Property complications involving retiring partners

The period leading up to retirement can be an exciting, yet busy, time for many GPs. There is so much to think about in order to ensure that business affairs are neatly tied up and ready to hand over. One key area that is often overlooked is the ownership of property assets of the practice. This can lead to confusion and additional costs to resolve the issue of ownership if it is not dealt with properly at the time of retirement.

Partnership property

A partnership cannot hold either freehold or leasehold property in its own right. Property must be held by some (or all) of the partners on trust for the partnership. It is therefore important to ensure that property ownership is reviewed with each and every change in the partnership structure, whether that be as a result of the retirement, recruitment or death of a partner.

It is important to ensure that the current partners of the practice from time to time own the property so that day to day decisions regarding its use can be easily made by the business.

Partnership agreements and title deeds

The first place to start when considering property assets is your partnership agreement . A well drafted partnership agreement should include a declaration of trust or other details which explain how the property is held, although this may be contained in a separate trust deed. There should also be a section in the partnership agreement providing instructions on how to deal with any property interests on the retirement of a partner. Your title deeds will also provide valuable information regarding the ownership of any property.

If there is no formal written partnership agreement, the partners may be operating under a partnership at will and specialist legal advice should be sought. If the partners do not own the freehold and there is no formal written lease, an implied tenancy of the premises could have arisen and this should be rectified as soon as possible.

Liability under a lease

A maximum of four partners can be named as tenant on a lease. Those named partners will remain personally liable for the premises for the whole term of that lease unless the necessary legal steps are taken in order to secure release.

In many cases, leases will be drafted so that the named tenants are jointly and severally liable for observance and performance of the lease covenants, including the payment of rent and service charge. This means that any one partner could be pursued for the whole of any debt, rather than a share of it, even if that partner has retired from the practice.
Outgoing partners therefore need to ensure that they take positive action on retirement to end their personal liability in respect of the practice premises.

Steps to end an outgoing partner’s liability

It is not enough simply to notify a landlord of the proposed changes in a partnership. The necessary legal steps must be taken to transfer the title to the lease in order to ensure an outgoing partner is released from liability on his/her departure. A properly drawn GP lease should include an ability for the partners to transfer the lease between themselves in addition to allowing for the release of an outgoing partner.

A formal legal transfer of the outgoing partner’s interest in the lease, known as an assignment, must be effected. Each lease will contain specific drafting governing the process which will need to be followed. This often includes various pre-conditions that must be met before an assignment can take place, for example the landlord’s prior written consent may be required. These conditions will vary from lease to lease so it is recommended that legal advice is sought in order to ensure that the correct process is followed.

Complications due to delay

If appropriate legal steps are not taken to transfer the title to the property with each change in the partnership, it can lead to increased costs for the practice trying to resolve the position at a later date. It is much simpler to ask a departing partner to sign transfer documentation before he or she leaves, rather than trying to unpick the situation years later by trying to contact old partners that have long since moved away or died.

The longer the situation is allowed to continue, the harder it can be to resolve. As partnership property is held by named doctors on trust for the partnership, the terms of that trust are important. It can be difficult to establish a timeline tracing the beneficiaries of the trust through several changes in the partnership and various iterations of the partnership agreement. This can all lead to increased time and cost in trying to resolve the situation.

In addition, when looking at leasehold property you need to consider the terms of the lease, as you may end up in breach of the terms of your lease if you fail to transfer the title to the property following the departure of a partner.

Last man standing clauses

We are seeing a rise in examples of complications arising from Last Man Standing clauses in leases and one key area where this has increasing effect is the impact of these clauses upon acquisition or merger plans relating to the practice of a retiring sole practitioner.

What is a Last Man Standing clause?

One significant concern for many practices when initially negotiating a lease of surgery premises is ensuring that the last remaining partner is able to end his/her responsibility for the premises on retirement.

Historically, it was common for GP leases to be drafted to take these concerns into account. Various mechanisms were agreed to enable a sole remaining partner to end his or her liability under a lease. These included put options, which enable a tenant to force a third party (such as the landlord or the former PCT) to take an assignment of the lease, and landlord or tenant break rights. These are often collectively referred to as “last man standing” clauses.

Additional complications due to last man standing provisions

Break clauses and options are notoriously difficult to exercise as the terms of the lease must be followed exactly in order for a break or option notice to be effective. Due to the strict interpretation of such clauses, landlords can exploit failures to follow the appropriate procedure to frustrate an attempt to exercise the relevant clause. Professional advice is therefore always recommended before any steps to exercise break rights or options are attempted.

While last man standing clauses were initially included for the benefit of the tenant, we are aware of circumstances where landlords have been able to use such clauses to their own advantage. It is therefore imperative to ensure that the terms of the lease are understood and any necessary steps are taken to assign the lease before the relevant partner retires.
For example, we were asked to advise on a case where the landlord was able to terminate a lease in the event that the tenant ceased to practice as a GP. Unfortunately, the tenant had failed to take the necessary legal steps to transfer the lease to the partners acquiring his practice before he retired, although all other steps had been taken in connection with the clinical contract. This meant that he remained the tenant under the lease even after his retirement date.

The impact of this was felt when the landlord became aware of the changes. The landlord informed the practice occupying the premises that they were doing so in breach of the lease and that a formal assignment would be required in order to rectify the situation. The practice then sought formal consent from the landlord to assign the lease.
Under the terms of the lease, the landlord’s consent to an assignment could not be unreasonably withheld. However, the lease contained terms that were particularly beneficial to the tenant, including service charge concessions, and the landlord wanted to renegotiate these terms.

While the landlord could not legally withhold or delay consent to the assignment without good reason, it was able to exercise its break right and terminate the lease as the named tenant was no longer practicing as a GP following retirement. If the break right was exercised, the lease would come to an end and the landlord would be entitled to recover possession of the property from the practice, leaving it with no choice but to renegotiate new terms.

The practical consequences of this situation were that:

  • the landlord could use the threat of exercising the break right to force the practice to renegotiate terms that were less beneficial than those contained in the existing lease, despite the prohibition on it withholding consent to an assignment unreasonably.
  • until the parties agreed terms, the retired partner remained primarily liable for the performance of all the tenant covenants of the lease, including the requirement to pay rent and other charges. This could of course have consequences for the reimbursement of rent.

However, this situation could have been avoided if the partnership had sought appropriate advice on the terms of the lease prior to the retirement of the outgoing partner. This would have enabled the issues to have been identified and the correct legal steps taken to assign the lease before the landlord’s break right was triggered.

Action you can take to protect yourself

Where a practice owns or leases its surgery premises, it is imperative that the following steps are carried out with each change in the partnership:

  • ensure that the partnership agreement is reviewed before each change in the partnership occurs
  • ensure that any lease is reviewed in a timely fashion before each change in the partnership; and
  • obtain professional advice where needed in order to ensure the appropriate legal steps are taken to assign the lease or transfer the freehold property as the departing partner leaves.

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