of your NHS contract. The agreement therefore needs to be regularly reviewed and updated where necessary.
- Decision-making/deadlock: If certain partnership decisions require unanimity, this will effectively give each partner a veto, and could therefore create a deadlock, with the partnership being unable to make a decision. You therefore need to carefully consider which matters should require unanimity (if any) and what steps can be taken in the event of a deadlock.
- Retirement: The retirement provisions need to ensure that a partner cannot retire on shorter notice than you need to give under the practice’s medical contracts. Also, if several partners leave at the same time, this could present severe financial and operational difficulties for the remaining partners. The partnership agreement might therefore provide that only one partner can leave at a time. Finally, the rules on age discrimination and their impact on compulsory retirement age are complex and the agreement should be reviewed so it is in line with current regulations.
- Expulsion: If a partner fails to perform his or her duties, this can severely damage the practice, so the other partners need to ensure that they can expel a problematic partner in certain circumstances, or require him to retire compulsorily. Many practices include a provision — the so-called “green socks” or “purple hair” clause — which enables the practice to expel a partner where the relationship with the other partners has broken down, even if the partner in question has not breached the actual partnership agreement. This provision can help resolve problems quickly and may be in the best interests of the practice as a whole, but each individual partner should bear in mind that the clause might be used against him or her.
- Suspension/garden leave: If a problem arises with a particular partner, it could harm the practice for that partner to carry on working in the surgery, so you should consider including a right for the other partners to suspend the problematic partner while the matter is being investigated, or to require a partner who is leaving to work “garden leave” (i.e. not come into the surgery premises) during his or her notice period.
- Maternity provisions: The partners must decide how much leave a pregnant partner should take and what financial arrangements should apply in her absence — for example, will she retain her full profit share for the whole period, will she or the practice pay for locum cover and who will retain the contributions from NHS England? This is a delicate area and there can be potential conflict between the needs of the practice and its patients, and the personal needs of individual partners. Paternity leave is also an increasingly complex area.
- Repayment of capital: If a partner with a share of capital leaves the practice, the remaining partners may have trouble paying for the outgoing partner’s share, particularly if the partner owns an interest in the surgery. You should therefore make sure that any period of notice of retirement or expulsion is long enough to allow time for the other partners to obtain any necessary finance. An alternative would be for the practice to take out insurance which would produce the necessary lump sum required to pay for an outgoing partner’s share, although insurance premiums can be very expensive.
- Ongoing obligations: If a partner leaves a practice, the continuing partners will usually remain liable for ongoing arrangements (e.g. loan repayments or rent under a surgery lease), with the liability being shared amongst fewer partners, unless a new partner is joining at the same time. You should therefore make sure that the notice period is long enough to give the remaining partners time to make alternative arrangements. You also need to take account of any notice requirements under your NHS contract. By contrast, the outgoing partner may wish to be released from all liability and indemnified by the remaining partners, so you should consider how to deal with this, and ensure that the agreement covers it.
- Competition from former partners: If a partner leaves and then immediately sets up another practice in the same local area, this could severely damage your practice. The partnership agreement should therefore contain restrictions preventing a former partner from competing with the practice — although you must make sure that the restrictions are not excessive (eg covering a geographical area which is wider than the area from which the practice draws its patients), otherwise they will not be enforceable.
The GMS and PMS regulations allow practices to introduce non-GP partners including practice managers, nurses, consultants, pharmacists or other health professionals, provided that the partnership includes at least one general medical practitioner. Please bear in mind, however, that a non-medical person who is not directly involved in the practice — for example, a third party accountant or professional adviser — cannot be a partner in the practice.
If you are proposing to admit a non-GP partner, you may need to change your partnership agreement, because some of its provisions may be inappropriate for non-medical partners. For example, the non-GP partner may not have a clinical role or may be subject to different professional rules (e.g. nursing regulations) from those which apply to the other partners. You should also consider what role the non-GP partner will play in management, decision-making and administration, as there may be certain tasks which are more or less suited to their particular abilities.
Limited companies and LLPs
GMS and PMS contracts can be awarded to companies limited by shares where at least one share in the company is legally and beneficially owned by a medical practitioner and the other shares are owned by other qualifying persons (including medical practitioners, practice managers, healthcare professionals, GMS/PMS providers, NHS employees or NHS trusts). Despite this increased flexibility, however, the vast majority of GMS and PMS practices still operate through traditional partnerships.
APMS contracts are, by their nature, more flexible in terms of the ownership of the contracting company.
The limited company model could have advantages for your practice, as compared with partnership. A partner in a general partnership is personally liable for his or her own negligence and debts and those of the other partners, meaning that his or her personal assets may be at risk, particularly if a claim is not covered by insurance. For example, if one partner incurs substantial debts in the name of the partnership, then the other partners will be jointly liable for those debts and all partners can be sued together, even if the other partners had no knowledge of the first partner’s activities. In contrast, the shareholders in a limited company will usually have no personal liability in a similar situation.
However, if you wish to transfer your existing practice to a limited company, this will require the consent of NHS England or your CCG, which could present difficulties.
As a result of the Primary Medical Services (Sale of Goodwill and Restrictions on Sub-Contracting) Regulations 2004, many practices have set up companies to provide enhanced services. Where the company is separate from the entity which holds the registered patient list of the practice, the company can be sold for a price that reflects the goodwill of the underlying business.
The members of a limited liability partnership (LLP) also benefit from limited liability in many cases. However, when the NHS contracts were negotiated in 2004, LLPs were not considered, and therefore the regulations do not allow for LLPs to enter into GMS or PMS contracts. It is possible that this may change in the future.
If you are interested in forming a company or LLP, please let us know.
Preparing a partnership agreement can be complex and time-consuming, but a properly drafted agreement can help to establish clear and practical guidelines for the running of your practice. It is therefore essential that you get the right advice at an early stage, as this can help to identify potential problems and minimise the risk of costly disputes in the future.
For support with medical partnership agreements, contact our primary care solicitors.