Public Sector Disposals - Could the NHS Estate Juggler be at his limit?

Working for a new public sector Client this week has made me realise how wildly different Public Department’s methods and resources are for the disposal of public land and property assets.

Whilst NHS Estatecode policy clearly sets out the requirement for NHS land & property assets to be sold at best value with the benefit of planning consent for the most valuable purpose, when it comes to finding the money to actually go and get these planning consents, many Trusts just are not willing to make that spend or even to allocate resource to explore potential. From experience I have found that high level decision making in NHS Trusts is often led by Senior Clinicians or former clinicians whom have graduated to senior roles, and they very much tend to prioritise financial resource to those matters that are immediately patient facing. Spending money to obtain planning consents on property that is surplus is not something they will readily consider – despite the recommendations of Estatecode. Could it be something to do with the quality of the business cases that are put before them? Or is it just strategic Estates Management (other than capital projects) not being recognised as something that is important to Trust operations?  

I’m finding that some Councils are quite different when it comes to disposals – they tend to sell requiring the best financial value and they will sell surplus sites fairly quickly. I see some parallels with the approach taken by the Defence Infrastructure Organisation, in that there is a keen reliance on the use of consultants and agents for decision making.  This can be a good and a bad thing – but probably more good than bad.  There also seems to be a much closer relationship between Council Land & Property Managers and the respective Local Planning Authority than NHS counterparts.

I am noting that quite often the Councils have had the aforethought and resource to nominate land for planning allocations considerably in advance of any actions for disposal or formal declaration as surplus.  In comparison,  Estates personnel in NHS Trusts are often too busy covering off ERIC returns, Capital Projects, general Compliance issues and trying to control who is using what in their buildings  -and they just haven’t got the time to strategically plan their Trust’s estate in terms of Town & Country Planning.  Indeed, I’ve found that it is not unusual for NHS Trust’s to make arrangements and undertake capital development without planning consents.  Nobody has the time! The main offenders being car park expansions, locating temporary buildings and changes of use within buildings.

A few years ago I was working for a large Acute NHS Trust which owns considerable land holdings, perfectly ripe for residential development. At the time, the Trust had no planned future use for around 70% of the land and speaking to a Housing Association colleague down that neck of the woods, this land has still not been offered up for disposal and also remains unallocated in planning terms. Due to numerous changes in management at the Trust- in both Estates and senior Trust management, I suspect that no one in house has had much time to think strategically (other than decisions for Capital development / refurbishments of clinical areas) and, I suspect, nobody likely answered any of the ‘exploratory’ emails from the HCA, who have been sniffing round for surplus / soon to be surplus public sector land for some time. 

  

In recent years, Estates resource in the NHS has seems to have been stripped to the bare basics to achieve savings targets and this fact together with increasing patient demands on NHS Estate, the steady increase of HTM standards, the need to closely manage PFI contracts (or pay the price!) and a revolving door of service providers due to changes in NHS Commissioning means that NHS Estate departments are just far too busy to truly stand back and identify/ manage surplus land effectively.

Ask any NHS Estates Directors and they will tell you quite genuinely that they get 200+ emails a day as well as relentless phone calls.  The first thing they ask themselves when prioritising workload is ‘is any one going to die?’ Strategic land planning is way down the list!   

Clearly this flies in the face of Government ambitions given the ‘call for public sector sites’ to be brought forward to help the Housing Crisis, but this could be throwing yet another ball at a juggler at his limit. I suspect the ball will be ignored.

PRS Licenses and your business

It has been an interesting week this week and I had an appointment at an Afro Caribbean Radio Station and recording studio frequented by people like Maxi Priest.

It made me think about the costs of listening to music and the fees charged by the PRS and the PPL.

Quite often these costs can be expensive and hidden in commercial property service charges. 

If your Landlord charges his overall site management fee on a percentage basis of the total of your service charge, then perhaps you are paying even more than you need to.

So how do you reduce this cost or avoid the need to pay for a PRS or PPL License if you are a tenant?

Indeed many small business forums contain posts from people who have received large demands for license fees from the PRS without any notice.

One situation I came across recently was an NHS employee working on an expansive first floor reception in a multi occupied PFI building.  She had a small radio playing next to her on the desk and the landlord had received a rather large bill from the PRS and paid it - and had snook in into the service charge.  On investigation the employee said that the radio was for ‘privacy’ reasons so she could deal with patients at the reception area without anyone else sitting nearby listening into their conversation as the place  was ‘echoey’.  However the PRS was charging a rate for broadcasting the radio to the entire waiting area.

