Procedures Section 3 : Leasing of NHSScotland property

The Scottish Government has published a new approach to location policy which embeds the principles contained in the Asset Management Review. The new policy and the principles contained therein apply to the core Scottish Government estate, its agencies and NDPBs and, within the context of NHSScotland, will apply to the office-based accommodation of the following bodies:

NHS National Services Scotland
NHS Healthcare Improvement Scotland
NHS Health Scotland
NHS Education for Scotland
NHS 24

The key principles are that major estate management decisions will be overseen by Scottish Ministers; decisions relating to the existing estate will be taken by Facilities and Estates Directorate. The Cabinet Secretary for Finance and Sustainable Growth will approve all new commitments (i.e. leases and acquisitions), confirm location decisions and arbitrate in any disputes relating to the existing estate; similar procedures will be put in place within Scottish Government Health and Social Care Directorates.

The Report setting out the Scottish Government's policy covering better asset management can be accessed via the following link:
http://www.gov.scot/Publications/2009/02/26142659/0

3.1 This Section provides guidance on the leasing of NHSScotland property (except for the leasing of accommodation to staff, on which separate instructions have been issued). It should be read alongside the overview of procedural matters which are common to all NHSScotland property transactions.

3.2 Surplus NHSScotland property should normally be sold, but where property is temporarily unused, or where a part of a property is unused and disposal of that part is not feasible or desirable, the property may be let until such time as it is needed for NHSScotland use or declared surplus. Property within an NHSScotland site may also be leased to a commercial or voluntary organisation for the purpose of providing a service to the patients or staff. Property may also be leased if expert professional advice demonstrates that leasing would generate income greater than would accrue from outright sale, i.e. the net present value of the future income stream would be greater than that accruing from outright sale.

3.3 The aim of these procedures is to ensure that NHSScotland grants leases of property in circumstances where, and in a manner in which, the best outcome for the public interest is obtained. It is essential that Holding Bodies are able to demonstrate publicly that that aim has been achieved in every case.

3.4 The achievement of the aim depends crucially on obtaining good professional advice, as described in paragraphs 1.6 to 1.13 of Section 1. Where specific procedures are not laid down, Holding Bodies must act in accordance with the best professional advice. Leasehold arrangements, especially those involving commercial leases, are necessarily more complicated than straightforward sale. Special care, and expert advice, must be taken to assess the risk element in commercial leases (especially the development prospects and likely income, the developer’s status and track record) and to safeguard the NHS’s position through the terms of the lease. New leases between NHSScotland Holding Bodies can be established on a cost sharing agreement basis. Such agreements will be similar to Memoranda of Terms of Occupation used within the Scottish Government and other public sector bodies in similar situations. SG Property Division and Central Legal Office can advise Holding Bodies on such agreements.

3.5 Holding Bodies are free to conclude property disposals by lease without involving the Health and Social Care Directorates unless notification to the Accountable Officer is required in the specific circumstances listed at Annex I.

The notification arrangements and certification requirements are described at paragraphs 1.14 to 1.19 of Section 1.

3.6 The Central Legal Office holds standard terms and conditions which can be adapted from the leases normally entered into by Holding Bodies. This includes in particular commercial leases of retail properties.

3.7 The lease should normally provide for a fixed rental payable quarterly/monthly in advance (as appropriate), with provision for rent reviews at stated intervals on the recommendation of the Property Adviser and Legal Adviser but not exceeding 5 years. Where rental values are difficult to assess (e.g. because there is too little market evidence), a “turnover rent” may be useful - this is where the tenant pays a base rent plus a negotiated percentage of business turnover.

3.8 The terms of the lease must avoid creating security of tenure which could prove to be an obstruction to future good property management. This is a particular problem with seasonal cropping, grazing or mowing leases - see paragraphs 3.19 and 3.20.

3.9 Intending lessees should not be allowed to occupy NHSScotland premises before the lease is granted.

3.10 The duration of a lease will depend on local circumstances but it must not exceed the life of the property, nor should it go beyond the time when the property may again be required for NHSScotland purposes or for disposal.

