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Vital Signs – A Primary Healthcare Blog: Are Surgery Lease Issues No Longer Relevant for GP Practices?

Date: 28/06/2018 | Healthcare, Real Estate, Blogs

When General Practitioner leaders voted to approve the new GP Contract in early 2018 it was recognised that there was a lot to do before it took effect in April.  Five months on, there remains significant uncertainty with the practical implementation of key aspects of the new settlement.  This is particularly the case in relation to premises issues.  

Premises issues were seen as being so important a part of the proposed settlement that they merited an entirely separate document being produced namely the “National Code of Practice for GP Premises”.  This 38 page document sets out at length how both Scottish Government and the BMA wish to see premises provision change by the mid-2040’s.

One of the boldest aspirations in the new settlement is the Scottish Government’s aspiration that the model for primary care should see GPs ceasing to own surgery premises or to lease surgery premises from third party landlords by 2043.  

The purchase of surgeries is not projected to start until 2038 except in exceptional circumstances.  

However, dealing with surgery leases is a far more pressing issue.   In large part this is due to the fact that the use of private or third party landlords to build surgeries and lease them to medical practices really took off in the mid to late 1980’s.  Leases were typically for 30 years hence increasing numbers of leases are coming to an end now.   Whilst they were not entered into under the private finance initiative as such GPs often refer to such leases as “PFI schemes”. 

Both landlords and tenants are concerned to clarify their positions.  Landlords want to protect their investment and to guarantee income from their asset for the foreseeable future.  Tenants want security of tenure whilst also avoiding crystallising dilapidations or other liabilities.

Health Boards across the country are struggling to get to grips with what this means for them.   However, those Health Boards who were early adopters of private or third party landlord developments are starting to take over those leases where the issue is most pressing.  This may involve either the Health Board taking an assignation of an existing lease or the Health Board negotiating an entirely new lease with the private or third party landlord. 

However, the premises concerned must meet certain minimum requirements for the Health Board to either take an assignation of an existing lease or negotiate an entirely new lease.   These requirements will be the subject of a further briefing note. 

Where practices are assigning an existing lease the Health Board will require that the practice gives legally binding confirmations or warranties regarding a range of matters.   Most practices appreciate that in such circumstances they need to take their own legal advice.

However, it is tempting for practices to assume that where the Health Board is negotiating an entirely new lease with the private or third party landlord they don’t need to take advice.   However, that is far from the case; practices who do not take expert advice risk serious financial peril.  

Firstly, the original lease will inevitably contain provisions about what the tenant must do at the end of that lease.  The National Code of Practice for GP Premises makes it clear that liabilities arising out of the original lease (e.g. dilapidations) remain the responsibility of the practice.   Whilst the Health Board may make sustainability loans available to practices who have complied with their leases that is not the same as saying there will be no liability.   Practices need to be involved in the negotiation of the terms of the new lease to ensure that their position as outgoing tenant is adequately protected and that they are not being left to fund substantial costs from their old lease.

Secondly, it is now apparent that most Health Boards are adopting a position where practices must take a sub-lease from the Health Board of the surgery premises.  As at June 2018 it is unclear what the precise terms of such a sub-lease will be although it may be that such leases will be of a shorter duration than the main head lease.  However, practices should anticipate that such sub-leases will oblige them to comply with the terms of the head lease the Health Board has with the private or third party landlord.  Whilst the Health Board may be seen as a more benign landlord than the private or third party landlord it seems likely that some if not all of the risks associated with a lease will be passed onto the practice through the sub-lease. 

Furthermore, if the practice is merely paying a share of the costs incurred by the Health Board, then the Practice will have lost much if not all of its ability to manage the amount and timing of costs and the way that the property is managed.  This could have a potentially significant impact on practice finances.

It follows that prudent practices will seek to approve the commercial terms on which the head lease is negotiated, to have complete visibility of the terms of the head lease, potentially to be involved in the negotiation of the head lease and to negotiate a sub-lease which contains adequate protections to ensure that they do not continue to be blighted by the risk of leasing property.

Davidson Chalmers acts for more medical practices than any other law firm in Scotland.  We understand in depth the regulatory framework GPs operate within, how GP practices are financed and the particular challenges faced by practices and individual partners in leasing and occupying surgery premises.   If your practice is seeking to assign its lease to the Health Board or if the Health Board is negotiating a new lease of the premises we would be delighted to assist you in negotiating your way through the issues which will arise.

The matter in this publication is based on our current understanding of the law.  The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers Stewart LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.

Written by

Andy Drane | Davidson Chalmers Stewart
Andy Drane

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