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21 June 2017
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Should you own and develop your own building, or find a reliable private sector partner to develop premises that you can lease? Monica Macheng and Michael Hiscock from law firm Wright Hassall explore the options
Reading the NHS sustainability and transformation plan for Coventry and Warwickshire published recently, I was impressed by the bold opening statement of the vision for the local health and care economy: ‘To work together to deliver high-quality care, which supports our communities to live well, stay independent and enjoy life.’
Of course, this is exactly what I want for my young children and aging parents, and I know that NHS staff work long and hard to make this happen. But then I read an article in the national press, in which a freedom of information request showed that, of more than 200 council areas across Britain, private care providers in half of them had cancelled contracts with the local authority due to affordability issues. Surrey County Council almost held a referendum to gain a mandate for a 15% council tax rise.
So just how is the sustainability and transformation plan going to be achieved in the face of financial stress? Throughout, it states, ‘proactive care of the population, reduction in the unit cost of healthcare provision, improving efficiency through collective productivity opportunities, developing sustainable infrastructure for buildings and IT, and creating a primary care and general practice model which is appropriate for the needs of the community’.
Here I examine one strand of the plan: implementing a primary care development workstream to focus on developing GP services that give patients better and extended access to GPs, and providing health services in the community, not just in hospital.
Translating that into local property development, the organisations need premises. Increasingly, we are seeing different categories of healthcare service providers working in close proximity. Doctors, dentists and district nurses are joining up with pharmacies, physiotherapists and patients to make financially sustainable community health buildings – and when that ticks the political and planning boxes of local councils by acting as a catalyst for regenerating deprived areas, then it helps everyone.
One critical early decision is whether to act as a partnership or incorporate a new company in the ownership and development of the premises. This may depend on a number of factors, including who else is involved in the development and ownership of the premises, and the risks associated with the development. The partnership route can be either an unlimited liability partnership or a limited liability partnership (LLP).
Acting as an unlimited liability partnership means that all partners are personally liable for losses. The LLP can provide the partners with limited liability similar to a company, while preserving some of the benefits associated with the unlimited liability partnership. Alternatively, a new limited company can be created to act as the property-owning vehicle.
The advantage of having a limited company is that it can be used to ring-fence the risk of the development and ownership of the premises. If any claims arise in connection with the development or ownership of the premises, such claims would be made against the company, which has a separate legal entity.
However, if it is a new company or LLP with no assets and the development requires third-party funding, or where the premises will be leased by the practice, it is likely that lenders and landlords will demand personal guarantees from shareholders of the company and LLP as well as other security. Such guarantees or security would create the personal liability that the company or LLP vehicle was seeking to avoid.
The strong covenant of the practice’s NHS contracts should provide a basis on which to resist having to give onerous personal guarantees or other security.
Another consideration is whether to buy, own and develop your own building, or find a reliable private sector partner that will develop a building that you can lease. For practices that want to ‘do it themselves’, there is the personal satisfaction of delivering a tangible benefit for the community – not just an asset held by a private landlord whose sole interest in to maximise income with no ties or loyalty to the local area.
Other factors that may influence this decision are whether you already own the premises you are in, the value and availability of land and new sites nearby, whether the practice is in a deprived or rural area, the difficulty the practice has in recruiting new joiners and, of course, the attitudes of key stakeholders to investment.
There is a noticeable trend in the NHS towards favouring GPs as tenants rather than owners. This may leave you feeling disinclined to own and develop your own building.
But securing funding to buy and develop your own premises is just the start of what could be a challenging project. Assuming you can find land at a suitable price and obtain planning permission, you then have to decide what you want in sufficient detail for contractors to tender and submit like-for-like quotes. What you don’t want are tenders based on assumptions, provisional prices and designs that don’t meet the operational needs of the practice.
Once you have chosen a builder, your surveyor will advise you on issues such as programme control, cost control, quality control and change control. If you have selected a ‘design and build’ route, a significant proportion of the risk will sit with the builder. But you will pay a premium for that, since you would be asking the builder to take responsibility for issues like ground conditions, accessibility, document anomalies and discrepancies and, in some cases, turnkey handover with pre-start technical commissioning, so you can walk in and start treating patients.
