Independent contractors operating under a specific set of regulations provide most NHS primary care. Working with them on premises developments can be complex because they are responsible for securing suitable premises from which they deliver primary healthcare for the local population. Furthermore, the operational issues, incentives and contractual levers for each of the primary care providers are quite distinct.
Primary medical care service providers must be registered with the Care Quality Commission (CQC). This means that registered providers are legally obliged to comply with minimum requirements for quality and safety. This includes a requirement for people to receive care in, work in, or visit safe surroundings that promote their wellbeing. Primary care organisations need to work closely with their providers and contractors to ensure they meet required quality and safety standards for premises.
The main source of information is the Premises Cost Directions and this briefing will focus on part 5 of the directions; Recurrent Funding. While many clauses appear as contractual clauses; there is still a requirement to understand the regulations.
There are two main types of funding associated with general practice:
- The practice is a tenant with a landlord (leased)
- The practice owns the premises (owner/ occupier)
There are also a number of other areas where primary care organisations reimburse business expenses.
Owner occupiers and third party landlords
The new Premises Costs Directions which govern all of the rental reimbursements of premises and improvement grant applications were due to be published in September 2016 and would have become effective from that date. However, due to various delays the negotiations did not complete until early 2020 and were due to be published alongside the revised GMS contract on 1st April 2020. We understand that there has been a further delay and so, currently, the Premises Costs Directions dated 2013 remain in place.
Having said that, we have been given some information regarding what is in the new PCDs and we understand that these will include a regular review of borrowing costs for those reimbursed based on a mortgage; the dreaded Memorandum of Understanding required between the landlord and yourselves prior to the District Valuer providing an assessment of the current market rental value will be removed; up to 100% capital grants could be available for improvements (we don’t know what strings may be attached to this yet but it is only likely to be available where there is major transformation!); the restriction on third party users of your premises will be removed meaning you can safely charge for utilities (heat, light, phones etc) without fear of abatement and there is a widening of the discretion to fund Stamp Duty Land Tax (SDLT) when a new lease is required.
There are two forms of payment made to practices that own their own premises. Initially a practice would obtain a loan/mortgage to develop their premises; the sum borrowed would include professional fees and cost of the building.
The primary care organisation, having agreed the scheme, would pay the practice the interest on its loan – ie the cost of borrowing. This would continue until the loan is paid off or, and this is the usual case, the practice elects to receive notional rent. Practices that change their borrowing arrangements are required to inform the primary care organisation. Notional rent pays the practice as if it was the landlord and receiving rent from a tenant. In the absence of an actual lease agreement, terms are laid out to set an annual value payable. primary care organisations are instructed to review notional rent every three years. Notional rent may increase or decrease. This is a risk the practice takes; there is no option to return to the cost of borrowing arrangement.
The three-year cycle may only be brought forward under mutual agreement with the primary care organisation if there is a further capital investment in the premises or if there is a change to the purpose of the premises. Practices may decide to immediately opt for notional rent, usually where this is greater than any cost of borrowing reimbursements. The primary care organisation and practice must agree the notional rent. If agreement cannot be reached between the practice, or its agent, and the primary care organisation, there is an NHS Litigation Authority (NHSLA) dispute resolution process, which involves the appointment of an independent expert to assess the value.
The practice is a tenant with a landlord. The landlord is a third party and should have a written lease with the practice. There are many types of lease that contain specific information regarding rent increases, who is responsible for repairs etc. The primary care organisation reviews their arrangements with the practice and reimburses the practice for the actual rent paid or the current market rent (CMR), whichever is the lower.
If you occupy an NHS Property Services (PropCo) owned building, a ‘standard lease template’ has now been published.
However, there are still some issues around the lease which requires professional advice before signing and you need to fully understand exactly what you would be signing up to.
DR solicitors has reviewed the new lease template and summarised some of the more important points below (where we have additional understanding I have amended the text slightly to reflect that!)
What we like about the new lease:
Break clause/flexibility. As a GP tenant, you can break the lease on a no-fault basis, either on the termination of your core contract or in contemplation of not wishing to renew your core contract. This is important to avoid becoming the 'last man standing'.
Rent reimbursement. There is a mechanism to ensure that the rent will always equal the rent reimbursement. However, please see our concerns about cash flow below.
Schedule of condition. The lease contains a schedule of condition which will set out items of disrepair that you will not be responsible for making good at the end of the term. You should complete this schedule very carefully to ensure that it is accurate.
Simplified rent review memorandum process. The lease neatly resolves the current problem of needing to produce a signed rent review memorandum prior to NHS England considering reimbursement of the increased rent, by permitting an unsigned rent review memorandum to be sent to NHS England. This minimises the risk of a shortfall in rent reimbursement following the rent review process. However, it’s worth noting that the controversial provision in the Premises Costs Directions 2013 is likely to be removed as stated above for owner occupiers and other third party landlord tenants.