Due to the limitations of the landlords service charge billing expertise, ALL of the tenants in the building were being charged a portion of the large PRS license fee, whether they used the first floor reception or not.

So my recommendations are as follows:

Firstly look closely at your service charge bill – if you don’t get a breakdown of what you are paying for, ask your Landlord to provide one.

If you are paying directly or indirectly for a PRS license then check whether you should be paying – are you playing the music or benefiting from it being played?  If not then you need to consult with your Landlord and the PRS.

If you want music playing but don’t want to pay for a license then you need to take a good look at the rules for playing music that is out of copyright or loyalty free.  It is extremely simple to access royalty free radio stations online or to download / obtain music or CDs that are out of copyright or loyalty free. I’ve listed a few web sites to check out at the end of this post. I will try and get the links running but today my new laptop is not playing ball.

The alleged sharp practises of the PRS in collecting royalties has been the topic of many business forum discussions and one of the most interesting threads I have read was the outcome of the case Societa consortile Fonografici (SCF) V Marco Del Corso which was a high level Italian SJEU court case relating to the playing of a radio in an Italian Dentist’s waiting area and whether a PRS license was required.  

In this case  it was found that the playing of music in the patients waiting area was only to a ‘limited class of public’ and was not a ‘communication’ for ‘profit making purposes’ i.e. that the patients were not flocking to the dentist because he had a radio in his waiting area, but to get treatment - they were accidental listeners!  

The PRS has claimed that the position is different in the UK and has continued to demand license monies from NHS and similar tenants, but it has been noted by law firms that the position is up for challenge should there be a further reference of a UK case to the CJEU.

See this link: http://www.capitallaw.co.uk/site/publicationsandnews/legalnews/ip3may2012.html

Other links for Royalty free music and radio and general information about copyright are below:

Copyrightsandwrongs.nen.gov.uk

https://musopen.org/

https://www.jamendo.com/en/welcome

http://www.imsradio.net/

http://rfmradio.co.uk/flash.swf

http://www.ichillmusic.com/

http://www.akmmusic.co.uk/

http://radio.publicdomainproject.org/

Landlords Management Charges...

 ((Note this Blog is for service  / management charges of commerical property - and not residential property.))

Are you faced with an increase in Landlord’s management charges?

Word on the street is that one of the main UK Landlords of multi-occupied healthcare premises is about to add 2.4% management  charges on to their service charge bill, so you could be one of those paying more in the near future.

But can the Landlord do this? And what are the rules governing service charge ‘add ons. ‘ Read on and I will try and explain management charges:-

The first rule as ever is to always look at your lease to see what it says about management charges.

Often, as seen in the LIFT leases there will be a clause allowing for a management charge of up to 10% of the total service charge costs.

Where management is provided by the Landlord via ‘in-house’ staff resource then there is no reason why the Landlord cannot reclaim these costs, subject to their reasonableness – however the costs of the resource MUST be associated with managing the service charge items, as set out under the lease, at that exact site (i.e. your Health Centre) and definitely not any other work associated with the site, or other sites, such as negotiating leases or collecting rent or dealing with breaches of covenant.

The RICS Commercial code says:

‘The management charge is the reasonable price for the total cost of managing the provision of the service charges at the location and relates only to work carried out in managing and operating the services and administering the service charge.

The management charge might comprise of 2 elements

·         The fee charged by the Manager for the management and supervision of the services to a site (the management fee)

·         The cost of specific site management staff, whether based on-site full time or part time (site management costs.)’

The RICS commercial code goes on to emphasise that no two buildings are the same in the way they need to be run.  The management fees charged ought to be a reasonable cost and overhead in relation to the operation and management of the services and should reflect the work necessary for that building.  Further, the commercial code provides that the fees should be based on a fixed price rather than calculated as a percentage of expenditure because this is considered to be a ‘disincentive to the deliver for value for money’.  Rather the fee should be fixed and subject to annual review or indexation.

So what does this mean for you as occupiers if your Landlord suddenly starts to add on a service charge?

Firstly make sure you are 100% clear that what you have been paying for in your service charge historically, to ensure that what you’ve been paying already does in fact exclude any form of management costs, or if it does include them, so you can explore the existing level they are at in terms of overall percentage of your service charge cost.

