Leases to GP partnerships: symptoms of change, and immunisation for landlords

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1 Real Estate briefing 14 February 2012 Leases to GP partnerships: symptoms of change, and immunisation for landlords Summary and implications With the demise of the primary care trusts and the emergence of GP consortia the following may become more common: GP premises which comprise more than just the primary care premises which are the subject of rent reimbursement. Consequently the covenant strength of the tenant becomes more important to the landlord. Leases to larger practices, bringing administrative difficulties in terms of dealing with the lease and frequent changes in the partnership. If these difficulties are not managed properly they may weaken the covenant strength of the tenant. In addition recent case law concerning guarantors on assignments of leases, means: A guarantee from a willing guarantor, who has guaranteed the previous tenant, is worthless. Consequently there are additional difficulties in maintaining covenant strength following a change in the partnership. Take action Read this briefing note, and: If you are already a landlord of primary care premises, or considering becoming one, where the premises are already let Review the assignment provisions and ascertain the covenant strength of your tenant. There may be little that you can change at present, but you may be able to improve your situation when negotiating with your tenant when they are looking for something from you. If you are already a landlord of primary care premises, and considering a request for consent to assignment Review the assignment provisions and ascertain the covenant strength of your tenant is there room within the assignment provisions to improve this? Even if there is little that you can change now, you may be able to improve your situation when negotiating with your tenant when they are looking for something from you. If you are considering granting a lease of primary care premises Consider carefully how to optimise your protection through choosing the right tenant/guarantor arrangement, and assignment provisions. Ask a question If you have any questions please contact Victoria Thourgood, Managing Associate T +44 (0) v.thourgood@nabarro.com The Real Estate team To find out more about the team, and our capabilities click here The Healthcare team To find out more about the team, and our capabilities click here Guidance on the future of Primary Care Trust estate: Service critical clinical infrastructure (August 2011) A summary of the Department of Health Guidance on the transfer of service critical clinical infrastructure. More Written Ministerial Statement, Department of Health, NHS Property Services, Wednesday 25 January 2012 A statement by the Secretary of State for Health on the transfer of PCT estate to a new government company, NHS Property Services Ltd. More 1

2 Leases to GP practices The tenant of primary care premises is usually either a primary care trust or a GP practice. Although it has now been confirmed that the new government-owned company, NHS Property Services Ltd will take ownership of the existing primary care trust estate (to the extent it is not being transferred to NHS community care providers), where a GP practice operates from the premises, it seems likely that the practice will at some point become the tenant. But in legal terms, exactly who is the tenant of a lease to a GP practice who could you take action against, for example, for rent arrears? To answer this, and consider the best options when dealing with the grant of a lease of such premises to a GP practice, or considering a licence to assign to a GP practice, it is important to understand what a partnership is. What is a partnership? There are now a number of types of partnership which you may have heard of (e.g. limited partnership, limited liability partnerships) which are quasi corporate in nature. These are not generally used at present by GP practices, and so are not considered in this briefing. They may however become more common in future and this will be considered in a later briefing. Most current GP practices are formed as a partnership at will. Such a partnership is a relationship between two or more people carrying on business in common with a view to profit. As it is a relationship it is not a legal entity in itself such as a company is instead, the individuals are each separate legal entities. When granting a lease to a partnership it is assumed that the partners executing the lease do not have implied authority to bind the others. However, the non-signing partners may give express authority to the signing partners to sign on their behalf. In practice this should be done by way of a power of attorney....a partnership is a relationship it is not a legal entity in itself Common approaches to leases to partnerships A number of approaches regarding leases to partnerships have developed due to the combination of the following: Signing partners being unable to bind non-signing partners without express authority and ideally a power of attorney. As a matter of law the legal title may only vest in up to four of the partners. The number of partners in the partnership. The common approaches are set out in the table on the next page. 2

3 Common approaches to leases to partnerships Tenant Grant to four partners who execute the lease. Grant to a service company which executes the lease. Grant to all of the partners even if more than four (on the basis that whilst legal title only vests in the first four, the remaining partners will be directly on the hook for the tenant covenants. Grant to four partners who execute the lease. Guarantor Remaining partners (or a specified number) act as guarantors and execute the lease in that capacity. All partners (or a specified number) act as guarantors and execute the lease in that capacity. No guarantor partners. Remaining partners (or a specified number) act as guarantors but grant a power of attorney to the partners executing as tenant, to also execute on behalf of the partners who are to be guarantors. Until now, due to the rent reimbursement scheme, landlords of primary care premises have been quite relaxed about which partners signed as tenant. It is therefore not uncommon to see just four or fewer partners signing as tenant, with no guarantor. However with the forthcoming structural changes in the primary care sector it seems increasingly likely that GP partnerships will take leases of premises which extend beyond the primary care premises to which the scheme applies. As a consequence landlords should be looking for more comfort on the covenant strength of the tenant. This, together with recent case law concerning assignment of leases and the giving of guarantees warrants a re-evaluation of these approaches as explained below. increasingly likely that GP partnerships will take leases of premises which extend beyond the primary care premises Changes within a partnership impact on the landlord Consent to assignment Typically where a partner has executed a lease as tenant (or as an assignee) (tenant partner) and wishes to retire from the partnership such partner will also wish to be released from the lease. Preferably this will be achieved by an assignment of the lease from the remaining tenant partners and the outgoing tenant partner, to the remaining tenant partners and (if there is one) a replacement for the retiring tenant partner. On an assignment from one group of tenant partners to a wholly or partially different group of partners the outgoing tenant partners will be released from all tenant covenants by virtue of statutory provisions to that effect. All partners who were guarantors on the lease (guarantor partners) will also be released. Leases often provide that the landlord s consent is not required to assignments within the partnership, but unless landlord s consent is required to an assignment, any guarantees will automatically be lost as explained above. In those circumstances the landlord s route against the non-tenant partners in the partnership will be indirect and much weaker suing the tenant partners and then relying upon those tenant partners to call upon 3

