In this article we look at some of the key differences affecting practices between the 2013 and 2024 NHS Premises Costs Directions (England).

Background

In January 2019, following settlement of the 2018/19 GMS contract, the NHS Long Term Plan was published, setting out key ambitions for the next ten years which included the introduction of Primary Care Networks (PCNs) as the foundation of Integrated Care Systems (ICSs) partially delivered through the new Network Contract Directed Enhanced Service (DES).

The GP Premises Policy review was then published in June 2019 by NHS England in collaboration with the Department of Health and Social Care, the Royal College of General Practitioners, the Strategic Estates Advisors service, NHS Property Services, Community Health Partnerships, the Care Quality Commission, District Valuer Services, NHS Clinical Commissioners and the General Practitioners Committee of the British Medical Association.

This review raised specific concerns with the outdated, cumbersome, and confusing nature of the 2013 Premises Costs Directions.  Since then, it has been widely understood within the Primary Care Sector that the 2013 Premises Costs Directions were being reviewed in detail and against the backdrop of the major ambitions for the further investment and development of Primary Care that have been set out in the NHS Long Term Plan itself.

The new Premises Costs Directions 2024 have now been published and have officially come into force with effect from 10 May 2024.  The 2024 Directions replace the 2013 Directions, and this article seeks to identify some of the key changes between the latest version, and its predecessor.

“Appointed Valuer”

Throughout the 2024 Directions there is reference to a new ‘definition’ that was not referenced previously; Appointed Valuer, and this is defined as:

“Appointed Valuer” means a suitably qualified professional who is registered with the Royal Institution of Chartered Surveyors who is appointed by NHS England in the circumstances of a particular case to perform any property valuation or related specialist services for the purposes of these Directions.

Whereas the 2013 Directions required NHS England to instruct District Valuer Services (DVS) to provide valuation or related specialist services and advice from assessing Notional Rents to producing Value For Money reports (VfM) and advice, there is now no such Direction.

Improvement Grant Funding and Guaranteed Periods of Use

The 2024 Directions have removed the 66 cap such that commissioners can now award any amount of funding up to 100% of project cost.  This effectively formalises a localised process that was happening in many areas previously.

Guaranteed Periods of Use (the period the new and/or improved clinical space needs to be in practice/GMS use) determined against the amount of premises improvement grant funding are as follows:

–             Less than £144,000, at least 6 years;

–             £144,000 to £360,000, at least 9 years;

–             £360,000 to £660,000, at least 12 years;

–             £660,000 to £1,200,000, at least 15 years;

–             £1,200,000 or more, at least 18 years.

The Abatement provisions have therefore also been updated in line with the above thresholds and abatement periods.

General Duties of NHS England in Applying the Directions

The 2024 Directions now include additional obligations on NHSE when making payments under the Directions, stating that it must:

(a) consider with the contractor, in a case where NHS England considers it appropriate, whether any opportunities exist for additional, multi-functional use of the premises, or any part or parts thereof, in respect of which the payment is made; and

(b) require the contractor to ensure that services are provided at the premises in a clean, safe, secure and suitable environment that is fit for purpose.

These specific changes demonstrate the increasing demand on existing GP Surgery space, and obligate NHS England to consider and more directly influence the utilisation of space within GP Surgeries.  Further, the obligation is being placed on GP Surgeries and Contractors to provide Services from premises that are clean, safe, secure and fit for purpose.

This concept is expanded upon further within the Directions themselves.

Premises Development Proposals

A formal business case-type application in the form of a Project Initiation Document (PID) is now specifically referenced as being required in order for NHS England in order to consider premises development and improvement proposals as set out within Part 2, 7(1).

Projects That May Be Funded With premises Improvement Grants

There have been some key additions and changes to the types of projects that may be funded with premises improvement grants;

  • The acquisition of land as part of building an extension
  • Fit-out works where the Contractor is a Tenant, or is agreeing to become a Tenant
  • Improvements that are necessary as a result of regulatory changes to Primary Care

Projects That Must Not Be Funded With Premises Improvement Grants

Improvements that are designed to solely reduce the environmental impact of premises can now potentially be considered for funding with improvement grants but only where NHS England considers those improvements provide a net financial benefit to the health service.

Any costs associated with compliance with minimum standards.

Initial Consideration of Premises Development or Improvement Proposals

Amongst a number of changes to this section includes the ability of NHS England to now consult with an Appointed Valuer, and not solely the District Valuer, in considering whether the proposal represents Value for Money.

It is likely that this key change will allow Value for Money (VFM) reports to be issued more swiftly through enabling NHSE to utilise the resources of other specialist Surveyors and Valuers within the Sector, especially given the limited resources within DVS which in many areas has led to delayed VFM Reports, thus delaying schemes and proposals.

For leases, there is now specific reference regarding assignment for the requirement of the ability of the Contractor to assign a Lease to NHS England under the terms of an approved Lease.

