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Vital signs on monitor

Vital Signs – A Primary Healthcare Blog: GP Premises Dilemmas.

Date: 10/09/2015 | Healthcare, Real Estate, Blogs

After staff costs property costs are, for many businesses, the largest outgoing.  This is as true for a medical practice as it is for any other business.    

Issues relating to ownership of premises can also form a serious faultline amongst partners.

Quality of premises, the costs of buying in and residual built up liabilities can be a significant disincentive when it comes to partner recruitment.

Counter all of this with Health Facilities Scotland’s aspirations to improve the quality of healthcare premises across the primary care sector.  Such aspirations are laudable and the single minded pursuit of government led intervention has much to be said for it.   However, for those practices caught up in the midst of change or those for whom change is a distant prospect there are very significant issues.

There is already government support for medical practices through the Premises Directions.  It is worth noting that the Premises Directions as they stand are over 10 years old and many of the aspects of the Premises Directions are a direct hangover from a system put in place some decades before.  This has come into sharp relief in recent months with the advent of HubCo projects; the Premises Directions take no account of the fact that under a HubCo scheme there is no rent to be reimbursed but rather a unitary charge which bundles up a range of services and costs in a single –non-reimbursable – charge. (There are some costs of a HubCo project which are reimbursable (e.g. rates) but they are modest compared with overall costs.)

There are various different systems under which practices occupy their premises most of which reflect prevailing government policy at the time the premises came into use as surgeries.  Each system brings with it challenges.  As with any property, age brings with it requirements for maintenance, repair and in some cases renewal.  Many practices are slowly realising that there are costs and/or financial impacts associated with property which are not ameliorated by rent and rates reimbursement.  Other practices discover they face immediate issues which they have not provided for over the years and which are so great they are no longer manageable.   

The precise circumstances will vary from practice to practice.   However, there follow examples of the sort of issues which can arise:-

Example One – Revaluation on Partner Retiral.

Dr A and Partners purchased the practice premises many years ago.  The premises have always been included in the practice accounts at original cost.  An outgoing partner requires that the practice premises are revalued and that she is paid out her share of the revalued property.  There is either no practice agreement or the practice agreement is silent on what happens and she is entitled to be paid out on the current premises value.   How can the remaining partners fund this?

Example Two – Incoming Partner Buy-In.

Dr B and Partners occupy Victorian premises which are located in a remote rural area.  The practice premises are valued in the practice accounts on the basis of the income generated by the reimbursable rent.  This value is significantly greater than the bricks and mortar value alone would be.  New recruits are unwilling to “buy into” the property because they are unwilling (or unable) to raise the loan funds necessary to buy in at the value based on rental income.

Example Three – Third Party Landlords and Dilapidations.

Dr C and Partners lease premises from a third party landlord under a so-called “PFI”or Third Party Landlord scheme.  As is normal the lease is on full repairing and insuring terms.  The practice premises have been altered over time, not always with reference to the landlord.  Decoration has been haphazard and the building fabric is tired.  The lease is due to come to an end and the practice is shocked to receive a notice from the landlord requiring that the practice premises are put into modern and good condition and repair.  The landlord also requires that all alterations are removed and the premises reinstated to their original condition.  The practice has made no financial provision for these costs which run into the many tens of thousands of pounds.

Example Four – HubCo development.

Dr D and Partners work from a Health Board health centre.  The Health Board has committed to a new HubCo surgery development and wants the practice to relocate there.   The projected costs of occupying the HubCo surgery development – when the Health Board finally produce them – are several times the costs of occupying the health centre.  Most of these costs are not reimbursable and would make the practice unviable.  The practice decline to move to the new HubCo scheme and advise the Health Board they will stay in the existing health centre.   However, they are then told by the Health Board that the health centre site has been sold to fund some of the HubCo scheme costs and that the practice will have to move out come what may.  The practice has no lease and no legal right to remain in the health centre.

Example Five – “Handing Back” a GMS /or Section 17c contract.

Dr E and Partners have reached the end of their tether.  Recruitment and retirement combined has simply got too much; they “hand back” their GMS/Section 17c contract to the Health Board.   Whilst that allows them to breathe a sigh of relief, all too quickly the practice discovers that one or more of the following applies:-

  • as the practice has ceased to be a contractor for the purpose of the Premises Directions there is no legal entitlement to rent and rates reimbursement.
  • the practice remains tenant under its third party landlord lease and the practice (and the partners as individuals) continue to be liable under the lease.  
  • whilst it owns the premises, the practice has substantial bank borrowings secured on the property.  The practice (and the partners as individuals) remain the borrower and continue to be liable for servicing the debt.  In some cases the end of a GMS/Section 17c contract is an event of default entitling the bank to call up the loan immediately.
  • The premises are owned with little or no debt secured on it.  However, the property is valued in the accounts on the assumption basis of rent reimbursement being received.  The bricks and mortar value is significantly less and partners face a substantial balance sheet reduction.

The extent to which any of these issues may play out in a particular situation will vary from case to case and Health Board to Health Board.  As at September 2015 most Health Boards are being supportive of practices handing back their contracts.  However, it seems inevitable that as more and more practices attempt to back out of their GMS/Section 17c contract these issues will be left increasingly with practices to handle themselves.

In light of the issues facing general practice particularly with regard to premises Davidson Chalmers are holding a seminar at Macdonald Crutherland House, East Kilbride on 23 September 2015 entitled “Premises: Fossilised or Future Proofed”.  If any of what has been said in this note resonates with you or if you are interested in finding out more please book in to join us by following this link.

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 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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