4 their partnership indemnity from the other non-tenant partners, including any guarantor partners who have been released. However, if the lease provides that the landlord s consent to an assignment is required, then a replacement guarantor may be obtained under a condition of giving that consent (if that condition is reasonable or allowed under express provisions already agreed in the lease). Whilst on the grant of a new lease to a partnership, the inclusion of a requirement for landlord s consent on assignment appears to be a simple solution to retaining a right of action against possibly all the partners in a partnership by them being either a tenant partner or a guarantor partner, it is not something that retrospectively can easily be imposed in an existing lease. Additionally, even where such a requirement for landlord s consent exists, recent case law has complicated matters. Release of guarantor partners Recent case law has confirmed that following an assignment of a lease granted after 1 January 1996, a guarantee of the new tenant by a person or company who was the guarantor of the old tenant (i.e. a repeat guarantee) is void. The following is an example of the effect of this on guarantees given by partners in a GP practice. Scenario Doctors A, B, C and D are the tenants. Doctors E, F, G and H are guarantors. Doctor A is retiring. Doctors A, B, C and D assign to Doctors B, C, D and E. Doctors F, G, H and a new partner, Doctor I, give a (new) guarantee. Effect Doctors A, B, C and D are released, as outgoing tenant. Doctors B, C, D and E will acquire liability as incoming tenant. Doctors F, G and H will be lost as guarantors. Doctor I will be the only guarantor. Possible solutions Depending upon how many partners there are in the partnership it may be possible to take the initial guarantee from Doctors E, F, G and H and then the next one from Doctors I, J, K, L and so on. A new lease could be framed so as to require a guarantee from partners who together hold no less than a specified percentage of the equity, and none of whom previously acted as a guarantor. However, these are probably not practical in most cases, depending very much on the partnership being big enough to keep supplying new guarantors for the number of changes that occur. The most reliable option would appear to be to grant the lease to a company formed by the partners. A company is a legal entity in its own right and a witnessed signature by only one director can bind the company. However such a company is probably worthless to the landlord as its only asset is likely to be the lease. Therefore the landlord should require that some (and ideally all) of the partners are guarantors. The final but crucial element of this structure is to prohibit assignment to the partners. 4

5 The appeal of this solution is threefold: A corporate body may in any event become a common structure used for consortia where there are lots of partners. As partners join the partnership they can be added as guarantors to the lease and as they leave they can be released from the guarantee they have given. The company should not need to assign whilst the partnership still practises from the premises. This is because as partners join or leave the partnership, shares in the company could be transferred between them. If the practice wishes to move the new tenant would need to offer new guarantors. But landlord s should be alert to a GP leaving one practice to join a second and then subsequently the second practice takes an assignment of the lease of the first practice s premises. The overlapping partner would not be able to give an effective guarantee of the second practice. Powers of attorney The above solution still presents problems with large partnerships, with all the partners signing the lease and any licences to assign, underlet or alter, as guarantors. To obviate the inconvenience partners should be asked, during negotiation of the lease, to provide a power of attorney empowering nominated partners to execute the lease and any supplemental documents on their behalf. Conclusion On the grant of a new lease: Ask for a corporate body, formed by the partnership, to be the tenant and a significant number (if not all) of the partners to act as guarantors. The lease should prevent assignment to the partners, and allow for releasing outgoing partners from being guarantors with incoming partners joining as guarantors. If there are a large number of signatories, powers of attorney could be used. If a corporate body is not on offer, try to get all partners to sign as tenants, rather than any guarantors, again use powers of attorney if it s a large partnership. Careful thought will need to be given to any ability to assign, and what your reasonable requirement in respect of granting consent should be. You may want to be able to call for bank guarantees or rent deposits. On a request for a licence to assign within the partnership: Consider very carefully who is being offered as tenant ideally have as many of the partners as you can reasonably require. Think about whether there are any existing guarantors who will be lost. With whom can you replace them? What does the lease say about the granting of your consent? Have grounds to withhold consent been set out in the lease? 5

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