What we are less keen on:
Rent reviews could give rise to cash flow issues. Whilst the rent review mechanism ensures that over time all rent paid will be reimbursed, in the event that the new rent is not agreed by NHS England it will be challenged, which could result in you paying more in rent than you will be reimbursed during the challenge process. You would have to finance this shortfall yourself until the monies are recovered from NHS England, which could be a long time. Furthermore, interest is payable on any rent arrears payable and this is unlikely to be recoverable from NHS England.
Potentially high service charges. Although service charges relate in the main to common parts, we see some potential costs which are unpalatable and we would expect to negotiate the removal of some of these. This is also the message from the GPC – you shouldn’t be paying either unsubstantiated costs nor for services you do not actually receive eg security
Potentially high management costs. Management costs under the lease are likely to be high as the landlord can choose which managing agents to engage and you are obliged to pay a proportion of their charges, which may be calculated as a percentage of the service charge you pay.
Shared areas rent position unclear. There could be a separate rent payable on the shared areas, but these shared areas are also to be included in the ‘common parts’ and are subject to service charges. How this will be dealt with under the Premises Costs Directions 2013 is unclear. For example, the shared areas won’t form part of your main premises, so will they be reimbursed at all? Will there be a separation of main premises rent and the shared area rent? Could your proportion of the shared area rent go up or down as the shared areas are used in different ways by the occupiers?
VAT. VAT could be added to the service charge, which may not be considered at the outset of the lease. Both you and NHS England must agree prior to any decision by NHSPS to charge VAT on the rent, but if you do so, VAT would also be payable on the service charge. This would likely increase your costs, since it would be surprising if all the service charges were recoverable from NHS England. The lease indicates that this clause was a concession until November 2017. Presumably after this time, NHSPS will insist on a clause allowing them to elect to VAT unilaterally, which could be very damaging.
Landlord's costs. You are likely to be liable for the landlord’s costs in a number of areas, some of which we would advise resisting.
No say on service providers. There are provisions for the landlord to decide who does repair work, meaning that NHSPS can decide who provides the services you pay for via the service charge, and who will carry out your direct obligations as a tenant. You may not even be able to determine who, for example, redecorates the interior of your surgery. This could lead to a dramatic rise in your costs, since the landlord can select the provider but is not responsible for the cost. However, this does seem to be more flexible more recently with NHSPS agreeing that tenants can use their own providers e.g. cleaners, plumbers, if wanted.
Overall, the template lease is broadly consistent with an ‘ordinary’ commercial lease, but will need to be negotiated carefully. The underlying issue is that many GP practices in NHSPS buildings are not on ‘ordinary’ commercial leases to start with, so moving to one is a big and potentially very expensive step. Remember that most NHSPS buildings are currently loss making, but an ordinary commercial lease sets out to ensure that this cannot happen.
The most important question for you to ask is, ‘Is it in my interests to enter into a negotiated version of the template lease?’ The answer depends on your individual circumstances, but for many practices the answer may be ‘no’. There is no ‘one lease fits all’ position so we can only reiterate the disclaimer published on the front page of the template lease, namely that you take independent legal and professional advice before you sign anything presented to you.
However, the BMA has challenged the legality of NHSPS increasing service charges on leases without due negotiation and this is currently subject to legal proceedings so the LMCs advice is not to sign a new lease (unless you are entirely satisfied with the terms and are in no doubt the practice will remain financially viable) until the outcome of the court proceedings is known.
Applicable to owner/occupiers, notional rent may be abated (ie the notional rent amount may be reduced) for three reasons.
- If ‘NHS money’ is introduced to improve the premises, the calculation of the abatement is detailed in the directions and is limited to 10 years. Improvements that have not been agreed with the primary care organisation, but which result in an increase in notional rent, may also be abated from the amount reimbursed. NHS money covers various sources, including capital grants from a primary care organisation (or deanery funding brokered through the primary care organisation).
- If the practice receives reimbursement for the total building area and rental income from other organisations using the premises, the rent received should be abated from the reimbursement, ie no double payment. If the other provider’s services are not NHS services, the practice should charge a rent to the provider. If other NHS services are being provided from the premises, there is no requirement to charge a rent for this and the practice may receive full rent.
Once a practice is receiving payments for its rent or cost of borrowing, it may also apply to receive payments in respect of its running costs. Although technically discretionary, primary care organisations reimburse business rates, water and sewage rates and clinical waste disposal.
The PCT does not pay for fuel and electricity, insurance, internal or external repairs, building and grounds maintenance (including removal of trade waste). These are practice business expenses.
Third party landlords (including where the primary care organisation owns the premises) should levy a service charge to their tenant to cover non-reimbursable running costs. Where an owner-occupier receives payments for the whole premises and provides accommodation for other providers, the practice may also levy a service charge for use of the accommodation. If the owner-occupier makes the premises available to accommodate other NHS services, it should not charge a rent to the service provider. This would be classed as a double benefit. If the owner-occupier also makes the premises available to non-NHS services as previously stated, it must charge a rent to the provider. The rent amount should be deducted from the reimbursement made by the primary care organisation, thereby disallowing double benefit.
Practices may claim that they incur additional costs for heating, lighting and so on, and seek to levy a service charge. The practice would need to justify this through transparent audited proof of such additional costs, to avoid unjustified income generation.