Thinking about a third party development scheme?

SUGGETT, Mick - squareI’m very pleased to welcome Mick Suggett, Associate at health lawyers Browne Jacobson to the blog. 

Mick works in the Health Property team, specialising in advising health clients on property and estates matters including acquisitions and disposals, leases, licences, property development and strategic estates advice. In 2012-2013, Mick was seconded full time to a PCT Cluster to help with the transfer of the NHS estate during the handover and closedown of the PCTs. He is currently working on new GP led Third Party Development Schemes for new primary care centres.

As the requirements for the standard of NHS buildings increase, GP partnerships may find that their current premises are struggling to keep up with modern standards and compliance. As a result, GP partners may consider either a significant refurbishment, or, if refurbishment is simply not enough, moving to modern, purpose built premises. There are usually two options here. Firstly, the GP partners may wish to secure bank lending and self fund a new health centre development. Secondly, if that is not an attractive proposition, or is not financially viable, the partners may consider engaging a third party developer to construct a purpose built modern health centre. It is this second option which we will look at in this blog. We have set out below some of the issues that crop up regularly for GP practices considering the redevelopment of their premises through a third party developer.

Usually the structure of a development scheme such as this will see two main documents being entered in to: an agreement for lease (the contract setting out what the developer will build, and the commitment by the GP partners to sign up to a lease); and the lease itself (which will regulate the occupation of the premises and sets out the obligations on the landlord and tenant).

1.      What will the developer build for us and what does the agreement say?

The contract which sets out the agreement between the parties will be a substantial document and will contain lengthy, complex legal provisions regulating the contractual relationship between the developer and the GP practice. Broadly, the agreement will provide that the developer will build the new premises to a certain standard and design and, on practical completion of the development, the nominated GP partners will sign a lease. Key issues in the contractual agreement should include obligations on the developer to build the premises to a certain standard and secure all relevant planning permissions and consents to use the building, as well as warranties for the benefit of the GP partners from the professional design team. The agreement will also contain provisions designed to calculate the exact rental amount (usually based on net internal floor area) and, if any conditions are to be complied with before the GP partners are to take up the lease, how those conditions are to be satisfied.

2.      What is the extent of your liability under the lease?

The lease granted by the developer on completion of the building works will usually be signed by up to four of the partners in the GP practice. These partners will usually hold the lease on trust for all the partners in the GP practice. A developer normally requires that the liability of the signing partners be “joint and several” and unlimited. Therefore, the signing partners are prima facie personally liable (together and individually) for payment of rent and performance of all obligations under the lease. This can understandably be seen as an onerous commitment on behalf of the signing partners. It is therefore important that a partnership agreement is put in place and (if already in place) reviewed to ensure that there are adequate indemnity provisions to “spread the risk” around the whole partnership, so no individual partner is exposed to undue personal risk.

Ideally, GP partners would usually want to cap their liability under the lease to the assets of the partnership from time to time. However, developers (and often the lenders who sit behind the developers) are very reluctant to agree to any cap on liability of their tenants. Experience shows that caps on liability will only be entertained in return for an increase in rent and compliance with onerous obligations.

3.      What happens if rent reimbursement was to be withdrawn?

Once the GP partners have signed the lease with the developer, as tenants they become liable for payment of all rent for the whole of the term of the lease. In the event that rent reimbursement was to be withdrawn, the tenants remain liable for rent to the developer even though that may not be reimbursed by NHS England. In that scenario the tenants may wish to terminate their lease. However, developers are very reluctant to grant break rights to GP tenants, as this weakens the strength of the lease and may make it very difficult for them to obtain funding for the development.

In our experience, developers are only willing to grant break rights in return for the payment of additional rent and compliance with a series of onerous obligations before the break can be exercised.

The GP tenants may have similar concerns if the practice’s list size falls below a certain number. They may wish to terminate their lease in that event. If so, this would need to be agreed at an early stage with the developer, as it is another factor that would affect its ability to obtain funding for the scheme.

4.      How easily are you able to transfer your lease if you leave or retire?

A developer will always wish to impose some control over what a tenant can do to transfer its lease or grant sub-leases. Typically, the landlord’s consent will be required to any proposed transfer of the lease or to the grant of any sub-lease.

However, the NHS and the provision of services to it is often subject to reorganisation, so flexibility should be sought to enable GP partners and other NHS tenants to freely transfer the lease without the prior consent of the landlord. This should be the case as long as the lease remains within the NHS umbrella. Such provisions should expressly permit partners in GP practices to come and go, allowing partners to be appointed or to retire without needing the landlord’s consent each time the partnership changes. Furthermore, an outgoing partner who is a signatory to the lease would wish to see his or her liability released upon retirement from the partnership.

Whilst developers in the market are aware of all these issues, care needs to be taken by GP partners in drafting the relevant lease provisions to ensure that their interests are properly protected.

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Mick Suggett

0115 908 4885 | mick.suggett@brownejacobson.com | www.bjhealthlawyers.com

About Laura

Laura looks after Neil Mason Associates' marketing and PR, including the company's online and social media presence. When she's not working, she's likely to be found running after her two small girls or out on Warwickshire's country lanes on her bike.

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