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Succession planning

24 April 2015

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Looking at the legal aspects of partner retirements and recruiting new partners

The current high level of partner retirement means every practice ought to have a succession plan. Even if your partnership appears stable at the moment it is sensible to be prepared, because sometimes retirements come out of the blue due to illness.

The most basic aspect of partners coming and going is the need to notify NHS England. Your personal medical services (PMS) or general medical services (GMS) contract provides that you must notify the area team (AT) as soon as a partner gives notice to the partnership to retire. And likewise new partners’ arrivals must be notified as soon as possible. The time that notification is most important though is when the practice is going to be left with just one partner (even if only temporarily). You must give notice to the AT 28 days before this happens, otherwise NHS England can claim that the contract has come to an end. So it is important for the practice manager to be ready for this and to serve the notices in advance.

A partner’s retirement can be disruptive to the practice, so as much notice should be given as possible in order to enable the practice to plan. The partnership deed will specify a minimum period of notice (usually six months, sometimes three months) but partners should be encouraged to be open about their plans so that when notice is served, it doesn’t come as a surprise. Ideally the partnership should be well advanced on the recruitment process before the retiring partner departs.

A key concern for practices who own the freehold of their surgery is the need to buy out a retired partner. Most partnership deeds provide for partners to be obliged to sell out on retirement, but this also means that the practice is obliged to come up with the money to do so.

Different partnership deeds approach the issue in different ways, but usually the retired partner will continue to be treated as a property owner and to receive notional rent (or an equivalent payment) until he is paid out. Some partnership deeds impose a deadline by which the retired partner must be paid, and this must be factored into plans. By that time the continuing partners should make sure that they have either recruited a partner who will contribute capital by then, or that they have raised the capital themselves, either through increased borrowing, or by other means. As it becomes increasingly difficult to recruit willing property owners, increasing the mortgage over the surgery is often the option chosen, especially given that banks are generally still willing to lend 100% of the value of GP surgery premises.

Can GP partners still be forced to retire at age 65? The law is not absolutely clear on this at the moment. Professional partnerships can ask partners to retire at a certain age if they have a legitimate business reason for imposing such a policy. In our view it is appropriate for practices to impose a retirement age for their own protection, and to prevent the indignity of having to ‘performance manage out’ that rare case of the partner who actually wishes to carry on beyond the age at which he has ceased to perform adequately. Advice should be taken in each case.

The only thing more destabilising than a retirement is two retirements in quick succession. The partnership deed should provide that this can’t happen and that a partner can’t give notice while someone else is already serving out their notice. However, you can’t absolutely make people come to work if they have decided to stop, all you can do is hold them as a partner for the remainder of their term, and charge locum costs against their profit share (assuming the partnership deed allows you to).

Tips on recruitment
The current shortage of new GPs willing to become partners means that practices are competing for recruits, and sometimes taking on recruits that they are not entirely convinced about. This makes the probation or mutual assessment period all the more important.
It also makes it very difficult to use the probationary period properly – but it is still important! A large proportion of partnership disputes are triggered by the arrival of a new partner and shift in partnership relations that it causes. If the partners have any doubts at all about the new recruit it is important that they pay careful attention to the new partner’s performance and behaviour during that period. Increasingly partnerships are extending mutual assessment periods to 12 months from six months, which in our view is sensible – after all, anyone can behave themselves for six months, and once someone is through their probation it can be very difficult indeed to manage or change them. We go further and recommend the addition of a clause in the partnership deed that allows the partners to extend a probation if they are not quite sure about the new partner yet.

It is a common misconception that you should wait until the new partner gets through his or her probation and becomes a ‘full’ partner before getting the deed signed. That is a very bad idea. It means that if there is a problem with the new partner while he or she is on probation, you will have no rights against him or her (including having no rights to end the probation) and could even be a partnership at will, which can be dissolved by any partner at any time that in turn could lead to the PMS or GMS contract being retendered. It is very important to get the deed signed on or before the day the new partner joins.

Many practices that own their freeholds are finding it particularly difficult to recruit because new partners need to contribute capital, and many new GPs do not have the means to do so. We always recommend that practices permit new partners to use the surgery premises as security for any loan raised if need be, after all, the continuing partners will have benefitted from that in the same way. Further, there is an argument for keeping equity in the surgery low (and for partners to build up their own investments separately) because then the amount a new partner has to buy in is much lower, which makes the practice more attractive (especially if the new partner will become entitled to an added income stream via his or her share of notional rent).

Difficult as it may be, if property ownership is part of the partnership culture, we would recommend being absolutely clear about that during the recruitment process, and ensuring that new partners are clear that they will be expected to buy in (this should then be backed up with an obligation to do so in the partnership deed). We have seen many disputes arise due to practices not being clear about this during recruitment, or not documenting an obligation to buy in, and then being disappointed when the new partner refuses to do so.

If the partnership deed is a good one, you shouldn’t need to incur legal fees on updating the partnership deed in the event of a retirement. This is because the partnership deed itself should contain all the terms relevant to a partner’s departure, so as long as everything is amicable, the retiring partner can give notice, and then the accountant can deal with matters.
Recruitment is a different matter though, for the reasons set out above the partnership deed should be signed on or before day one of the partner joining, to ensure that the practice has protections from things going wrong during the probation.

Oliver Pool, senior associate, Veale Wasbrough Vizards.