Considering a GP Practice Merger or Acquisition?
Over the last few years, we’ve been experiencing an increased number of practice mergers. Some of these are borne out of the desire to gain scale locally by forming ‘super partnerships’, while others are aimed at resolving problems. Either way, there are important steps to consider before a practice merger takes place.
Apart from the belief that ‘bigger is better’, practice mergers are typically motivated by seeking to resolve one or more of the following problems:
Merger or acquisition?
Whatever the motivations, GP practice mergers usually fall into one of two categories: true ‘mergers of equals’ and acquisitions.
The difference is important, because a true merger creates a business which is different from the original practices whereas an acquisition simply make one of the practices bigger.
Due to the regulations, both mergers and acquisitions will use the legal mechanism of going into partnership, and both will almost always be referred to as merger. However, it’s the reality on the ground is very different.
In an acquisition, the acquiring practice will impose their own systems, processes, management, controls and so on. Partners from the acquired practice will either be in a minority in the new, bigger practice, retire, or possibly become salaried. This scenario is most common when a single hander is retiring and looking to dispose of their practice, or when one of the practices is much larger than the other.
In a merger, however, all of these things will usually be looked at before selecting the ‘best from both’, The partners from both practices will generally stay on as partners in the new partnership with a shared vision for the future. Often this will involve new ways of working such as a management board to make day to day decisions in the enlarged partnership.
Caveat emptor (buyer beware)
Whether your practice merger is a true merger or an acquisition, there are risks and problems inherent in the process. GPs often seem to believe that a merger or acquisition is simply a question of drafting a new partnership agreement. Not so.
If you’re considering merging with or acquiring another GP practice, remember to ensure that you take the time to fully understand the other business. This process is known as due diligence, and encompasses identifying the actual and potential issues inherent in each practice, and deciding what the new merged practice will look like. Potential issues could be financial or legal so you should be looking at both the accounts and the various contracts and legal obligations.
For example, we’ve seen mergers that resulted in the transfer of large dilapidations costs on buildings, mortgage redemption costs, long forgotten pension fund liabilities, and legal disputes with current and previous employees. When these later crystallise in the merged practice they can come as an expensive surprise.
Download our step-by-step guide to ensure you don’t miss anything out when preparing for and executing a merger or acquisition.
For more information about practice mergers and acquisitions and any other related issues, please contact Daphne Robertson on 01483 511555 or email d.robertson@drsolicitors.com
- Difficulty in recruiting partners
- Lack of potential buyers of a surgery
- Too much time spent dealing with regulations and paperwork
- Current partners approaching retirement
- Inability to provide a broad enough range of services such as 7-day opening
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Beware the ‘Last Man Standing’ Issue in GP Practices
The ‘last man standing’ issue refers to the concern that one or more partner(s) will be unable to retire from a GP practice when they want to, because they are unable to divest themselves of the various liabilities and obligations of the practice.
The issue tends to arise when there are problems in recruiting GP partners, significant numbers of GPs looking to retire or emigrate, or when there are particularly onerous practice liabilities.
The most common type of last man standing problems are associated with surgery leases and mortgage redemption penalties, but they can be triggered by any onerous contractual obligation or unfortunate event such as a death in service or a property market crash.
How the ‘last man standing’ issue destabilises practices
A useful analogy is with a run on a bank. Normally you are happy to deposit your money, confident in the knowledge that you can get it back on demand. However, if enough people want to withdraw their money at the same time the bank cannot raise enough cash to pay them all out and it goes bust.
Similarly, if a GP partner gets concerned that one or more of their partners may be considering leaving and there is no obvious succession plan, they will start thinking about the likely costs of closing the practice and consider leaving while they still can.
Well-drafted partnership agreements normally seek to restrict their ability to do so by requiring a gap between retirements. If a retiree is not replaced in that gap or a partner leaves on other grounds however, the remaining partners may find themselves part of a rush to be the next to resign.
Once this process starts, it is difficult to get confidence back. It becomes even harder to find replacement partners, and ultimately the accountants start wondering whether the business is still a going concern, i.e. able to survive. They may then decide that it is prudent to accrue for the potential liabilities, worsening the financial position of the practice and hastening its demise.
Look after number one: beware the ‘last man standing’
There are multiple ways to reduce the risk of a practice suffering the last man standing problem:
- Be part of a larger practice; small practices only need to lose one or two partners to be at risk, whereas larger practices offer more room for manoeuvre
- Ensure the partnership agreement defines a minimum 6 month gap between permitted retirements
- Maintain a sinking fund for repairing obligations under the lease and other unfunded practice obligations
- Try to negotiate a break clause in your surgery lease for events such as termination of the GMS/PMS contract, but remember enforceability of such clauses can be an issue
- Ensure that you are always in compliance with the terms and procedures of your lease or mortgage; particular risk points are the arrival or departure of a partner
- Take out insurance against specific risks such as an inability to pay the mortgage
- Consider a practice merger to share and thereby reduce the risks
If the last man standing issue appears to be rearing its head in your practice, seek professional advice early. The sooner you get help, the more likely you can prevent it. Once it starts, it can quickly become like catching a falling knife.