If your landlord has not been sending you statements as per RICS standard requirements under the Commercial Service charge code, you need to ask for more detailed statements to be sent with due regards to RICS best practise. Indeed I am aware that one of the landlords for NHS premises has merely been sending service charge demands which are just an invoice with single ‘total’ figure with no explanation.  If this sounds like your landlord, you need to write to them formally, asking for full breakdown of the service charge including all receipts / proof of expenditure. 

Under RICS best practise guidelines (which reflect best practise in the commercial property and industry and the law of England & Wales) the landlord must be totally transparent with the service charges and be able to explain and provide a paper trail, to not only prove all of the expenditure made and recharged to the tenant under the service charge clause, but also to show that it is reasonable.

So when you get to the stage that you have your service charge breakdown.  You need to look through that breakdown and check that it only contains items contained within the service charge clause of your lease.

For example, there may be the cost of buildings insurance included– but if the Insurance clause is on a separate clause/ schedule in the lease to the Service charge schedule, then strip the costs out from the service charge figs. The insurance is payable separately!

Also, have a look at business rates.  In many LIFT buildings the landlord may be paying the business rates directly to the Local Authority and then recharging the tenants in the building according to the Landlord’s own service charge recharge proportions, and adding VAT – again, all added up into a single fig in an invoice under the guise of the ‘service charge’.

What you need to remember is that business rates are a tax on occupation. If you occupy space exclusively in any rented building, even if you have not signed a lease, then you should contact the valuation Office agency directly and arrange to pay the tax directly for your area of the building. This is in accordance with Local Government Legislation.

If you do this, an officer from the Valuation Office Agency (VOA) will come out and assess the extent of your area in the shared building (or taxable Hereditament  - to call it the proper name.) This follows standard methodology, accepted by courts, and will be the ‘Net Internal Area’(NIA) of what you exclusively occupy, as measured per the current RICS measurement code. The NIA excludes any shared areas like corridors or toilets.

Many LIFT buildings are not measured nor the proportions measured as per NIA or RICS standards (which are the standards of measurement accepted in the UK Courts.)  So some NHS Landlords service charge proportions can often be misguided and at worst, unfair.

Once the VOA has assessed your business rates, they instruct the Local Authority to send you a bill directly. This means that you will not have to pay for any business rates charged by your Landlord, nor the VAT that the landlord may also decide to charge on it!  

Furthermore some tenants may find that on assessment by the VOA, the rateable value of their occupied space is below the threshold for paying this tax. Others may find that by contacting the Local Authority who collect the rates, and filling out a few forms, that they can obtain small business discounts from the Council  or other discounts if they are a small business with only a couple of buildings. 

Also – there has been a recent case heard on appeal at the Lands Tribunal James Gallagher and (1) Dr M G Read & Partners (2) Dr J Poyser & Partners, which has upheld a decision that found that for rates purposes, in new buildings, it is appropriate for the GPs surgeries to be calculated using the ‘contractors method’ of valuation rather than the comparable method.  From the examples provided in the case, this offers considerable savings to GPs.

All in all it is far preferable to pay your business rates directly  -as it takes your Landlords out of the equation, their VAT and also reduces the service charge – and hence also the management charge!

Basically, to summarise, if your landlord is going to charge you a management fee based on a percentage of your service charge – you need to analyse the service charge and strip it down to the bare bones of what the lease clause will allow the landlord to recharge.

The landlord will not do this for you.  It is not in their interest to minimise the service charge cost.  If you are a GP obtaining reimbursement under the GMS Premises directions, you need to know all of your costs exactly to maximise what you can re-claim and to minimise the rest.

Finally, I will pick up the point about how reasonable it is for a Landlord to introduce a management fee out of the blue.   Whilst the lease may reserve a right for the Landlord to charge a fee, industry best practise under the RICS code is for the Landlord not to undertake to charge something ‘new’ under the service charge regime without first consulting / informing with everyone in the building that has to pay for the service. In terms of a management fee it is wholly reasonable for the tenant to require the Landlord to explain the basis of the management fee and how it is justified for the premises and the administration of the service charge for that building.

Next time,  I will look at some hidden costs in service charges and ways to reduce them.

 

Commercial Service Charges Best Practise

Today's blog will provide more detail about the best practise for commercial service charges.  Please note that residential service charges are different so please do not use this blog when considering residential premises. This Blog is also directed to premises in England & Wales – as the law in Scotland will also differ.)

Indeed, due to the amount of conflict in Landlord and Tenant relationships over the years, legislation has been introduced in the residential sector to control service charges but in the commercial property sector things are still catching up.

