Is your surgery leasehold? New NHS rules will affect your rent reviews

Practices occupying property subject to a lease to a third party landlord are facing changes to the way in which their rent reviews will operate, thanks to new NHS directions and guidance (Premises Cost Directions April 2013).

Under the previous system, the landlord activated the rent review clause in the lease, specifying a proposed new rent. This was then passed to the NHS who instructed the District Valuer (DV), who then either signed the proposed new rent off or negotiated directly with the landlord. Once the landlord and the DV had reached an agreement, the rent review memo was signed by the landlord and tenant, with the NHS providing reimbursement at that level.

However in an attempt to reduce the fees the NHS incurs from the DV (and to reduce speculative reviews), the NHS now requires the rent review to be properly negotiated between landlord and tenant. In practice, the tenant must now instruct a suitably qualified surveyor to act on their behalf in negotiations with the landlord and sign a rent review memo which is then passed via the NHS to the DV.

The important point here is that once the rent review memo has been signed, the tenant is contractually obliged to pay the rent regardless of whether the DV concludes that the rent should be lower and advises the NHS as such. The tenant may then be left in a situation where the difference must be paid out of its own pocket.

Several DVs have told me that they have been instructed by the NHS not to start work on any reviews until they have a signed memo in front of them. We are therefore left in a situation where no tenant should sign a memo without confirmation that the NHS will reimburse at that level BUT the NHS will not confirm this until the memo is signed – a catch 22 situation!

We also have a situation where, if the landlord and tenant cannot agree with the DV, then the matter can be referred to the NHS Litigation Authority who will appoint an independent surveyor to settle this. The end result of course is that we have 4 surveyors trying to agree one rent review where it used to only take 2. Any dreams of cost savings by the NHS have disappeared quite quickly!

Ways round the situation are of course possible and I know that a number of the specialist investors are looking at this situation at the moment in order to come up with a way that suits both landlord and tenant.

If you do receive a rent review notice from your landlord, please do not sign and return it or indicate that you are happy with it. You must satisfy yourself that the rent is reasonable and that the DV will accept it, otherwise you run the risk of bearing any shortfall yourself. Give us a call and we can advise on the best way to resolve the situation.

About Tom

Tom advises a range of clients on a day-to-day basis both in the commercial and healthcare property sectors. He specialises in rent reviews, dispute resolution and surgery valuations, with a particular specialism in pharmacy rental values. He's currently advising Local Medical Committees on how NHS changes will affect practices occupying NHS owned premises. When he's not at work, he's kept very busy by his three small boys!

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