One of the biggest causes of financial disputes is change control; for example, when the owner or end-user makes decisions or tweaks as the building work is in progress.
In one case, a consultant wanted a bed to be moved 30cm. The request was based on sound clinical judgment and experience, but this small change towards the end of the development had a significant impact on the heating, lighting, ventilation, medical gas connections and electrical connectivity – and, in turn, incurred a hefty cost.
So make sure you explore all the options early. Brainstorm, consult with stakeholders, and consider setting up a steering committee that holds power to make all but the most expensive decisions.
If you don’t want to shoulder the burden of a development yourself, you might prefer to work with a private sector partner that will develop a building you can lease. If so, you will need to be clear at the outset on what such a lease arrangement entails. The agreement should be clear on what the developer will provide during the development stage, once the project is complete, and going forward.
In short, a leasing arrangement enables you to specify what you want, and the developer handles the rest, including raising the capital and engaging the architect and engineer. Signing an agreement to lease allows practice staff to focus on caring for patients, and will minimise disruption because you can simply move everything over when the new premises are ready.
Leasing means not benefitting from any increase in the capital value of the asset, but if you ring-fence a long lease in a newly formed development company, it might be more attractive to young GPs who don’t have to buy into the partnership. Leasing the premises may also remove the concern of having to encourage new GPs to the practice, and save a large part of the costs of the initial development. But it’s vital to negotiate terms that are fit for the purposes and future needs of the practice.
For example, depending on the lease terms, there may be a risk of a possible deficit on rent review, leaving the partners to make up the shortfall. New GPs may not want to take on the liabilities of the lease, which could make difficult for retiring partners.
If you establish a landlord/tenant relationship, give yourself the option of subletting space to another practitioner, like a pharmacist, dentist or physiotherapist. You should also have the ability to assign the lease, so ensure that restrictions on use don’t prevent you from disposing of the lease to another party.
If possible, you should avoid giving an authorised guarantee agreement. This would allow the landlord to pursue you for payment of rent and any other monies due under a breach of covenant of the lease, even if you are no longer the tenant. Negotiate appropriate break clauses, and ensure the rent is no more than that reimbursed by the health authority.
Then there is the issue of obtaining certification for the regulator. The Care Quality Commission (CQC) applies the following five questions: Is the service safe? Is the service effective? Is the service caring? Is the service responsive? Is the service well led? Then the CQC applies ‘fundamental standards’, which, in the case of premises and equipment, demands that facilities are clean, suitable for the intended purpose, and looked after properly. This will include health and safety matters such as employee safeguards, fire safety and means of escape, asbestos or other substance assessment and management, compliance with the Disability Discrimination Act (DDA) and the gas and electricity requirements.
Where you have opted for the lease route, you will, for example, still be liable under the DDA to make physical adjustments to the premises where they are required. Therefore, if these requirements have not been thought through at the outset of the project and only come to light once you are in occupation, you may have to seek consent from the landlord under the lease to make them.
Then arises the question of repair and maintenance. The extent of your obligation for repair and maintenance will depend on whether you own the premises or have opted to lease.
If the latter, it will depend on the terms of the lease. But in any event, repair and maintenance issues could create an opportunity to benefit from economies of scale: for example, if small practices merge, or large practices join forces to develop a repair and maintenance framework.
The Coventry and Warwickshire sustainability and transformation plan identifies overlaps in back office functions such as IT, finance, building management and purchasing. It is incumbent on NHS buyers to get value for money, and efficiency drives might justify outsourcing or sharing skills, knowledge and training.
There is nothing new here. Indeed, Nye Bevan’s 1948 vision of the NHS was restated in 2011 in seven key principles. The fifth states that ‘the NHS works across organisational boundaries and in partnership with other organisations in the interest of patients, local communities and the wider population’. It’s time now to get together to make best use of our physical, financial and human assets.