Financial Considerations of Merging - Premises Issues

As we discussed in our last issue, we are seeing more and more practices starting to consider merging with one or more other local practices. Last time, we looked at financial issues but, this time, we are going to look at premises issues.

One Site or Several?

The first decision to make is whether to combine all the practices onto one site or whether each practice will continue to practice from their current sites.

Combining the practices onto one site is going to be the most financially efficient solution, as this will allow for significant economies of scale, particularly with regard to staff. However, unless you are looking to all move into completely new premises, this is unlikely to be practical as space will normally be an issue and no one site is likely to be large enough to accommodate all practices.

Unless you all move into a new health centre, we most often find that each practice site will remain open, at least for the foreseeable future. Sometimes this will also be because the sites are at too great a distance from each other for patients to travel.

Keeping all sites open can be beneficial to some patients who may find that another site is actually closer or more convenient to them than their previous surgery.

If all sites are to be kept, then the next decision is whether to buy into each other’s property and/or sign each other’s lease. To keep everything equitable, this is often the best solution.

Leased Premises

Leased premises can have different provisions, however, the majority are full repairing and insuring leases. The significance of such a lease is that the lessees are responsible for maintaining the building inside and out. Therefore, any new partners signing up to the lease will need to consider the state of the property. It is likely that they will want it to be put back to the state it was when the lease was first signed, i.e. they will not want to find that they become responsible for dilapidations which relate to a time prior to the merger. In this case, work may need to be carried out to get the building up to standard and the current lessees and possibly partners who may leave before the merger occurs will need to be responsible for this.

The rent and term of the lease will also need to be considered if the lease is due to be renewed.

Owned Premises

There are several different issues which need to be considered when looking at buying into each other’s properties and these are as follows:

• Valuation - a formal valuation will be required to determine the current market value of the property. The method of valuation can produce varying values, so the method will need to be agreed first, i.e. whether to value as a doctors’ surgery or just at open market value.

• Stamp Duty - property that is described as a partnership asset in the partnership agreement and which currently shows on the balance sheet as an asset will be exempt from stamp duty on transfer. However, it should be noted that the transfer of a property from a sole practitioner into the partnership may attract stamp duty as will the removal of a property out of the partnership into the ownership of one individual. This is a complicated area, so further advice must be sought.

• Mortgages and Loans - do loans already exist on the properties and are these going to be continued, renewed or changed? If they are to be changed, are there any redemption penalties and if there are, who should be liable to pay them? Often, exiting a current high interest mortgage can be beneficial to all parties.

  N.B. Do note that any changes to a mortgage, particularly in a PMS practice, can have an impact on the rent reimbursement which may have been set to match the high interest payments at the time when the original mortgage was taken out.

  The bank will almost certainly require a profit projection of the merged partnership before they consider offering a mortgage, so consideration as to how this will be done needs to be made.

• Legal and Valuation Costs - it must be agreed up front as to how these costs will be shared, including any partner who is selling but not buying perhaps due to imminent retirement.

• Capital Gains Tax - a sale of any part of a property may give rise to Capital Gains Tax. A partial sale may give rise to a gain which falls below the annual exemption, currently £11,300 (£11,700 2018/19).