Declaration of Trust: A useful tool for the modern practice
First published in Practice Management in March 2021
Lisa Davison, Real Estate Partner from specialist healthcare law firm Hempsons, explains why a Declaration of Trust is vital to protect your surgery
If you have invested in your practice premises, why would you not protect that investment? Many don’t, and they are putting their investment and the sustainability of the practice at risk.
What is a Declaration of Trust?
A Declaration of Trust is a legally binding agreement, which sets out the arrangements governing jointly owned premises. It states:
- Each owner’s share of the premises
- How income and expenses of the premises are shared
- The procedures and timetable for purchasing a retired or deceased partner’s share
- The basis of determining the value
- What happens if there is negative equity
- Practice owners’ rights and obligations before and after retirement, including loans.
When is a Declaration of Trust required?
The surgery is probably the largest investment a practice will make and is often an important source of income. Unless otherwise documented, each co-owner has an equal beneficial share in the premises. It is, therefore, essential to state if partners’ investments are different.
A partnership deed is a risky solution because when new partners join the practice, there is a risk that the change is not dealt with correctly, resulting in a ‘partnership at will’. This means the provisions of any formal partnership deed no longer apply, including valuable property rights. Under a partnership at will, all partners may claim an equal share even if they have not paid for it, and that includes a share in the surgery. A separate Declaration of Trust survives a change of partnership, ensuring that the intentions relating to the premises are unchanged, and so protects the investment of the property owners.
Is a Declaration of Trust applicable to leasehold premises?
A Declaration of Trust may also be useful for leasehold premises. It declares that all partners have an equal right to occupy the premises even if they are not on the title, and also makes it clear that the obligations under the lease are shared. There is a risk that a retiring partner could remain liable to the landlord under the lease. The Declaration of Trust will ensure that a retiring partner is indemnified by the continuing partners.
With the pressures facing GP Partnerships we have seen a dramatic increase in the number of partnership disputes. A well thought out and comprehensive Declaration of Trust not only is vital to protect individual investments but is also a tool to minimise the risk of partnership disputes going forwards.
Used correctly, a Declaration of Trust provides the added benefits of allowing flexible funding options through unequal or third party investments, enabling flexibility in terms of property ownership outside of the GP Partnership and providing a clear distinction of liabilities as part of succession planning for the practice.
For other partnership matters or information, contact Justin Cumberlege 020 7484 7575 or email him at firstname.lastname@example.org