At the end of January 2020 Scottish Government issued an update for GP Practices on Sustainability Loans. This included template documentation agreed following extensive and lengthy negotiation between Scottish Government and BMA Scotland.
There is now much more clarity regarding the conditions on which Sustainability Loans will be made available to practices, what processes require to be gone through to access the loan and how key policy aspirations will be applied in years to come.
This note selects three key elements of Sustainability Loans and explains, at a high level, what is now known about them.
1. Who Are the Parties to the Loan?
The Lender is the Scottish Ministers although the relevant Health Board will act as their agent. The Borrower is all of the partners in the practice. This includes not just property owning partners but all partners including salaried, fixed share and non-property owners. Every partner must give specific written undertakings to the Health Board confirming they are bound by the Sustainability Loan. When a partner joins the Practice they must also give such an undertaking.
For an incoming partner, particularly if not a property owning partner, this may be seen as a significant issue. Whilst Sustainability Loans are presented as being benign – and in the normal course of things they may be – they may still be repayable in the future and it is anticipated they will be taken into account in assessing an individual’s aggregate level of borrowings. Why would someone joining a Practice voluntarily “contaminate” themselves in this fashion? If there were financial benefit, they might do so but it is unclear what the financial benefit may be to someone who is not a property owning partner.
Of course, it may be possible to ameliorate the associated risks by providing through the Partnership Agreement that others in the Practice (e.g. property owners and/or equity partners) indemnify the incoming partner.
2. What is Negative Equity for the Purposes of a Sustainability Loan?
Where the Practice would, having drawn down the Sustainability Loan, be in negative equity it must use the Sustainability Loan to pay off prior borrowings. For these purposes “negative equity” means a situation where the aggregate of existing lender debt plus Sustainability Loan exceeds Existing Use Value (i.e. per the District Valuer valuation from July 2018). This can arise where the Loan to Value ratio of existing borrowing is already high. This may be exacerbated where the Existing Use Value is less than the bricks and mortar value. This will tend to be more likely to occur in more sought after urban locations but could apply anywhere. It is worth noting that there is the potential for Practices to challenge the Existing Use Value in such situations and propose an alternate value. However, it is entirely unclear how this process would operate, not least because the Sustainability Loan refers to the challenge being made at the time of application.
Requiring repayment of prior debt is likely to cause problems for those Practices with fixed rate mortgages as early repayment may lead to break penalties being charged by the prior lender. There seems little point in taking out a Sustainability Loan only for a substantial portion to be spent on break penalties. With some of the higher rate, longer term loans which were typical in the 1980’s and 1990’s break penalties can be very high.
In some circumstances, even having used the Sustainability Loan to pay down prior debt, the Practice will nonetheless find itself in negative equity. In such circumstances the Practice must either agree with the prior lender to repay the remaining prior debt on a capital and interest basis or to make regular fixed capital payments.
3. What is the Option to Purchase?
In taking out a Sustainability Loan the Practice automatically grants to the Health Board the option (or right) to decide at some juncture in the future to purchase the Surgery Premises. This is a right, not an obligation, to buy; the Health Board is not obliged to do so. The fact that the Health Board has granted a Sustainability Loan is not a guarantee that the Surgery Premises will ever be purchased. There could be many reasons why this may not happen including financial constraints, reprovisioning of surgery facilities in the area and government policy.
The option is to purchase at then Market Value, taking into account the notional rent payable under whatever policy then exists. This is not necessarily the same figure as the Existing Use Value on which current Sustainability Loans (or any future tranches) have been calculated. The purchase price will be used firstly to pay off any borrowing to a prior lender and secondly to pay off the Sustainability Loan. If there are any free proceeds, that is what the Practice will receive. If there is still Sustainability Loan outstanding, it is understood current Government policy is to write such monies off. Clear commitments should be obtained from the Health Board to this effect when a Sustainability Loan is taken out.
The Partnership Agreement needs to address what happens to such proceeds and who is liable in the (seemingly unlikely) event of any shortfall not being written off.
The Practice can opt that, instead of selling the Surgery Premises to the Health Board, it will pay off the Sustainability Loan. It has a fixed period in which to do this failing which the Health Board can purchase. The Practice needs to decide if this is a decision of all partners or just the property owning partners.
If, following exercise of the option to purchase the Practice wishes to continue to occupy the Surgery Premises or part of them, then it must enter into a lease with the Health Board. The terms of this lease are agreed when the Sustainability Loan is taken out (i.e. now).
This is a summary of three key aspects of how Sustainability Loans will be applied. There is much more detail underpinning Sustainability Loans. As well as taking advice from a solicitor with an in-depth understanding of Sustainability Loans it is essential that the Practice takes advice from an experienced and knowledgeable accountant particularly when it comes to establishing how the Practice will treat any element of the Sustainability Loan which exceeds the current book value of the Surgery Premises, what someone pays to buy into the Practice and on what basis a retiring partner is paid out.
At Davidson Chalmers Stewart we have invested heavily in understanding both the policy framework and the complex, detailed provisions underpinning Sustainability Loans. If you would like more information on how Davidson Chalmers Stewart can help you, please contact a member of the Davidson Chalmers Stewart Healthcare Team.