If you are a tenant of your surgery premises under a lease, it is essential you understand and manage your repairing obligations. Depending on the size, age and condition of the premises, the costs of meeting these obligations can run into the tens and sometimes hundreds of thousands of pounds – and a regular programme of maintenance can help to avoid larger claims arising at a later date.
It is particularly important that GP partnerships understand the potential liabilities as usually the individual partners in whose names the lease is vested will be personally liable for the repairs. This liability is typically “joint and several” which means that the landlord can pursue any one or more of the named partners for 100% of the lease costs.
Unfortunately, many practices do not fully appreciate or consider their maintenance liabilities, particularly when the lease end date is perhaps many years into the future. However, leaving this as a problem for another day carries with it the risk that the liability may snowball over the years, making the practice less and less attractive to potential new partners.
But like most things, the risks associated with repairing liabilities and dilapidations can be managed by sensible planning and by seeking appropriate professional advice at the right time.
FRI and IRI?
When considering lease repairing obligations, the first question to ask is whether the terms are FRI (Full Repairing and Insuring) or IRI (Internal Repairing and Insuring).
An FRI lease will make the tenant fully responsible for the costs of repairs to the premises. If the FRI lease is of the whole of a building, then the tenant will often be responsible for undertaking the maintenance itself – and this is likely to include everything from the internal plasterwork to the exterior and structural parts, including the roof and the foundations.
A common mistake is for a tenant to believe he has no FRI liability as his lease makes him personally responsible for carrying out internal maintenance only. However, a lease which imposes a service charge on the tenant, which includes the maintenance costs of the structure and exterior (notwithstanding the works are the responsibility of the landlord), is also an FRI lease. This may well be relevant in the case of a lease of only part of a building.
The important point to note is that in either scenario, the liability – and therefore the “risk” – associated with the maintenance of the structure and exterior, remains with the tenant, notwithstanding the responsibility for undertaking the maintenance may lie with the landlord.
As a consequence of this arrangement, a tenant under an IRI lease is likely to pay a higher market rent to its landlord than under a FRI lease of the same premises.
Top Up Rent
Under the Premises Costs Directions, GPs are paid “current market rent” for the provision of their surgery accommodation. This is broadly speaking made up of a “bricks and mortar” element (i.e. the rent which represents the “accommodation” cost of the premises) and the “top-up” rent (which reflects an allowance for the cost of the maintenance of the structure and exterior plus the buildings insurance).
Under an FRI lease, the payment of rent to the landlord should be limited to the “bricks and mortar” element of the rent– thereby allowing the GPs to retain the “top-up” rent towards the costs of the structural and external maintenance and the buildings insurance costs. The onus is then on the practice to ring-fence this funding to ensure it is used appropriately and not mixed up with other practice income. There is of course no way of knowing whether the “top up rent” will be sufficient to cover the actual costs of external and structural repairs plus the buildings insurance – and any surplus costs will therefore be at the GPs’ risk.
Where a lease is entered into of anything other than brand new premises, it is essential that the tenant should require the landlord to agree a schedule of condition, which should be undertaken before the lease is completed and should be annexed to it for future reference. The lease should then limit the tenant’s repairing responsibilities to exclude liability for pre-existing disrepair – as otherwise a tenant’s liability under its repairing obligation may extend to putting right existing disrepair. As such, it is important before entering a lease (particularly on FRI terms) that the prospective tenant takes advice from a surveyor on the condition of the premises.
Internal maintenance should of course be undertaken on a regular basis and treated as an ongoing expense of the business.
Planning for Dilapidations and Partner retirements.
It is important to appreciate that notwithstanding there is no capital gain to be made from a “rack-rent” lease, there could be an exposure to significant capital expenditure – particularly at the end of the Term. This can take the form of a claim for reinstatement of any alterations undertaken, to a claim for dilapidations arising from a failure to maintain; (this is another reason why an IRI lease is preferable, as the tenant’s exposure to such a claim is more limited). Best practice advice is always to ensure that when entering a new lease, the practice puts in place an updated form of Partnership Deed and Declaration of Trust to ensure that:
(a) all partners in the practice legally enjoy the benefit of, but share the burden of, the lease (a maximum of four partners can be named on a lease so this is particularly important for larger practices); and
(b) all decisions relating to the lease are subject to the usual partnership decision making protocols;
(c) contractual arrangements are in place to deal with the retirement or death of a partner (typically the continuing partners may agree to accept an assignment of the lease and to indemnify the outgoing partner against future lease liability); and
(d) a reserve fund is built up over the life of the lease against the costs of future repair, decorating and any reinstatement costs.
A combination of (c) and (d) above should provide a sensible balance between the interests of the senior and junior partners in a practice. A senior partner will want to ensure he or she can retire without having to worry about future liability under the lease. On the other hand, a junior partner should be aware of the “last man standing” risk and would be advised to ensure a reserve fund is in place to fund future liabilities.
Why plan now?
In our experience, if there has been a failure to plan for repair costs under the surgery lease, partnership tensions and disputes can erupt(sometimes spectacularly and without warning!). We have seen cases where, faced with an unexpected large dilapidations’ claim, partners have retired suddenly from partnerships in an attempt to escape liability. Not surprisingly, this can quickly lead to both sides becoming embroiled in costly litigation, which in most cases could have been avoided by earlier planning.
Even if your practice has been leasing its premises for several years without grappling with this issue, it is never too late to put arrangements in place. If for instance there is the possibility of a £50,000 claim arising in five years’ time, then setting aside £10,000 a year from now on is likely to be much easier to stomach than finding the full amount when the lease ends.
Terminal Dilapidations at the end of the Lease
If you are faced with a potential dilapidations claim, you should seek specialist advice from both a building surveyor and your lawyer as soon as possible. There are tactical steps that can often be taken to minimise (and sometimes extinguish altogether) the value of such a claim.
Facing the future with comfort
Whilst lease repairing liabilities can be a minefield for the unwary, there should be little to fear if your practice plans well and backs this up with appropriate contractual agreements between the partners. As a matter of good governance, this should also help to make your practice more attractive to prospective new partners and guard against the risk of future disputes. And if you are faced with a potential dilapidations claim from your landlord, we can also assist with your efforts to negotiate a fair and reasonable settlement.
Whatever your position, we would be delighted to assist in helping to assure your practice is future proofed against these risks.