Sale and Leaseback in Primary Care Part 1: What Could It Mean For Your Practice?

This article is the first part of a 3-part series on Sale and Leaseback in Primary Care articles.

Whether to own or rent premises is a decision which affects all businesses.

Historically, the majority of GP surgeries have been run from freehold premises owned by the partners as partnership property. New partners buy a share in the property on joining the partnership, and retiring partners receiving a payment from the partnership to purchase their share.

This arrangement can work well, but increasingly partnerships are experiencing difficulties with recruiting new partners and some of the reasons cited are:

• potential partners cannot or do not wish to take on a personal loan to buy into the property
• potential partners do not want to sign up to existing partnership loan arrangements when there are often better deals/rates available in the market today
• prohibitive terms such as redemption penalties on old loans make unaffordable to pay off existing finance to enable new partners to put their own finance in place
• the property needs investment to bring it up to date and potential partners would rather not take on that expense at the start of their ownership

One option is a Sale and Leaseback, often used in the wider commercial property arena, is gaining traction in the Healthcare sector.

What is a Sale and Leaseback?

A Sale and Leaseback transaction is where the freehold property is sold by the partnership to a third party investor who then, immediately following the sale, grants a lease of the property back to the partnership.

The lease is usually for a term of around 20 - 25 years (although this does vary from deal to deal) and it sets out the property responsibilities and liabilities between the landlord and tenant. The partners never move out and continue to run the surgery from the property.

The amount previously received as notional rent will often be set as the rent under the lease and the partners will receive rent reimbursement under the General Medical Services (Premises Costs) Directions 2013 (or the 2015 Directions in the case of Welsh practices) for the rent. However, prior to committing yourself to any such arrangements, NHS England (NHSE) or the Local Health Board (LHB) in Wales must approve the terms of the new lease.

Because GPs benefit from rent reimbursement, investors view GPs as secure tenants who are unlikely to default on rent payments. Owning premises let to a GP tenant is therefore considered a valuable investment and the investor will often pay a substantial premium for the freehold interest. The increased investment 'value' is created by the new lease to the partners.

What Are the Benefits of a Sale and Leaseback?

• The purchase price paid by the investor provides a cash injection into the partnership. This will be used to pay off any mortgage liability.
• Any balance of purchase money can then be shared between the property owning partners or perhaps reinvested in new initiatives around collaborative working/improved service delivery/new premises.
• With no debt, it may be easier to recruit new partners as they will not be required to fund a purchase of a share in the property or take on a share of the existing liabilities.
• The partners have a property expert as landlord who will (hopefully) maintain the property to a good standard, take the burden of organising the repair and maintenance of the property away from the partners, leaving them to focus on the day job.
• Part of the deal with the investor may also include a programme of improvements to be carried out to bring the property up to standard.
• Partners can build a relationship with the investor landlord, which may lead to partnering with them on new property ventures.

What Are the Downsides of a Sale and Leaseback?

• Partners only receive the purchase price once. Who should benefit from the purchase price - retiring owners or the new partners taking the lease which creates the investment value?
• Redemption penalties on existing loan arrangements may make a sale unattractive.
• Whilst in most cases Stamp Duty Land Tax relief will be available on a sale and leaseback, there are some circumstances when this is not available and partners may need to pay SDLT on the new lease. NHS help with such costs is not guaranteed.
• Partners' ability to secure additional funding will be limited without a freehold property, against which a bank can secure borrowings by way of a legal charge/mortgage.
• Whilst new partners do not have to fund a 'buy in', they will still become jointly and severally liable for the responsibilities under the lease.
• Investment leases are usually Full Repairing Leases. This means that the tenant is responsible for the repair of the whole property, either directly or via a service charge. There is no guarantee that the NHS will reimburse these costs in full, and any shortfall will have to be paid in full by the partnership.
• If you currently have a tenant such as a pharmacy, the partnership may not benefit from the same income from the pharmacy after the sale and leaseback has been completed.
• The landlord's consent will be required before partners can carry out works to the premises, sub-let rooms and assign the lease to new tenants (other than partners within the practice). Consent may not be forthcoming and there will be legal costs involved in formally documenting such consents.
• Partners lose the capital gains tax benefits available on retirement to property owning partners.

What Should I Do If I am Considering a Sale and Leaseback Transaction?

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. 

Please also look out for part 2 and part 3 of this series of articles. Part 2 discusses negotiating a deal with a Sale and Leaseback investor (January 2018 Healthcare Law Brief), and Part 3 discusses the process for documenting a Sale and Leaseback (February 2018 Healthcare Law Brief).

For more information or questions on Sale and Leaseback transactions, please contact Gemma Pouncy on 0117 314 5300 in our Commercial Property team.