From negotiating with developers to who has liability for repair costs after the final handover of the building, Richard Brackenbury and Chris Hawrylak from Nottingham law firm Berryman provide advice on how to successfully lease new premises.
If you have outgrown your old premises and buying or building a practice is not an option, leasing a practice can allow GPs flexibility without the risk of a large initial capital outlay.
Leasing purpose-built premises from a third party developer can be a good option, but they will charge you a premium rent to cover the cost of construction, including finance and legal costs, over the lease period.
But you can negotiate more favourable terms in your contract to ensure you are not met with large repair bills and this article will take a detailed look at the process of signing a lease with a developer and how to prevent the relationship turning sour once you move in.
1. The basics
A lease is a form of contract between the landlord and tenant GPs. It usually contains many details agreed between the parties concerning the premises, its use, rent (with payments linked to PCT rent reimbursement and reviews to the District Valuer’s rent assessment), length of term and passing the lease on to third parties. A lease may not be varied without the agreement of both parties.
Depending upon the terms of the lease, the two areas of greatest expense to GPs are rent and repair obligations. A new purpose built practice will command a premium, usually in the form of higher rent than existing/refurbished premises. However, you should be able to negotiate favourable repair obligations terms with the developer and request other protections, including collateral warranties, to reduce the risk of any substantial repair costs during the term of the lease.
Maintenance costs of premises can be high. A full repairing and insuring (FRI) lease, which is a lease that requires you to carry out repairs needed to keep the premises in good condition, can lead to serious costs of repair. The majority of leases are of this type. Not surprisingly the developer will ask that you sign such a lease.
2. Agreement for lease
Most commercial lease transactions proceed straight to completion of a lease. However, a developer will request you enter into an agreement for lease where you or, normally, the developer are required to do something before entering in to a lease.
Typically, an agreement for lease is used where the developer, at the GPs request, will provide a new purpose built premises:
a) to plans/specifications which achieve the minimum standards for practice premises set out in the National Health Service (General Medical Services – Premises Costs) Directions 2004; and
b) within a set timescale; and
c) with the benefit of collateral warranties (see later)
In return, GPs agree to enter into a lease once the premises are complete. Rent will then become payable (at a level determined by the District Valuer), giving the developer a return on his investment.
The terms of the agreement for lease and lease are usually negotiated at the same time. The agreed form of lease will then be attached to the agreement for lease. It is important for GPs to negotiate how much control, input and supervision the GP and its advisors will have during the carrying out and inspections of the works and what happens if, after the developer completes the works, defects arise in the premises.
3. Completion of works and start of lease
The final inspection and issue of the practical completion certificate is an important event as it usually triggers the commencement of the lease (and therefore payment of rent).
Surprisingly, there is no one true legal definition of ‘practical complete’. This means the issue of whether works are practically complete is the subject of many disputes within the construction industry.
The common view is that the premises will be practical complete when works are sufficiently complete to enable use and occupancy as a practice, even though there may some minor works to complete and/or ‘snagging’ items to put right.
GPs should appoint a (monitoring) surveyor to represent their interests during the carrying out and inspection of the works. In particular, the surveyor should attend the premises when the developer considers the property is sufficiently complete to make representations for the issuing of the practical completion certificate.
The District Valuer will also likely attend the final inspection and make representations so that it can make an assessment on the rent payable.
Normally, the developer will agree to these other parties attending the inspection and making representations although on the basis that they cannot stop the developer issuing the practical completion certificate. However, if it is clear that the practical completion certificate should not have been issued, the agreement for lease will set out the procedure for referring the matter to an independent expert to determine.
4. Defects in works
As a tenant of newly built practice, GPs can benefit from a defects liability period under the agreement for lease.
A developer will usually accept an obligation to repair any defects that appear within 12 months after the issue of practical completion certificate even though the GPs signed an FRI lease. Effectively, this gives GPs opportunity to identify and request the contractor repair any defective works missed on the issue of the practical completion certificate or which appear afterwards.
GPs should ask that their surveyor attend the premises on or around 11 months after practical completion to carry out a detailed inspection of the premises and then notify the developer to carry out the repair works. Timing is critical. The developer is unlikely to carry out the repairs if you notify too late.
The developer will accept a defect liability period because it will likely mirror a similar obligation in the contract entered into with its building contractor.
5. Collateral warranties
In very simple terms, a collateral warranty is an agreement which gives, amongst other things, a right to sue a company that designed and/or constructed the premises for damages due to a failure to carry out its contractual obligations. Collateral warranties are normally only available when leasing newly built premises.
As a tenant of a newly-built practice, expect to receive a pack of collateral warranties from the developer’s building contractor, professional design consultants, consultant that certifies practical completion and, possibly, sub-contractors (depending upon the size and complexity of the premises).
If the works are defective or the practical completion certificate was issued incorrectly due to the failure of one of these companies to perform, it may be possible to offset repair costs against damages recovered from these companies. However, usually, before bringing a claim for damages, you would request (with the approval of the developer) that the company or companies be allowed to repair the premises.
As actions under warranties can usually be brought within 12 years of the date of the warranty, you can offset the risk of repair obligations under the FRI lease.
6. Expert Advice
If at all possible you should avoid signing a lease or agreement for lease without having a commercial property or development solicitor look over it. They will know exactly what to include and what to remove to benefit your practice. This article highlights only a few key points and benefits.
Richard Brackenbury is a partner and head of the property and construction team at the Nottingham law firm Berryman and is a construction specialist. Chris Hawrylak is a construction specialist at Berryman.
Leasing a new practice