Vital Signs – GP Sustainability Loans – The Latest Position
April 2018 heralded the introduction of a new General Medical Services Contract for GPs in Scotland.
It followed years of negotiation between the Scottish Government and the BMA and was intended to “re-invigorate general practice and to re-energise its core values” 1. Underpinning the new Contract are two key policy documents namely The 2018 General Medical Services Contract in Scotland and The National Code of Practice for GP Premises. The latter focuses on addressing many of the risks which are perceived to arise for GPs in connection with premises.
A key plank of the National Code of Practice is the introduction of the GP Premises Sustainability Loan Scheme. The Code of Practice states:
“There are few, if any, premises issues which will not be substantially addressed with a GP Sustainability Loan” 2
The Code of Practice sets out in fairly high level terms what is involved with a GP Premises Sustainability Loan. We have previously commented on those high level terms and speculated as to how they might be implemented.
Further guidance was issued by NHS Scotland on 8th November 2018. This focused on how to apply for a GP Premises Sustainability Loan as well as the process which successful applicants would have to go through. Much of our previous speculation has turned out to be correct.
The deadline for applying for a Sustainability Loan was 12th December 2018 although we understand that at least one Health Board refused to accept applications after 30th November 2018 on the basis that they then needed time to consider the applications prior to 12th December.
The purpose of this briefing note is to set out more clearly what we understand to be the process which successful applicants will have to go through.
How much can be borrowed?
The default position is that up to 20% of the Existing Use Value can be borrowed. The Existing Use Value is determined by the District Valuer for the purposes of the GP Premises Sustainability Loan Scheme. This is likely to be different from the value shown in the accounts. The Practice Partnership Agreement should set out the basis of valuation for partnership purposes.
The National Code of Practice envisages that Health Boards will be able to “top up” the amount of a GP Premises Sustainability Loan where they believe there are exceptional circumstances 3. The November 2018 guidance confirms that this will be funded from the GP Premises Sustainability Loan Scheme 4.
Who is entitled to apply for a Sustainability Loan?
Only GP Contractors can apply for a Sustainability Loan. The GP Contractor must own the Practice premises for which the Existing Use Value has been issued. For so long as the Practice premises are owned in whole or in part by former partners, spouses, a SIPP or SSAS, a Sustainability Loan will not be made available.
A GP Premises Sustainability Loan is secured against the legal title to the Practice premises. It follows that only property-owning partnerships can apply.
The property owners will grant a standard security (i.e. a mortgage) over the surgery premises.
The title deeds must be held in the name of some or all of the current partners as partners of and trustees for the Practice. If the title deeds are not held in this fashion, for instance because former partners names have not been removed or because the title is held in name of some or all of the current partners as individuals, then the title will require to be updated. It should be possible to deal with this at the same time as the Sustainability Loan is finalised.
The Practice’s solicitor must certify to the Scottish Ministers that the Practice has a valid and marketable title to the Practice premises. Depending on the age of the Practice’s title this may be straightforward or it may be complex. It is likely that the Scottish Ministers will also require the Practice’s solicitor to warrant that the Practice premises comply in all respects with statute. This will involve detailed due diligence being carried out and may involve the Practice in additional cost if the paperwork and documentation is not current and in place.
Granting a standard security may also involve the transfer of the Practice’s title from the historic General Register of Sasines to the modern plan-based digital Land Register of Scotland. This will involve mapping the historic title description on to the ordnance survey map.
It is normal for standard securities to contain conditions which constrain the borrower’s use of the premises. For instance, alterations to the building will normally require the lenders’ consent. Practices need to consider the extent to which this may give the Health Board involvement in the management or the surgery premises.
There will be a Loan Agreement between the partners and the Scottish Ministers. This will impose conditions which apply to the loan. The precise terms of the Loan Agreement the Scottish Ministers will require have yet to be disclosed. However, some of the terms are already in the public domain. Of particular relevance are:-
- The applicable interest rate will be 0%. However, where there is a breach of the Loan Agreement, interest will rise to 6% above Bank of England base rate. Such a breach is called an “Event of Default”. The November 2018 circular sets out what constitutes an Event of Default 5. This includes insolvency proceedings being brought against the borrower (e.g. if a partner is declared bankrupt), the dissolution of the partnership (e.g. if there is a “falling out” amongst the partners) or the Practice premises are abandoned. These may sound unlikely occurrences. However, Davidson Chalmers is dealing with examples of all of these at the time of writing.
