Third party developments (3PD) have the potential for providing purpose built, modern facilities that are geared up for multi-disciplinary working where GP contractors do not have to assume the burden associated with practice ownership.
Care should, however, be taken to ensure that the terms of the 3PD are sufficiently clear and do not themselves create any underlying issues.
We provide our tops tips when it comes to developing your primary care premises using 3PDs.
1. Obtain commissioner approval – it’s essential
The most fundamental and overarching tip is to ensure that a full and complete business case is developed and the commissioner and the DV approve it. This approval is essential. It will among other things:
- Identify the approval of the GP contractor relocating to the new site
- Identify the commissioner’s commitment to the recurring rental costs that will arise under the lease that will be put in place when works complete
- Identify the commissioner’s commitment for any one off or capital expenditure
In relation to one off capital expenditure, this may include funding towards works, fit outs, relocation costs and Stamp Duty Land Tax (SDLT).
The latter is an important point, if you are a primary care contractor considering a 3PD remember that when the works complete and the lease is granted you will be required to pay SDLT. While the exact amount of tax will depend on two variables (the rent, plus VAT, and the term under the ultimate lease), the rate is usually quite high for most 3PDs.
2. Understand the terms of the grant funding
If there is grant funding being issued to the GP tenant then it will be important to understand the terms on which that funding will be awarded.
If, for instance, it is to be subject to the provisions of the Premises Cost Directions, then automatic provisions will apply, which range from implied minimum use periods and abatement periods (these can vary according to the level of funding provided).
3. Identify and document your 3PD conditions
If the commencement and completion of the 3PD is subject to conditions, then it will be important to identify and clearly document what these are. Examples include:
- Conditions applicable to obtaining a satisfactory planning permission
- Obtaining bank borrowing to fund the development or indeed acquiring the site
Whatever they are, be clear and document what they are in the documentation agreed between the parties. Such conditions will usually feature in the Agreement for Lease document, which sets out the terms applicable to the planning and build phase, and usually appends the form of lease that the developer, landlord and tenant will ultimately enter into.
4. Be clear on your long stop dates
While it is important to identify the conditions that will apply, an equally important point will be the consideration of so called “long stop dates”. Put simply, at what point in the future will either the developer, landlord or tenant be entitled to terminate the agreement, if conditions have not been met.
Depending on the circumstances, it is not uncommon to see a back stop date by when:
- Planning is to be received
- Works are to complete
The key is to create certainty and to avoid projects being mothballed with no end date.
5. Be clear on who is responsible for what, when it comes to works
It is highly likely that the developer landlord will bear the responsibility for the works (largely, if not exclusively, at their cost). However, any agreement that is entered into should be clear on items such as:
- The specifics of the proposed works (by reference to plans and specifications agreed or to be agreed between the parties)
- The provisions concerning inspection and the standards that are expected in respect of the works
In relation to the latter point, remember that very specific NHS and CQC obligations will fall to primary care contractors whether in terms of the size of consulting rooms, infection control or otherwise.
6. Practical completion: be clear on the process
Be clear on the process through which works are signed off as complete and the ability for tenants (or their appointed surveyors) to inspect and comment on the works before this occurs.
This is an important point: when the works are deemed to be practically completed (which is usually done by a surveyor issuing a notice that works have completed) this usually triggers an automatic position where the subsequent lease between the parties has to be formally entered into and completed.
7. Be clear on how defects with the building works are to be handled
Usually you would expect a minimum of a 12 month period after the works complete, during which time issues will, where raised, be addressed by the developer (or, more likely, the appointed building contractor).
8. Appoint the right team for your development
Be clear on the process for appointing a professional team and a building contractor that is suitable for the proposed development.
In respect of the appointed team, clarity should exist over their insurance obligations and their obligations when it comes to providing building or collateral warranties to allow third parties (most notably, the proposed GP tenant) the ability to bring a claim should problems with their work arise.
9. Getting the terms of the lease right
So far, most of our tips have focused on the terms applicable to the development phase (or the pre-development phase). However, the terms of the lease are equally important: the lease will be what the parties will ultimately enter into when the works complete.
Key lease terms you should discuss and agree, include:
- The starting rent and provisions relating to rent reviews
- The length of the lease term
- The repairing obligations (who is responsible for what)
- The service charges that may be payable (if any)
- The provisions concerning the tenant ability to deal with the lease (assignments, sharing, etc)
- Whether any break clauses will feature in the lease
We have prepared a separate top tips on leases which you can read here.
10. And don’t forget about the terms of your existing premises
Be clear on the terms applicable to the existing premises from which the GP contractor operates. In essence, will the GP contractor have the flexibility and freedom to relocate from their current premises once the 3PD completes? A consideration of the terms of any lease and/or bank borrowing that they may have over their existing premises is likely to prove vital.
A final comment
While not an exhaustive list (and other important points, such as the concept of security of tenure apply) it is hoped this provides a flavour of the core elements that need to be discussed when entering into a third party development.
We can help
This briefing note provides a brief overview of some of the top tips when it comes to developing the primary care estate using a third party developer.
If you need advice or support do get in touch with our primary care team - we have the experience and expertise to help.