In cases where the GP property is owned by partners/business owners, their succession is a growing conundrum. Whether due to a lack of affordable funding or a concern over the risk, there's a growing question over the available options when it comes to the handling of their share and/or interest in the practice premises. In this article, we explore some of the core options available to GP practices.
Before doing so, it's important to stress that in many instances there will be existing binding commitments in place (whether within a Partnership Agreement, Property Deed or some other contract) which will take precedence unless, and until, the parties agree to vary the same. This aside, before following any particular route it's important to have a clear understanding of the tax implications to make sure you’re not generating an unforeseen tax burden or losing some form of tax benefit/relief.
With these warnings aside, some of the core options available are:
Option 1: Buy out
The traditional option is for the successor partners/organisation to buy out the property owner. In such situations, there are usually two core considerations.
They are:
- How the value of the property owner’s share in the property will be determined
- What will be the applicable repayment terms
The latter consideration is an interesting one with no uniform answer. The maximum length of time afforded for full repayment to have occurred, the minimum repayment required at periodic intervals (say annually), and whether interest is payable are increasingly key discussion points when determining the repayment terms. The successor partners are increasingly flexing to strike a balance between the interests of the outgoing and incoming/continuing business owners.
Option 2: Retention
The obvious counter option is for the property owner to retain their share/interest in the property and hold it as an investment. If this option is pursued, then it's imperative to appreciate the changing relationship that will exist. The relevant property owners will no longer be “practising property owners” (so to speak). This can change the dynamic with those that are continuing to operate the business quite dramatically. As a consequence, it's always useful to consider what contractual arrangements may be needed to address this new relationship and changing dynamic.
These arrangements can include:
- A lease to document the terms upon which the property will continue to be occupied (the rent payable, the repair and maintenance obligations on the parties etc will all be key areas to clarify).
- A property deed to document the terms upon which the property owners (that may be a mix of current and former business owners) will, among other things, hold the property, share incomes, share costs and take decisions.
Option 3: Retention and subsequent buy out
A variation to option 2 is where the property owner retains their share of the property, but there's some form of option that covers a potential sale/acquisition of their share at a later date. These options can work one way (so they could benefit the outgoing property owner and enable them to force successors to acquire their share) or work as a cross option, where there's a right for either the outgoing property owner or their successors to force a sale/acquisition.
In such circumstances, the contractual arrangements considered in option 2 are equally important but will evolve to include and cover the terms applicable to the options that are put in place. Terms such as the length of the options, the period of time that must elapse before they are exercised, and the way in which the share is valued when the option(s) are exercised are just some of the key components that would need to be covered off.
Option 4: Sale and lease back
A final core option, which has an increasing range of permeations depending on the purchaser involved, is a sale and leaseback scenario where the property in question is sold to a third party and leased back to the continuing business owners/operators. With recent market conditions, this has proven a trickier option, but there remains a real interest in the market which is seeing the emergence of new players and new and quite unique funding models.
If you're looking to pursue a sale and leaseback, it's always important to recognise that the lease back terms will have a direct impact on the value paid for the property. This can create a degree of friction between the property owners, who will understandably want to maximise the value of the property, and the continuing business owners, who will want to negotiate tenant friendlier terms in the lease. For details of the type of terms that should be considered in any lease, please see our earlier article, “Negotiating lease heads of terms in primary care settings” here.
If you're considering any of these options and need support with negotiating and/or documenting the arrangements, please do contact us.
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