Premises costs – how to get reimbursed properly

Wessex LMCs Director of Primary Care Carole Cusack explains how to ensure you secure the right premises costs due to your practice

GP partnerships are entitled to financial support for the costs of buying or renting their premises and its upkeep.

Under the GMS contract Premises Costs Directions (PCDs) 2013, practices may be reimbursed for mortgage, rent or ‘notional’ rent, plus business and water rates and clinical waste.¹

The GMS Regulations 2015 also make clear that the contract between the practice and NHS England must specify ‘the address of each of the premises to be used by the contractor or any sub-contractor for the provision of such services’.² 

New PCDs were due to be published this summer, but other matters have taken priority within the government. The General Practice Premises Policy Review published in June indicated there should be simplification of PCDs in future, and included plans for a potential single payment model, and for the NHS to bear the direct costs of integrated care hubs or medical centres with multiple providers.³

While we await publication of the new PCDs, the existing 2013 PCDs apply and these are explained below. However, a recent development means that provisions of the original 2004 PCDs are now being applied where a practice was in receipt of reimbursement prior to 1st April 2013. Importantly this means practices that rent or lease premises from a third party may have more ability to challenge rent increases – read on for more details.

There are currently three main types of reimbursement:

• Rent reimbursement for those who rent or lease premises from a third party;
• Notional rent, for owner-occupiers, to reimburse a mortgage or loan that has been repaid or where the owners incur additional borrowing costs to build or substantially refurbish existing premises, but the partnership elects not to receive borrowing cost reimbursement;
• Borrowing cost reimbursement (cost rent) for owner-occupiers, where premises are built from scratch or substantially modified or extended, to cover the cost of borrowing (ie, a mortgage).

Rented or leased properties

Partners renting or leasing from a third party are eligible for reimbursement of their rental costs, either at the current market rental (CMR) value of the property or the actual rent charged.

The reimbursement payment should be reviewed every three years by a District Valuer (DV), appointed by NHS England or the CCG. The anniversary of the review will be the date on which the premises were first occupied, or the date the lease was signed.

Prior to review, the practice must agree and document the current rent with the landlord, under a rent review memorandum of understanding (MOU).

To trigger the rent review, the practice should request a CMR1 form, complete and submit it to their CCG (or NHS England if not delegated) who will instruct the DV. Please note that the DV does not work for the practice and will not share the assessment with the practice but reports back to the CCG/NHS England with the recommendation. 

The CCG/NHS England will then inform the practice of their offer of reimbursement, which the practice can either accept or dispute.

Check what type of lease you have if renting from a landlord. There are two types, those that are Tenant Internal Repairing (TIR) only and those that are Fully Repairing and Insuring (FRI). With the former you are only responsible for internal repairs and maintenance, with the landlord responsible for structural and other major items. With an FRI lease you take responsibility for both external and internal repairs and maintenance, in which case the DV should recognise this and recommend a higher rent reimbursement. The increase is usually around 5-7% of the rental value and should be retained within the practice and put towards regular maintenance of the premises. 

There have been occasions where the DV recommended reimbursement is less than the actual rent being charged by the landlord, and this should lead to an immediate submission of dispute to NHS England or your CCG.

If you go into dispute, you may wish to appoint a medical specialist surveyor who will negotiate on your behalf with the DV. From the date you go into dispute, you only have three years in which to resolve the issue or refer to the NHS Litigation Authority. The Authority is very strict on adhering to this timescale, even where NHS England or a CCG has been slow to respond. 

There are three possible outcomes to this issue:

1. The DV and independent medical surveyor agree on the level of rent reimbursement;
2. NHS England/the CCG can invoke the PCDs 2013 Part 5, paragraph 33 – Current market rents, which allows a supplement to be paid in order to provide sufficient returns or support. Any supplement will be reduced in line with increases in current market rent until the supplement is extinguished.
3. The local dispute procedure is invoked.

It is important to note that, in July 2018, NHS Resolution determined that where a practice was in receipt of reimbursement prior to 1st April 2013, then the assessment, regardless of the valuation date post 2013, should reflect the provisions of the 2004 PCDs. 