 

Due to this situation, the RICS launched a Code of Practise in 2007 to set out the standards for best practise in the commercial sector. Whilst this code is not law, Courts do take account of the contents and resultantly, any self-respecting Chartered Surveyor or commercial property company follows this code as closely as possible.

In a nutshell, the Code’s objective is to ensure transparency in service charge budgets so that Landlords don’t make a secret profit or alternatively, make a loss. It’s about finding the middle way and being fair in all circumstances.

 

The Code can be Downloaded from the RICS Books Website http://www.rics.org/uk/shop/standards/

 

Always look at the lease

The first rule in service charge management is to always look at the provisions for a service charge in the lease.  If you do not have a lease but are still paying a Landlord for a ‘service charge’, the matter is rather more obscure but nevertheless as an occupier under Common Law, (I.e. someone who is paying rent/insurance / service charges to a Landlord but does not have a formal written and signed lease), you will still have a right to know exactly what you are being asked to pay for.

The services that a Landlord provides under the lease will be listed in the Landlord’s Covenants and most leases provide the Landlord with an option to add / vary / change the provision of the services in accordance with ‘good estate management’.  The wording of the lease here is important as it sets the context for any changes the Landlord may choose to make to the services at a later date.

What is clear is that the tenant is only liable to reimburse the Landlord so far as the lease allows. If the Landlord’s expenditure falls outside the lease clause, then this cost can’t be recovered from the Tenant.

 

There is no legal presumption that the Landlord can cover all of his costs in running the building and this is where some of the Landlords of multi occupied healthcare buildings need to be careful.

There is also general presumption in law that the Landlord should not profit via the service charge – albeit this can differ depending on the construction of the lease – hence this is why when you agree a lease it is so important to get decent advice before you sign up.

 

Implied Term as to Reasonableness

In the service charge covenants, many leases will say expressly that the Landlord’s expenditure must be reasonable. Even if the lease is silent, there is an implied legal term that when spending on behalf of the Tenants, the Landlord must not to be unreasonable. This was seen in Finchbourne Ltd V Rodrigues [1976] which was a court case which led to the tendency towards an automatic implication of reasonableness with regard to the circumstances of the Landlords service charge expenditure.

This doesn’t mean that the Landlord has to find the cheapest service provider, but it does means that they can’t go overboard when they procure service charge services on behalf of the Tenants when they are expecting to recharge under the service charge clause.  The key phrase is that the Landlord must ‘maintain to standards contemplated by the covenant’.

So if you are a Tenant in a multi occupied health centre and the standards of e.g. plumbing maintenance are set out as a Department of Health Policy, and other health buildings in the area maintain to this policy level, then it will be reasonable for the Landlord to competitively procure the plumbing service to that standard.  This process may not end up with the Landlord instructing the cheapest provider in the market, but the plumbing service will be in tune with the general cost and quality of plumbing in the local health sector for that particular maintenance activity.

What this means is that the factual background of the lease and all circumstances will influence the outcome of what is deemed reasonable or not.

So to add to this ‘plumbing’ example, it would be unreasonable to the Landlord here, to replace the taps in the building with expensive Gold designer ones– as this would be somewhat out of tune from that both landlord and tenant had in mind when they signed the lease agreement.

 

What about building works incorporated in the Service charge?

When something goes wrong in a multi occupied building, eg a roof leak, the Landlord’s decision with regard to that works are necessary or methods to be adopted must always be reasonable in all the circumstances as court cases have shown a willingness to imply a ‘reasonableness’ requirement.

Again, here the factual background to the lease will influence what is deemed as ‘reasonable.’

However, it is all about the Landlord being reasonable in his actions in ‘incurring’ the costs and not whether the actual costs billed to the Tenants are reasonable. This means that it would be reasonable to expect the Landlord to get ‘arms length quotes’ for appropriate works considering all the circumstances.

 

What if the Landlord wants to vary the services provided?

Again this is quite often provided for through the terms of the service charge covenant in the lease. The Landlord has to exercise careful discretion to only vary the service charge services in the very best interests of estate management and definitely not for any personal gain. The decision must be something that would be reasonable for any reasonable Landlord to make in that position.

When making changes the Landlord must ensure that the decision making process is open and fair and that the Tenants are kept informed, even if this is not explicitly required through the lease terms, so that the scope for later challenge by the Tenants is minimised. 

Where there is an existing system of service charging in place, then the Landlord must approach all the Tenants in the building and engage them to obtain an agreement for the proposed variation in the services. This is where the Landlords liaison and relationship with his tenants is very important.

 

 

Next Time:

We delve into Landlord’s Management Charges.