Reducing the risk of the ‘last man standing’ is one of the issues which need to be considered when negotiating a surgery lease. Other issues are identified in our free guide, Top 10 Tips When Agreeing a Surgery Lease.
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How to Successfully Negotiate a NHS Property Services or CHP Surgery Lease
Following the March 2013 abolition of primary care trusts, the government-owned companies NHS Property Services (NHSPS) and Community Health Partnerships (CHP) took over the NHS real estate in England, including about a quarter of all primary care surgeries.
If your practice occupies a building owned by NHS Property Services or CHP, it’s likely your new landlord has or will come to you asking, or pressuring, you to sign a lease agreement, ostensibly with no room for negotiation.
In all probability, your existing occupation is either poorly documented or not documented at all. Your building may also be in a poor state of repair, responsibilities for services (and payment for these) is unclear, and the rights and obligations of you as the tenant may be uncertain.
This is because historically most of these buildings were owned by the PCTs, who also paid the rent reimbursement. Since the landlord and the funder were the same organisation, insufficient attention was paid to the formalities of how the surgeries were occupied.
Since the buildings were transferred to NHS Property Services and CHP, the ‘funder’ (NHS England) now pays the practice while the practice has to deal with an independent landlord. NHS PS and CHP are government owned, but have been instructed to turn their currently very unprofitable property portfolio into a well managed and profitable one. As a result, they behave more like private landlords. Occupants of their buildings are having to learn quickly about commercial leases.
Download our Top 10 Tips When Agreeing a Surgery Lease to ensure you’re well informed about the law and other important factors before you sign anything.
Don’t be intimidated by your landlord
Because of the sheer number of surgeries they have acquired, NHS Property Services and CHP have understandably tried to develop a standardised approach to managing their estate. This has included agreeing a ‘standard lease’ with the GPC (which has, incidentally, yet to be published), and issuing standard letters to practices asking them to sign the ‘non-negotiable’ lease and offering a small contribution to their legal fees. This is occasionally accompanied by a letter setting out ‘heads of terms’ in the form of a ‘Tenancy at Will’.
In addition, some practices have come up against inflated service charges, enormous claims for back rent (even sent to retired doctors), and the bailiffs arriving to enforce debts which have become unaffordable.
This is all very concerning for practices who may feel pressured to sign up – perhaps confident in the belief that in the past the building has never been much of a concern as it is ‘owned by the NHS’.
If your new landlord is trying to exert pressure on your practice to sign a lease, perhaps by threatening you with the termination of your NHS contract (yes we have seen that as well), it may feel like your only option. There are, however, several legal factors and avenues for negotiation to bear in mind before signing a lease or parting with any money.
Case study: CHP-owned GP practices agree more favourable lease terms
Multiple GP practices occupying several neighbouring urban CHP-owned buildings simultaneously received strongly worded letters requiring them to sign up to new leases. It was made clear that their GMS/PMS contracts would be at risk, as well as any prospect of future investment, unless the leases were signed within a week.
The practices were provided by CHP with the contact details of a law firm, and offered £1000 each towards legal costs if they wanted legal advice. The issue was framed as a non-negotiable one: they were simply “obliged” to sign the lease, but had the option to have it explained by the named lawyers at effectively no cost. It was mentioned that the named solicitors were familiar with the lease, but omitted to explain that this was because the same firm had helped CHP to draft the template!
Despite feeling under pressure to sign, they suspected something was amiss and collectively contacted DR Solicitors. We advised them not to sign the leases right away, until we had better understood their current terms of occupation.
It was rapidly clear that most of the practices were protected by the Landlord and Tenant Act 1954, which meant that they were entitled to a new lease on substantially the same terms as before. Since the current terms of occupation were poorly documented this presented problems, but nonetheless it was clear that these were significantly more favourable than the “non-negotiable” terms of the proposed lease.
The exact circumstances of each practice were slightly different, but by standing together and resisting the new lease they were able to start negotiations on improving the terms. Importantly, we were also able to explain that by modifying their plans for business growth, the practices were able to further improve their negotiating position.
By informing them of their rights as tenants and advising them throughout their surgery lease negotiation, we helped the practices avoid some very onerous (and extremely expensive) lease conditions.
Always negotiate, and seek professional legal advice
Regardless of the landlord, you should always be very careful before signing any surgery lease. The particular circumstances of NHS Property Services and CHP are that they need to pay for their loss-making buildings, but just because the building has an expensive maintenance contract or is in a poor state of repair, it doesn’t necessarily follow that your practice should pick up the bill. That said, someone will ultimately have to pay; so make sure it isn’t you!
When you receive a notice from NHS Property Services or CHP about your GP practice lease renewal, remember you probably have rights as a current tenant. There are many factors to consider when considering the implications of a surgery lease, and perhaps surprisingly the rent is probably the least of your concerns.
We have put together some ‘Top Tips’ for practices who are faced with having to negotiate a lease for their surgery, and these are equally relevant for tenants of all GP surgeries regardless of who the landlord is.
Remember this useful rule of thumb for all leasehold negotiations: the ‘L’ in lease is for liability, and to remind you to seek specialist legal advice at an early stage.
For more information about the NHS Property Service standard lease or the CHP surgery lease and any other related issues, please contact Daphne Robertson on 01483 511555 or email d.robertson@drsolicitors.com