In this post, I’m going to take a look at the recent changes to the Premises Cost Directions and the effect on leasehold rent values.
For leasehold practices the landscape has changed recently in terms of their premises. In the past most of the issues around premises were focussed on how they were used and if there was enough space. Most practice managers had very little to do with issues of value and rent.
The Premises Cost Directions are a set of instructions set out by the NHS which detail how to deal with costs associated with both leasehold and freehold property, in terms of the ongoing costs of running them as well as building them.
In April 2013 these directions were updated to include a number of changes. One of these was in relation to how the process of a rent review on a leasehold surgery was carried out. In the past the landlord would serve a notice on the tenant giving an indication of the rent, the practice would pass that to the PCT and the District Valuer would be instructed to negotiate directly with the landlord. The rent agreed was then reimbursed via the practice to the landlord.
We now have a situation where NHS England will not instruct the District Valuer to confirm the rent until a rent review memorandum, signed by both the landlord and the tenant, has been received. NHS England stipulates that negotiations must have been carried out between the landlord and a suitably qualified surveyor acting on behalf of the practice.
The reasoning behind this change is not exactly clear but I suspect it is to try to ensure that increases to the rent are kept to a minimum as it should already have been negotiated between the two parties.
The main issue is that if the tenant signs a rent review memo at a particular level of rent but the District Valuer decides the rent should be lower, the tenant is still contractually obliged to pay the difference to their landlord. This is clearly a crazy situation and one which I know worries a lot of practices who have very limited cash flow as it is.
Some landlords are aware of this and are trying to reassure their tenant that if this situation occurs they will vary the agreed rent to be the same as the rent set by the District Valuer. Others are sending out letters containing a set of terms to deal with that eventuality and asking for a copy to be signed and returned.
The worry is that a verbal assurance carries no weight if the landlord decides to enforce the rent review memo anyway. In the case of a side letter, it is arguable whether a document such as this varies the lease or carries any weight at all. In this instance I would recommend any practice receiving a letter such as this to get a suitably experienced solicitor to look it over before signing it.
We are working on a number of these rent reviews at the moment, and our position is to try to reach an agreed rent that we believe is supportable by the comparable evidence available. In doing this the chance of the District Valuer being able to disagree is limited if the rent review memo is accompanied by a weight of evidence. This would ensure that any problems mentioned above should never occur.
Our current experience is that the rent review process is quite protracted. Increased rent will not be signed off until the practice has supplied a number of certificates to NHS England confirming the practice is safe (such as electrical certificates/lift maintenance certificates etc). Therefore there is a need to try to be proactive about this process and ensure that these are in place. This certainly helps to keep the process running smoothly and keeps a good relationship with your landlord which is always advisable.
If you have a rent review approaching or have received some correspondence from your landlord, please do give me a call. We will be happy to help and advise you on this matter to ensure that the matter is concluded and the practice is protected from any additional rent demands.