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How sale and leaseback of premises can attract new practice partners

15 November 2018

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Specialist commercial property solicitor Clare Darwood outlines why sidestepping property ownership and going down the sale and leaseback route could be the right option for your practice. 

Understandably, many practices struggle with the decision on whether to purchase practice premises or take a lease.

Historically, most practices have operated from freehold properties owned by the partners – with incoming partners buying a share in the property on joining the partnership – and those retiring selling their shares back to the other partners.

Although this traditional ownership structure has not caused any specific issues, it is now regarded as one of the reasons why practices are experiencing difficulties recruiting GP partners.

New partners may struggle to find the funds to take on a share of the premises or be unwilling to enter into more debt. For many, the risks of buying a share in the practice premises outweigh potential benefits, such as capital growth, further down the line.

Increasingly, practices are looking to sale and leaseback deals to avoid the financial pressures of new partners needing to buy in to the premises – an arrangement that is changing property ownership for partners.

A sale would provide an injection of cash into the partnership – although high early redemption penalties may need to be factored in – and could see the partnership become debt free.

Other considerations include the practice’s ability to secure future funding as the partners will no longer own the freehold asset, and potential capital gains tax for current and future partners.

With a lease arrangement there is no lump sum investment required – although the partners will still need to put their names to a lease, which will come with the usual tenant obligations – potentially making this a more attractive option for new partners.

With this arrangement, the landlord would hopefully maintain the property to a good standard, avoiding partners becoming embroiled in property matters and bogged down with copious amounts of paperwork.

It is worth bearing in mind however, that although rent reimbursement would still play a part, the NHS does not reimburse practice partners for the costs of any repairs that fall to the tenant.

Another advantage of a sale and leaseback arrangement can be that it speeds up the retirement process as selling shares in a property partnership can be costly, time-consuming and complicated for all parties involved.

The arrangement means that the freehold property is sold by the practice partners to a third-party investor who then grants a lease of the property back to the partners. The lease is typically for a term of 20-25 years, although the term is usually negotiable and assessed on a case by case basis.

As GPs benefit from NHS rent reimbursement, they are regarded by prospective investors as strong tenants who are unlikely to default on rent payments. However, it is important to safeguard the partnership in the lease should such rent reimbursements be withdrawn or decreased or, for example, where only one partner remains.

Choosing a potential landlord is an important part of the process, whether it’s a large investor that specialises in the sector, or a smaller one. It is advisable to appoint a specialist healthcare surveyor to assist with this and to negotiate the heads of terms.

Approval from NHS England is required prior to completing a sales and leaseback transaction, in order for recurring notional rent funding to continue under the General Medical Services (Premises Costs) Directions 2013.

There is no standard lease format, so NHS England will obtain input from District Valuer Services as to the most appropriate lease terms. It is important for practices to engage with their local NHS body as early as possible to avoid any delays to the approval process.

Clare Darwood is a specialist solicitor at Sheffield-based law firm Keebles, which offers guidance the healthcare sector on all aspects of the law