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Valuation of the Surgery Premises - Could Your Practice Be Worth More?

on Friday, 01 December 2017.

Does a retired partner think that your surgery premises is worth more than the other partners do? Are they falling out about it? If so, you are not alone.

Increasingly we are dealing with practices who are in dispute with a partner who has retired, or who is about to, who believes the premises are significantly more valuable than the remaining partners do - and so wants a higher pay out.

Where there is a properly-drawn partnership deed in place, this sort of disagreement should not become protracted, because there will be a binding process for the partners to follow to determine the value if they cannot agree. But sometimes there is no partnership deed, or the deed has ceased to be binding for some reason (often because a new partner has joined without signing it). This is when the problems can arise.

In our recent experience, the most common reason for a serious dispute about value is because an investor (such as Assura, PHP, Octopus etc) has offered to buy the freehold for a certain price on the basis of a sale and leaseback (an arrangement where the partners sell the freehold of the surgery to an investor, and then take a lease back from the investor, who becomes their new landlord). The price achievable under a sale and leaseback is generally significantly higher than the market value of the surgery premises - and for good reason.

When the partners agree to a sale and leaseback, they are obliged to pay rent to the investor, whatever happens, for the term of the lease - ie. up to 25 years. This 'guarantee' of rent is what attracts the investor and makes them willing to pay a higher price than might otherwise be achieved. So the investor is not just paying for the bricks and mortar, they are paying for this future income stream also.

The above is a very different situation to where a retired partner is selling on to the continuing partners. There is no lease at that stage, and so no added value.

Some retired partners will argue that the market value of the surgery is what someone is willing to pay for it - and the fact that an investor will pay, say, £1m means it must be worth £1m. But it is not as simple as this. First, if the retired partner can only sell to the continuing partners, it cannot be right to look at the price that an investor (who isn't buying it) would be willing to pay if there was a lease in place (which there isn't). Secondly, it is arguably a breach of the goodwill rules to sell for 'investment' value rather than on the basis of a valuation prepared by an expert surveyor which specifically ignores the goodwill of the practice.

When there is a sale and leaseback, it is the ongoing partners who are taking the risk in entering into the lease and guaranteeing the rent for up to 25 years. The retired partner is not taking any such risk, as he or she is not signing the lease. So why should he or she be able to benefit from some of the added value created by entering into the lease?

If this situation already applies to you or you are concerned that your partnership deed may not give you protection against this scenario, please contact us and we would be happy to review it for you.

If you would like assistance with your surgery valuation, please contact Oliver Pool on 0117 314 5429 in our Healthcare Commercial Property team.

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