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Tenant of the NHS

Tenant of the NHS
22 May 2013

Articles have been produced and rumours abound over the move of many primary care trusts (PCTs) to ‘commercialise’ the letting of their NHS owned properties to GPs. Gone are the days of no or minimal rent plus low or non-existent service charges. Many of these properties will have been taken over by NHS Property Services (NHS PS) from 1 April this year, and the intention is to run on a fully commercial basis collecting proper market rents and demanding service charges based on the full and comprehensive cost of running the centre. Indeed, such systems were being put into place prior to the transfer, and we hear stories that, in some areas, it is not the market rent and service charge that is being considered as such, but the back-dating of substantial costs where these have not been collected over recent years.
There is no suggestion that there is to be any substantive change to the NHS Directions and the reimbursement scheme that lies at their heart. Thus the proposal to charge full market rent for GPs in NHS property may be an administrative complication but it should not result in a financial deficit (although it may cause a cash flow problem). However, the service charge is very different as, while GPs will receive some contribution towards external decoration and repair, this is not true of internal costs, which of course can be very extensive in some of these older-style NHS properties. Not least of course is the cost of internal services including boilers, central heating and lifts. Internal repairing costs are down to the practice, and in an older style building, this could include the replacement of lifts where one is likely to get little change from £50,000.
To add to the above grief, doctors in NHS premises will potentially continue to suffer from their outdated style and fittings. Should GPs therefore be considering the purchase of these buildings?  Would the benefits of such outweigh the cost and administrative responsibility? Certainly such a route must be investigated, but let us first look at the benefits and disadvantages.
Property investment. Instead of paying rent (which you get reimbursed), you will be receiving a notional rent, the vast majority of which will initially be used to pay all mortgage interest charges. However, future notional rent reviews, should they produce an increase in rent, would be of benefit to the practice (although remember rents go up and as well as down). In the long term, one would expect an increase, creating an investment in property.
Premises improvement. Owning your own property opens up the possibility of raising further loans and/or getting NHS premises improvement grants to refurbish and improve the quality of the building. Income can also be improved by looking at subletting non-general medical service (GMS) parts of the building to associated healthcare users.
Standard of repair. The role of NHS PS may improve matters, but historically the quality of repairs by the NHS to their primary healthcare buildings has not been high. By owning your own building, GPs would have full control over improvement and repair, including of course the cost of such work.
Control. Owning your building gives you control over the premises from which your service contracts emanate.
Property risk. Any investment in property naturally brings with it a risk and, as noted above, rents go up and well as down, as indeed do capital values. To minimise this, it is essential to get specialist advice from an experienced lawyer and surveyor/valuer.
The role of the landlord. I have previously noted the benefits of looking after your own property, being able to undertake your own improvements and, where there is excess space, having the benefit of creating a rental income by subletting. It is, however, an intensive administrative role and a responsibility which, if not undertaken properly, could not just waste a lot of management time but cause a lot of additional cost on the practice. If you are looking at a large building with a number of sub-lettings, possibly including sub-lettings to other GPs or other NHS Trusts, it may well be worth you considering employing a specialist management agent to run all these aspects for you. By putting in place a professional and properly run service charge, you should be able to recoup a lot of the cost back from your sub-tenant.
Acquisition costs. Acquisition costs can be high and to try and skimp on these is a false economy. You will need to employ a specialist and experienced valuer/surveyor and an experienced lawyer. Don’t expect any favours from the NHS just because you are GPs who may have been in occupation. The likelihood is that you will be negotiating with NHS PS whose remit is to commercially manage the NHS estate and obtain from any sale full market value.
We know that NHS PS has taken over the property ownership from PCTs in respect of many GMS GP surgeries and health centres. Where the GMS element is ancillary and there is a substantial NHS Trust presence, then the property may be going over to a Foundation Trust. 
Either way, there will inevitably be an element of uncertainty and confusion while the hands of control pass over. Personnel may be uncertain of their roles and authorities, the sale of premises may initially be off their agenda and new process and procedures may cause additional complications and delays. It is likely that GPs will need a strong constitution to fight their way through the red tape and bureaucracy.
Leasehold or freehold?
If the property you are looking to purchase is a stand-alone unit where the site can be clearly and easily delineated, then you should push to be able to purchase the freehold interest. In selling, the NHS may want to exert an element of control over future use and certainly they will, under their ‘estates code,’ want to prevent you from achieving any future development windfall. To buy the premises as a doctors surgery only to substantially increase the value by getting planning for future residential development would, to say the least, cause the NHS a huge embarrassment. 
Therefore, when selling freehold, the NHS will often put a covenant on the land restricting its use to healthcare and only allowing a change in such use where they are able to ‘claw back’ part of any potential increased development value. Careful negotiation by a specialist surveyor/valuer and lawyer is essential in order to safeguard your interests.
Where the property is more integral with another use, such as a surgery with residential flats above, or a surgery that forms part of a hospital, it is probable that, rather than a freehold interest, you will look to buy a long leasehold interest just as one would purchase a residential flat. 
In such circumstances, you should look to get as long a term as possible (the commercial norm would be 125 years) and, by paying the amount virtually equivalent to the freehold value, you would expect only to be liable to pay a peppercorn rent with no rent reviews throughout the term. 
By selling leasehold, the NHS would be able to exert an element of control as the lease would cover such items as the use of the premises (no doubt limiting it to healthcare use) and place certain requirements on the purchaser, such as the need to keep the building in good repair.  As part of a larger building or hospital development, the lease would also attend to matters such as service charges to reflect the cost of shared car parking, shared service roads, etc. 
Once again, specialist advice is essential from both your lawyer and surveyor/valuer.

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