Improvement Grant Funding to Contractors in Leasehold Premises

Where improvement grant funding is to be undertaken as Tenant’s Improvement works in leasehold premises, there is now a Condition to apply which has the effect of committing the Contractor to documenting that the development or improvements for which the grant is paid will be documented as “Tenant’s Improvements” and that those improvements will be disregarded on any subsequent review of the rent under the lease until the expiry of the guaranteed period of use or of the lease, whichever is the longer; and

Fundamentally such works should form Tenant’s Improvements and be disregarded from the assessment of rent in any event, but this provides further absolute clarity on how they should be treated.

Any sale and leaseback arrangements agreed where improvement works have been funded through improvement grant funding, must ensure that the Term of the Lease is equal to the remainder of the guaranteed period of use as referenced above.

Repayability of Premises Development or Improvement Grants

The 2024 Directions now include a new section which deals entirely with addressing the repayability of premises improvement grants in various scenarios including the termination of GMS contract prior to the expiry of the guaranteed period of use.

RECURRING PREMISES COSTS

Inclusion of reference to applications to NHS England for financial funding towards the payment of Premiums during development or on completion of new premises for the purposes of reducing the rent below current market rent.

This addresses a specific measure that could be considered to assist in the viability of new development or to assist re-development projects requiring a Variation / Re-Gear or Reversionary Lease consideration.

It is noted that the Directions clearly identify rent reviews as not meeting this criteria.

Amount of Leasehold Premises Rental Costs Payable

Specific reference now to LIFT Schemes and PFI projects such that rent reimbursement shall equate to the amount that NHSE considers reasonable having regard to the terms and the advice of District Valuer Services (DVS) or Appointed Valuers.

The Contractor shall now have to use reasonable endeavours to secure agreement with the Landlord that the terms of a new Lease include a provision that no VAT will be charged during the term of the Lease.

Where a Contractor is in occupation of leased premises and paying rent as at the date of these Directions, has not completed a Lease at that date but is seeking to do so, then NHS England shall reimburse properly charged VAT subject to approval of the other terms of the proposed new Lease.

Where the Practice is a Partnership, in receipt of Notional Rent, and all partners have retired and no longer partners in the Contractor, then NHSE must assess the Contractor’s financial costs as if an application for reimbursed rental costs has been made, and from date of the financial assessment – Notional Rent must cease and reimbursement must be based on Current Market Rent.  Notwithstanding this, NHSE may agree to continue making Notional Rent payments for a period to be agreed with the Contractor.

This could potentially affect a lot of surgeries across the country where Partners have retired from the Practice and suitable agreements and provisions have not as yet been made with regards the leasing and governance of the Premises.

Current Market Rents

This Section now opens up NHSE to use either the District Valuer or an Appointed Valuer to determine CMR (and not solely DVS).  Before the District Valuer or an Appointed Valuer has considered the matter, NHSE are to invite the Contractor and Landlord of the premises to make representations or submit other professional evidence for consideration by the District Valuer or Appointed Valuer.

The ability now for NHSE to utilise the expertise and resources from RICS Chartered Surveyors who are specialist within the Primary Care Sector, may not only now lead to a potential significant reduction in delays in reports, but may also have other implications with regards the perceived values and ‘tone’ across the Country.

It is noted that NHSE cannot reimburse a Contractor a Current Market Rent (CMR) unless the Contractor has notified NHSE in writing that it accepts or does not accept that determination:

  • Within 12 weeks of date of notice being given to the Contractor as to the level of CMR, or
  • Such longer period as may be agreed between Contractor and NHSE

Amount of Notional Rent Payments

NHS England CANNOT reimburse a Contractor a Notional Rent unless the Contractor has notified NHSE in writing that it accepts or does not accept that determination:

  • Within 12 weeks of date of notice being given to the Contractor as to the level of CMR, or
  • Such longer period as may be agreed between Contractor and NHSE

Where the Notional Rent determined is lower than is currently being paid, NHSE may make payment on that basis after 12 weeks if the Contractor has not accepted or challenged the assessment, or pending the conclusion of a review if it is being challenged.

Our interpretation of the Directions is that the suggestion of not paying Notional Rent is in relation to additional practice space.  We believe that NHS England would continue to reimburse the previous Notional Rent (in the event it is lower than the proposed level) until the assessment is either accepted or agreed following a challenge.

It is therefore crucial that every Contractor carefully considers the Notional Rent assessment and seeks professional advice as swiftly as possible, certainly if the assessment is proposed at levels lower than currently being reimbursed.

Recovery of Overpayments

There is now the inclusion of a new section to cover more detail surrounding the ability of NHSE to recover overpayments made to a Contractor, and an obligation to notify NHSE if overpayments are made in error, and to cooperate with NHSE in repayments.

Transitional Provisions

The new Directions are required to take effect immediately from 10 May 2024.

If application was made for financial assistance prior to 10 May 2024, and the costs to which the application relates incurred before 10 May 2024, then NHSE are determine the application as if the 2013 Directions apply.