- The Scottish Ministers will have an option to purchase the Practice premises at some point in the future. This is an OPTION not an OBLIGATION. It does not mean that the Scottish Ministers will purchase but rather that they may purchase. The November 2018 circular makes it clear that it is possible “the Scottish Ministers . . . do not exercise the option to purchase over a large number of premises”.
- Where the Scottish Ministers do exercise the option to purchase, the price they will pay will be the market value as set by the District Valuer. This is not the same as the Existing Use Value. Practices need to consider carefully, and take professional valuation advice to understand precisely, what this may mean in practice.
- Where the Scottish Ministers do exercise the option to purchase, the Practice will be entitled to continue to occupy the Practice premises if they enter into a lease with the Scottish Ministers. The terms of the lease will be set out in the Loan Terms. In signing up to the lease terms now Practices will be committing themselves to enter into detailed contractual arrangements potentially many years hence.
Inevitably there will be other conditions which apply to Sustainability Loan terms. It is essential that Practices consider the Loan Terms and take advice from their professional advisers (in particular their accountants and lawyers) to understand how such loan terms may affect them in the future.
Many Practices will have borrowings from main stream lenders already secured against the surgery premises. The Loan Terms with those lenders will almost certainly prohibit the granting of subsequent standard securities without their permission. As it is a prerequisite of a Sustainability Loan that a standard security is granted to the Scottish Ministers it follows that the consent of any main stream lenders will be required.
It would appear that none of the main stream lenders who operate in this sector have been consulted as to what their approach will be. It is unclear what position such lenders will take when approached for permission to grant a subsequent standard security. We understand that most lenders are adopting a “wait and see” approach.
One possibility is that lenders will require that some or all of the Sustainability Loan is used to pay down their outstanding borrowings. Whether this is what the Practice wishes to happen is an entirely different matter.
Where a prior lender does consent to the granting of a subsequent standard security there will require to be a Ranking Agreement amongst the partners, the prior lender and the Scottish Ministers. This will regulate what happens in the event that one of the lenders wishes to enforce or call up their security.
Is a Sustainability Loan Repayable?
A GP Premises Sustainability Loan is repayable in the following circumstances:
- The borrower’s GMS or PMS contract is terminated;
- The borrower ceases to use the premises for providing GMS or PMS services;
- The premises are sold, leased or otherwise disposed of;
- There is an Event of Default which is not remedied.
There may be exceptional circumstances where the Sustainability Loan is instead written off.
Every Practice, whether it owns property or not, should have a current up-to-date Partnership Agreement to which all the partners have adhered. A Practice without such a Partnership Agreement is not a stable business.
Where a Practice owns property the Partnership Agreement should have partnership property provisions. Where the Partnership Agreement does not specify the respective ownership shares the Partnership Act 1890 provides that partnership property is owned in the same shares as profits and losses are allocated. In our experience this is rarely what is intended.
When a Sustainability Loan is taken out the Practice Partnership Agreement should be reviewed to confirm how the liability for the Sustainability Loan is shared amongst the partners. It should also address what happens when someone leaves the Practice and when someone joins the Practice.
There will be costs involved in obtaining a GP Premises Sustainability Loan. As well as meeting its own solicitors’ and accountants’ costs, Practices will also be responsible for the costs of any prior lender. Practices may also incur additional costs of ensuring that the Practice premises comply with statute (e.g. carrying out a Fire Risk Assessment, obtaining an Energy Performance Certificate, evidencing compliance with Building Regulations and Planning Permission). It would appear that none of these costs are reimbursable.
All of these aspects will require legal advice and assistance. In summary a Practice may require some or all the following legal services:-
- Updating the Premises title deeds
- Title transfers from former partners to current partners
- Providing a certificate of title
- Updating Partnership Agreements or the creation of a new Partnership Agreement
- Advising on the terms of the Sustainability Loan
- Creating, negotiating and registering the standard security
- Automatic Plot Registration
- Negotiating consent with existing lenders
- Creating, negotiating and registering a ranking agreement
Davidson Chalmers has established a specialist GP Premises Sustainability Loan Team to guide GPs and Practice Managers through the process of drawing down a Sustainability Loan. If your practice has applied for a Sustainability Loan the Healthcare Team would be delighted to assist you in navigating your way through the issues that may arise. In the first instance, please contact our Healthcare Partner Andy Drane.
1. Executive Summary, The 2018 General Medical Services Contract in Scotland
2. Para 11.1, National Code of Practice for GP Premises
3. Para 10.1, National Code of Practice for GP Premises
4. Para 10, Section 5, Scottish Government Circular DL (2018) 22
5. Para 16, Section 1, Scottish Government Circular DL (2018) 22
6. Para 7, Section 2, Scottish Government Circular DL (2018) 22
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.