Following on from part 1, this article discusses negotiating a deal with a Sale and Leaseback investor and key steps to take.
This article has been prepared with assistance from GVA's specialist Healthcare team. Gemma Pouncy, an Associate in the Healthcare team at VWV and Frank Convery, a Director at GVA, have worked together on a number of Sale and Leaseback transactions for GP partnerships over the past couple of years.
Prior to completing a Sale and Leaseback transaction, the approval of NHS England, or the Local Health Board in Wales is required in order for recurring notional rent funding to continue.
In Wales an 'exemplar' lease has been agreed which is the starting point for all Sale and Leasebacks, and offers considerable protection for the GP practice as tenant, ensuring that the practice remains effectively cost neutral in respect of rental payments.
In England there is not a standard format, so NHSE obtain input from the District Valuer as to the most appropriate lease terms specific to a particular property during the approval process for each individual lease.
The price paid by the investor for the property will be based upon the investment value of the notional rent and any other income (for example, a pharmacy tenant), and the length of the lease term. Because GP partnerships are considered to be safe tenants (due to the reimbursement of the rent under the NHS Premises Cost Directions), this can often yield a considerable premium.
Upon sale of the property to the investor, a lease is simultaneously granted back to the partners allowing the GP practice continued exclusive use and rights over the property. The landlord would have no contact/involvement in the day to day running of the property.
A heads of terms document outlines the main terms of the lease, which are agreed between the parties. We always recommend that the partners appoint a specialist healthcare surveyor to assist with negotiation of heads of terms, to ensure that they represent market terms, and to protect the partners interests as well as possible.
The rent will be the current market rent as agreed by the District Valuer, or NHS Wales Shared Services Partnership, and usually the initial rent reflects the notional rent payable to the partnership at the commencement of the lease. The rent will generally be reviewed at three yearly intervals in the same pattern as the notional rent reimbursement. The lease should be agreed on the basis that the rent can never exceed the amount approved by the District Valuer/NHS Wales, whereby offering protection to the GP practice on rental levels during the entire lease term.
Liability for building repairs is normally subject to agreement between the parties. If the parties agree to a Tenant Internal Repairing obligation, this will mean that the landlord will be responsible for maintaining and repairing the external and structural parts of the property, and the tenant will be responsible for the internal parts. If the tenant is to be responsible for internal and external repairs, the partners will retain a percentage of the notional rent as a sinking fund towards these repairs. The key point here is that if the initial rent figure is the same as the notional rent at the date of completion of the lease, the tenant would only be responsible for internal repairs with the landlord making up the cost of external repairs and buildings insurance.
Choosing a potential landlord is an important aspect of the process. The large niche investors have large portfolios of similar surgery properties and large cash reserves, which do not require bank funding and want to hold the surgery asset long term. Smaller investors tend to require bank finance, which can add to potential issues and are often more inclined to hold the property short term.
For these reasons, the larger niche primary care investors are often a much more suitable candidate as a potential landlord. There are several potential funds actively seeking surgery investments and due to this competition, there is upward pressure on prices being paid.
If you are considering entering into a Sale and Leaseback, or would like further information on what it may involve, we would be happy to talk you through your options and put you in touch with other healthcare specialists (eg surveyors) who can help you.
We would highly recommend having an in-depth read of part 1 and part 3 of this series of articles. Part 1 (December 2017 Healthcare Law Brief) provided useful guidance around the pros and cons of a Sale and Leaseback transaction and what to be aware of before considering it for your practice. Part 3 discusses the process for documenting a Sale and Leaseback and is due to be published in our February 2018 Healthcare Law Brief.