However, if the costs to which the application relates are to be incurred AFTER 10 May 2024, then the application is to be considered based on the 2024 Directions.

CURRENT MARKET RENTS AND NOTIONAL RENT ABATEMENTS

Factors Common to All Current Market Rent Calculations

Inclusion now of the determination and consideration of CMR to be made either by the District Valuer OR Appointed Valuer.

Change in respect of Car Parking – such that no ‘tandem spaces’ are to be included within the assessment unless NHSE consider that this restriction is inappropriate taking into account local circumstances.  What does this mean?  It is likely the reference to local parking pressure and traffic stress, and demand for parking amenity at the location will be duly considered relevant.

Once NHSE have determined the number of spaces to be included within an assessment – unless there is a material change of circumstances, then at least that number of parking spaces must be taken into account at each review.

Where improvements have been made to accommodation designed solely to reduce environmental impact of the premises e.g. Solar energy systems, replacement windows etc., then they must be disregarded UNLESS the Contractor can satisfy NHSE that the improvements provide a net financial benefit to the health service.  This is a change to the 2013 Directions thus opening up the ability to make the business case that environmental improvements to buildings and premises do provide financial benefit to the health service.  Importantly, this provision also requires NHSE to act reasonably and is thus a point that could in theory be tested at Dispute Resolution via NHS Resolution if necessary.

Factors Which Only Apply in Relation to Leasehold Premises

Prior to determining the amount payable by way of Initial Rent for a new proposal for rent reimbursement, NHSE MUST invite the Landlord and contractor to submit representations for consideration by the District Valuer or Appointed Valuer.

Unfortunately, the 2024 Directions still require a Contractor to first negotiate a rent with the Landlord BEFORE an application can be sent to NHSE for reimbursement of the reviewed rent.  However – further process details have been referenced and included in the Directions:

When reviewing NHS England’s assessment of the current market rent under sub-paragraph (d)(i), the following process must be followed—

(i) first, the contractor must agree with the landlord a proposed revised market rent,

(ii) second, the contractor must provide information to NHS England as to this proposed rent, along with evidence of the negotiation between the contractor and the landlord (which may or may not include a formal valuation),

(iii) third, NHS England must consider the proposed rent, taking advice from the district valuer or appointed valuer,

(iv) fourth, NHS England must confirm to the contractor whether NHS England will provide reimbursement at the level of the proposed rent or at a lower level, and

(v) fifth, the contractor must either enter into a rent review memorandum, signed by the landlord and the contractor, recording the change in the level of rent charged, or re-negotiate the revised rent with the landlord (for example, if NHS England agrees to reimbursement at a lower level than the proposed rent),

and neither NHS England nor the ICB may negotiate directly with landlords or those acting on behalf of landlords during this process;

This actually suggests that in point of fact, a formal Rent Review Memorandum may now not need be formally required to be signed before the Contractor can put the rental proposals to NHSE for approval.

However, agreement does need to be reached and evidence of negotiation presented (but not a formal valuation as such), thus it will remain to be seen how this manifests itself exactly in local procedures and NHSE systems.  This could, however, streamline the initial phase of Leasehold premises rent reviews.

Factors Which Only Apply in Relation to Notional Rent cases

As with the assessment of CMR, Notional Rent assessments can now be made by Appointed Valuers to NHSE, in addition to District Valuer Services.

Final Thoughts

The various updates and changes that are imposed through the implementation of the 2024 Directions generally reflect the direction of travel within the Sector and demonstrate the increasing need for significant investment in Primary Care premises improvement and development.  The changes would appear to be drafted in such as a way as to help try to create an environment in which greater improvement and development funding can take place.  At the same time, it is evident that the expansion of wording around minimum standards and the obligation of NHSE to carefully consider and apply estate-wide space utilisation considerations to all proposals, underpins the stark reality of the sector which faces increasing demand surpassing the supply of existing stock, and the urgent need to significantly modernise the NHS Estate.

One of the biggest changes we identify is the ability for NHSE to now engage with and utilise other specialist valuers and Chartered Surveyors within the sector.  Not only could this speed up costly and delayed approvals processes, there may well be other impacts that remain to be seen.  For example, it may be the case that in consultation with external Appointed Valuers, certain schemes in particular locations that until recently have been unable to be deemed ‘viable’ directly as a result of approved rents that are sub-optimal, may now have different outcomes.

The imposition of a 12-week timeframe in which to challenge or accept a Notional Rent assessment could be seen as unreasonable when no such timeframe is imposed for the issuing of Notional Rents in the first place.

The above commentary is merely our thoughts on and interpretation of the new Premises Costs Directions (2024).

Our recommendation is whether you are going through a Notional Rent/lease rent review, lease renewal or regear, considering improvements or extensions to the building or wanting to optimise the utilisation of space within your practice, to seek professional and specialist advice or representation as swiftly as possible.

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