Pitfalls with GP premises leases

Minimising premises risk

GPs may not realise it but their leases of practice premises could hide a number of very significant risks. Those risks can impact financially upon the practice as a whole and on the partners personally. The best time to minimise the effects of those is at the outset when negotiating the heads of terms for the practices’ lease, whether moving to new premises, on the renewal of an existing lease, under the NHS LIFT scheme or as part of a thirdparty development project (3PD).

Negotiations

At the negotiation stage GPs can often find themselves trapped between the interests of a commercial landlord or developer and the PCT. Developers will generally want to grant long leases, 20 or 25 years in many cases, which will maximise the value of their freeholds, while PCTs will wish to steer clear of premises risk.

Negotiations often take place against a tight deadline to ensure that the premises are available on time, particularly in the case of LIFT developments.

Termination or expiry of your GP contract

Termination or expiry of your GP contract (whether GMS, PMS or APMS) will not usually bring your lease to an end. The tenant(s) named in the lease will continue to be liable for payment of rent, service charge, insurance premium and all other lease costs until the lease expires or is otherwise ended, which could be many years later. If your contract ends, so too will rent reimbursement by the PCT.

There are many reasons why a GP contract may end. It is not difficult to imagine a worst case scenario (see box out).

20 years is a long time for a PCT’s organisational structure and policy to remain static. The previous Government made one stop primary care centres its focus, but the imperative for the coalition Government is not the same. In August 2010, a Primary Care Centre in Peterborough had its APMS contract terminated pursuant to a “no cause” clause. We do not know what property arrangements the practice had in place at the time of termination, but the implications of a long lease with a third party landlord and no break rights could have been serious.

GPs should be very cautious about taking on long leases. They cannot be sure that GP services will be required from those premises for a long period.

Risk reduction

Any or a combination of these strategies will limit your exposure:

1. Insist on break clauses: the most useful break clause can be exercised by the tenant at any time after an initial period if the service contract is terminated or not renewed. Commercial landlords will not agree to that because they require certainty, but some landlords like local authorities or PCTs might be persuaded. It depends on the premises, bargaining strength and the overall project.
2. It is more likely that the GPs will be able to negotiate break clauses every three or five years, meaning the lease can be brought to an end at certain fixed points. (2) If no or insufficient break clauses can be agreed then agree a shortterm lease: if the GPs can negotiate for the lease to be within the security of tenure provisions of the Landlord and Tenant Act 1954 then they will have the right to remain in the property when the term ends and call for the grant of a new lease. The landlord can only refuse in certain limited circumstances. A short lease combined with security of tenure limits the risk of having to pay for premises that will no longer be used for providing primary care.
3. Require the PCT to take on the lease if the contract ends: The PCT will often request a right to take over the lease if the contract ends but that only benefits the PCT. Far preferable for the tenant is an obligation on the PCT to take over the lease. Whether a PCT will agree to that depends on the PCT involved and the nature of the project.
4. Resist providing personal guarantees. Where the lease is granted to a limited company, the partners should resist giving personal guarantees. If no personal guarantees are given then only the tenant company will be liable for the lease costs. If things do go wrong that could mean the end of the limited company, but the GPs involved will avoid personal liability.
5. If the lease is granted directly to the partnership ensure that the lease provides that, on retiring, partners are released from their obligations under the lease. Worstcase scenario: An example A GP partnership takes a long lease of practice premises for 20 years at an annual rent of £50,000 plus VAT, subject to upwards only rent review. After five years, the contract is terminated by the PCT. The partners will continue to be liable for the premises costs for the remainder of the lease. So here, the partners would be personally liable for a further 15 years: £750,000 together with service charge, insurance premium, dilapidations, VAT and other costs.

Assignment

If the partnership or limited company is left with practice premises and no contract then assignment of the lease might be a possibility. Tenants can pass on their liability by assigning an unwanted lease to a third party. However, demand for purpose built practice premises no longer required for medical purposes is likely to be very low and dependent on market forces. Even if someone can be found to take over the lease the assignment will incur costs and the outgoing tenants will usually be asked to guarantee the obligations of the incoming assignees. GPs should not rely on an assignee being found and should take steps before entering into their lease to limit premises risk.