DH Guidance - Future Ownership & Management of Estate in the Ownership of PCTs in England

The Department of Health issued guidance (published on 4 August 2011) on the ownership of the PCT estate, largely to address the consequences of the TCS transfers but not specifically limited to that. The purpose of this article is to bring to your attention some important operational issues that you should be considering as part of implementing that guidance.

If you have not read the guidance then it can be accessed here.

The overall intent of the guidance is to ring fence, within the NHS, certain PCT property assets by giving FTs, NHS Trusts and aspirant CFTs (so not social enterprises) the opportunity to acquire community properties that have a high enough clinical content – what the guidance calls “service critical infrastructure” – but only where you occupy 50% or more of the premises and there is no right to cherry pick some of the estate that falls into this definition. You either take it all or none. The acquisition is at book value and we assume (but this ought to be confirmed) that Public Dividend Capital will be made available to match that price. How the remainder of the estate will be handled will be subject to future guidance.

Whilst the opportunity to acquire may have some immediate attractions we have some concerns that we think you should consider very carefully.

The first is the fact that the Secretary of State for Health (SOSH) retains a right to re-acquire any properties that transfer where:

• You fail to retain a service contract – so in general if the TCS contract is not renewed  (but partial termination may raise some complex issues).
• You vacate the property.
• You cease to exist or become insolvent.

We assume that such a right to re-acquire will be at book value.

Perhaps even more importantly you will have no right to sell the property unless you first offer it back to  SOSH (presumably at book value). If SOSH does not wish to re-acquire you will be free to sell but on the basis that you account to SOSH for 50% of the GROSS gain in value. So, if you invest in enhancing the value of the property (refurbishment, subletting or obtaining a planning that improves the value) there will be no right to set off the cost of such improvement against the overage payable to SOSH. In some circumstances that could leave you with a net loss on sale. SOSH will not share in any losses.
 
The alternative - to keep a leasehold interest - may be more attractive where you are able (as is generally the case on TCS transfers) to leave the responsibility for backlog maintenance with the PCT (as Landlord). Acquiring the freehold will not allow you to pass these liabilities back to the PCT (the guidance specifically requires liabilities to be transferred to the transferee). Whilst acquiring the freehold will put you in greater control that liability can be significant and will need to be considered very carefully.

We think that overall this puts you in a position closer to a custodian than an owner, but a custodian who sees only 50% of any enhancement (and who will have to pay the full cost of securing that enhancement), takes on the full liability for maintenance and future repair and the full risk of any fall in property values.

A further and perhaps even more fundamental question is whether this is a transfer of an asset or a liability. I say this because the acquisition is at book value but the right to re-acquire is only in favour of SOSH (or a body nominated by him); so there is no right to force the SOSH to re-acquire even if you are not awarded any renewal of the TCS contract. You could be left in a position where: the TCS services are competitively tendered in a few years time; your bid is more expensive due to these liabilities; as a result you are not successful; and  the new provider sees little merit in delivering services from the transferred properties.  SOSH is unlikely to exercise the right to re-acquire and you are left to sell the properties in the open market in circumstances where if the open market value is less than book value the loss will be yours alone. For this reason you should undertake a valuation survey to assess whether (in whole and in part) the estate that you are proposing to take over has an open market value equal to or greater than its book value – if not you may just be taking on a liability.  You should of course also undertake a condition survey to assess the level of contingent liability for backlog maintenance. The timetable is very tight to allow for such surveys to be undertaken. Retaining a leasehold may be a more attractive option.

Other issues that you should bear in mind include

1. There can be some pretty odd consequences of applying the 50% occupancy rule, for example where the acquirer takes on a group of community hospitals but provides less than 50% of the services in some of them. We know of one example where the acquirer of TCS services will be left with only half of a group of 6 community hospitals. Not perhaps a very rational way of approaching a long term estate strategy for the area. 
2. The implications for properties that have shared occupation will need careful considerations. Possibly an extreme example but one that illustrates the need for some forethought. Two community providers share a facility. The dominant occupier (Trust A) takes the freehold and leases the remainder to the other (Trust B) for a term that expires with the TCS contract. Trust B’s  community services contract comes up for renewal and Trust A  decides to bid for the services being tendered.  The CCG/PCT have no right to require Trust A to grant a lease to the winning bidder (whether Trust B or another). Trust A will have a competitive advantage that has not been considered in the guidance.
3. The local health economy should consider a strategic approach to FM rather than leave the maintenance obligation to follow the accident of freehold ownership, particularly given some of the unintended consequences of ownership highlighted above and all the attendant and possibly complex TUPE implications that will follow. You may already have centralised FM provision but if not you may like to consider such an arrangement – who is best placed to offer a cost effective service?
4. What happens to the residual estate is subject to future guidance. A change of ownership to a private sector organisation or a joint venture is possible. If there is a risk that you may end up having dealings with a more commercially orientated organisation you may consider a greater level of care should be taken over the details upon which any transfer takes place

If you would like to talk through how this guidance may apply in your circumstances, we would be happy to discuss this. Please feel free to get in touch.