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Stewart Gregory

Partner - Brighton & Hove

6th November 2019

NHSPS debt problems – Committee finds that NHS Property Services was set up without the powers to succeed

Those are some of the findings of a House of Commons Public Accounts Committee report into NHS Property Services (NHSPS) published yesterday (5 November 2019).

“NHS Property Services Limited has made progress in tackling some of the issues that it inherited when it was set up. However, it has struggled to get its tenants to sign rental agreements for the properties they occupy, and it is unacceptable that 70% of its tenants still do not have rental agreements in place. Without these agreements, it is very difficult to run an effective property management company and provide value for the NHS and taxpayers from the £3.8 billion estate that it was set up to manage.”

“The Department of Health & Social Care, NHS England and NHS Improvement and NHS Property Services have had six years to get a grip of this problem and have failed miserably. While we recognise that the situation is complex, and the provision of health services provided by tenants must continue uninterrupted by rental disputes, the whole system needs to work together far more effectively to find a solution which incentivises tenants to sign rental agreements and pay their bills promptly.”

Committee conclusions

The Committee concludes that NHSPS was set up without the powers that a commercial landlord needs to enforce occupancy contracts and charges. This was as a result of an overriding need to maintain the provision of clinical services by its tenants. Therefore, whilst it was expected to move the management of NHS estates onto a more commercial footing, the reality is that it does not have the powers to do so. It cannot therefore bring legal or forfeiture action, cease providing services, or levy penalty charges against its NHS tenants.

The NHSPS debt problem

In addition, NHSPS inherited an estate with a range of issues from predecessor organisations. These issues include:

  • Limited property data
  • Two thirds of tenants with no leases in place
  • Tenants not being charged for rent and services
  • Over 2500 different facilities management arrangements with different suppliers.

The result is that NHSPS has outstanding debts of £576 million (March 2019), with £110 million of debt having been written off in the last five years. Of that current debt, about half is also being challenged by tenants for a range of reasons, including bills being based on inaccurate information or inappropriate apportionment of costs. Dealing with these challenges is clearly not a good use of NHS resources. Whilst NHSPS now has a debt recovery plan with a range of actions, it is evident that the system is currently not working.

The problem of a lack of occupancy agreements

The lack of written occupancy agreements in the primary care estate has been cited as a key reason for the difficulties being faced by NHSPS. When NHSPS commenced work in 2013, about two thirds of its tenants did not have rental agreements in place. It has therefore been trying to agree leases retrospectively with in-situ occupiers. This is never an easy task given the lack of incentive to make such agreements. Despite NHSPS’s efforts, by April 2019 the situation had actually deteriorated, with only 30% of tenants on signed rental agreements. Without these in place it is difficult for NHSPS to manage its properties effectively.

The key to any occupancy agreement is a common understanding between the landlord and the tenant about what exactly is being let and how much that will cost. NHSPS however does not have reliable data on which to base its assessment of cost, and struggles to understand the extent of space that its tenants occupy. NHSPS believes that if it gets its data right, puts forward tenant-friendly occupancy documents, and gets help from national bodies to require tenants to sign them, then that would go a long way to sorting its current problems.

The plan on occupancy agreements

NHSPS advised the Committee that it was working on a plan with national bodies to get rental agreements in place for all its tenants. The key elements of this plan include:

  1. Getting the national bodies to pre-endorse a suite of occupancy documents for tenants to sign
  2. Improving the data it holds
  3. Introducing a “no lease, no occupancy” policy going forward.

NHSPS aims to have “deemed rental agreements” (where rent and space are agreed but no document is signed) in place for 90% of its tenants by April 2020. Even that sounds like a tall order given where they currently are, and clearly introducing from now on a “no lease, no occupancy” policy is not going to help in all those cases where there are tenants already in-situ.

Other criticisms

As well as managing the primary care estate, NHSPS is also mandated to dispose of surplus property. However, whether a property is “surplus” is not NHSPS’s decision. Instead, the decision rests with commissioners and clinicians who use the property. Occupiers benefit from property sales, in that they are immediately relieved of operating costs, but the local health system does not benefit as receipts are reinvested at national rather than local level. This means that local health systems are not incentivised to release property since they may not benefit from its sale.

With NHSPS inheriting a range of occupancy arrangements from its predecessor organisations, there are many different property charging arrangements in place, with many occupiers paying very little (or no) rent and service charge. NHSPS recognises the unfairness in the system whereby tenants in commercially-let properties pay a full market rent to their landlords whilst NHSPS tenants get away with paying little or no rent for their premises. It was for this reason that NHSPS tried to move to a more commercial footing for its occupancies.

Review and recommendations

The Department of Health & Social Care is currently undertaking a review of NHSPS. That was originally due to report in October 2019 but has been delayed to the end of this year. The Committee made four recommendations in its report, all of which it wants to see addressed in the review, and progress reported back by July 2020. The Committee’s recommendations are:

  1. Within two months, the Department should set out a clear timetable for NHSPS to agree tenancy details with all tenants by July 2020.
  2. The Department should set NHSPS clear debt recovery targets for current year debt and agree an approach for historic debt.
  3. The Department and NHSPS should engage local areas as how best to maintain and improve their local estate.
  4. The Department should move towards a more equitable model of charges, with transparency about any subsidies that are received, and ensure that tenants and commissioners are funded at an equitable level.

What does this mean for occupiers of NHSPS properties?

So what does this mean for occupiers of NHSPS properties, 18% of which are GPs?

For some time now NHSPS has been trying to get its tenants to sign some form of occupancy agreement, with little real success. The take-away message from this report is that those efforts must be stepped up and systems put in place to require occupiers to sign these. The recommendation is for all tenancies to be agreed by July 2020. In order to achieve this, the Committee recommends:

  • Proper transparency between NHSPS and tenants on the basis for all proposed charges;
  • National bodies to ensure that tenants fully engage with the process to agree tenancy arrangements;
  • An agreement from national bodies of any funding arrangements required to meet agreed obligations; and
  • An agreed process for making changes to tenancy arrangements and billing.

If you are an NHSPS tenant you can therefore expect to be coming under a lot more pressure to agree occupancy documents. Tenants should not however feel under pressure just to sign any documents put in front of them without taking proper legal advice. Please get in touch if you would like assistance with any occupancy documents you are being asked to sign or other arrangements you are asked to agree.

For more information, please contact:

Stewart Gregory 
Partner, Commercial Property
T. 01273 766930
E. stewartgregory@rixandkay.co.uk

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