This includes that the DV does not require a rental review MOU to have been signed between the practice and the landlord prior to assessment.

A number of test cases have now ruled that the practice can go straight to the DV without first signing the MOU with their landlord, in line with the 2004 PCDs – meaning they can challenge a rent increase if the DV assessment for reimbursement is lower. Indeed, DVs have been advised to revert to the 2004 Directions where applicable. 

We don’t yet know if there will be a full review of which practices this applies to, and if you are happy that your current reimbursement covers your rent and any repair costs then you may feel the ruling is immaterial. However, where it doesn’t, you may wish to seek advice from your LMC and/or a medical specialist surveyor. 

Owner-occupiers receiving notional rent

Where owners are no longer paying off a mortgage, NHS England (or the CCG) will reimburse the partners at the current market rental value, as determined by the DV. The owner occupiers do not require a lease to be in place (although some do, where the practice leases the premises to the partners, some of whom may not be property sharing owners).

The DV will assess the CMR value in line with the Premises Cost Directions, Schedule 2 Parts 1 and 3.¹ The CMR is assessed based on notional lease terms, which assume a 15-year term and TIR obligations, with the landlord responsible for external and structural repairs together with insurance.  

The CMR value, and the amount of notional rent paid, must be reviewed every three years. The review will be brought forward if there is a change to the purpose for which the premises are used or if there is further capital investment in the premises, which will be reflected in the payments the contractor is receiving under its contract.  

One potential issue here is where the review provides a lower notional rent than previously, due to a reduction in property value in an area. This is rare, but not unheard of, and it is worth practices going into dispute if it happens.

Owner-occupiers receiving borrowing cost reimbursements

Partners who own and occupy their premises may be eligible to have their borrowing costs for a mortgage or loan reimbursed, also known as ‘cost rent’.

Cost rent premises are usually built as brand new surgery premises, or they may be existing premises that have been extensively extended and refurbished.

Cost rents are based on a combination of the prescribed percentage mortgage agreed (either fixed or variable) on the date the newly built/refurbished premises are first occupied plus up to 1% of the total contract sum for project management fees, up to 12% of the total contract sum for professional fees including surveyors, architects and engineers fees, legal costs in connection with the land purchase (if appropriate) and the construction and refurbishment work. Where VAT is properly charged, that can also be reclaimed.

All other normal expenses are also reimbursed as with any surgery premises, including business and water rates, and clinical waste.

Cost rents are different to other rental type arrangements as they stay in force until either the practice pays off the mortgage, re-mortgages or requests a DV assessment.

Very few practices are still receiving a cost rent – the reducing cost of borrowing has meant many have taken the opportunity to reduce their interest rates on their mortgage.

The original PCDs from 2004 were clear that any reduction in mortgage interest rates must be declared (to NHS England/the CCG) who will then reduce the cost rent reimbursement to match the interest rate being paid. For this reason, most practices would request a valuation and, if higher, move to notional rent – certainly after about 15 years, as the notional rent would be higher than the cost rent.    

Since the 2013 PCDs came into force, however, practices can no longer have a valuation done and, if it compares unfavourably, stick with their cost rent. Once a valuation is requested by the DV, the practice must accept a notional rent reimbursement from then onwards. A dispute can still be raised, but whatever the result there is no return to cost rent reimbursement.

It is really difficult to lodge a successful dispute in these circumstances, but if you are aware that other premises comparable to yours in location, size, age etc. are yielding a higher notional rent than yours it is certainly worth going into dispute.  

Carole Cusack is Director of Primary Care at Wessex LMCs  

References

1. UK Government. NHS (General Medical Services – Premises Costs) Directions 2013.

2. The National Health Service (General Medical Services Contracts) Regulations 2015. Part 5, Regulation 20 (1) (b) http://www.legislation.gov.uk/uksi/2015/1862/regulation/20/mad3

3. NHS England. General practice premises policy review. June 2019. https://www.england.nhs.uk/wp-content/uploads/2019/06/general-practice-premises-policy-review.pdf