3.11 The tenant should normally be given a Full Repairing and Insuring Lease where the tenant is responsible for all repairs, maintenance, insurance etc. When this is not possible, the cost of repairs, heating etc should be recoverable under a service charge which can be reviewed annually. The tenant must also be responsible for complying with the requirements of Planning, and other Regulations.

3.12 The lease should not allow tenants to make improvements or alterations to the property without obtaining the landlord’s approval in writing to the plans for the proposed alterations and improvements, before works commence. Occasionally, it may be appropriate for the lease to provide for compensation to be paid by the landlord, at the termination of the lease, for improvements made by a tenant (although see paragraph 3.14). The Legal Adviser should be consulted about any compensation rights for improvements. At a rent review, tenant improvements are normally excluded from the assessment of the reviewed rent. When the Property Adviser is instructed to negotiate the review of rent he should therefore be advised of any improvements which have been carried out to the premises.

3.13 The position of any buildings erected on a leased site needs to be given careful consideration in the drafting of a ground lease. Generally the terms should avoid any commitment on the part of the Holding Body to the purchase of redeveloped property or any buildings erected on a leased site, or other form of compensation. This can create an actual or contingent liability requiring to be agreed by Scottish Government Finance Group and notified to the Scottish Parliament where the amount of the financial liability could exceed £1 million (see Annex I). It is however open to Holding Bodies in certain circumstances to negotiate, in suitable terms, an option to “buy back” following consideration of the financial consequences and subject to any required Scottish Government Finance Group approval and notification to Parliament. Any proposal to create an actual or contingent liability where the amount of the financial liability could exceed £1 million requires to be notified to the Accountable Officer (see Annex I). A clause to leave the building or to demolish at the tenants expense will however be preferable.

 

3.14 All Holding Bodies shall ensure in all leases or licences to occupy NHS lands and buildings for purposes which include the retail of food and/or beverages, that the tenant/licensee is obliged to comply with the Healthy Eating Initiative. The Legal Adviser has wording which requires to be incorporated in such documentation. Holding Bodies must have reference to the Healthy Eating Initiative policies, as amended from time to time See (NHS Scotland Retail Policy for lease Guidance v3). For the avoidance of doubt, existing leases and licences must be amended to incorporate a requirement to comply with the Healthy Eating Initiative when opportunities arise to amend the documentation.

 

3.15 Holding Bodies must ensure that tenants comply with the terms and conditions of leases - especially commercial leases. This should be done by appropriate monitoring (including, if necessary, visits to the property); a periodic check that any repair, decoration, insurance etc requirements of the lease are being maintained; that the rent is paid; and to review the future of the lease shortly before it expires. When Holding Bodies propose to take action for any alleged breach of the terms of a lease, they should obtain their Legal Adviser’s advice.

3.16 Holding Bodies must ensure that the rent review process is started in time for the Property Adviser to report on the proposed new rent, and for notification to be given to the tenant in accordance with the terms of the lease.

3.17 At the termination of the stated period of a lease, the tenant may request either an extension or renewal. At this point, Holding Bodies must consider whether the property should still be leased rather than sold; whether the lease should be re-advertised (particularly where there is any indication of possible competition for the property); and whether any terms of the lease should be altered. If the tenant merely wishes to extend the lease for a short period, the Legal Adviser should (after consultation with the Property Adviser) draft a Minute of Extension for the appropriate period continuing the conditions of the lease, subject to any appropriate changes of rent. If a total renewal of the lease is contemplated, a fresh Minute of Lease is more appropriate.

3.18 Scottish Ministers may, under Section 15(1)(d) of the National Health Service (Scotland) Act 1978, make premises available to local authorities (including education authorities). A formal lease on terms recommended by the Property Adviser will generally be appropriate for the use of NHSScotland property in such circumstances.

3.19 Where a new permanent building is required for a hospital, special school for the education of mentally handicapped and/or other long-stay children and young people in hospital, land may be leased or sold to the local authority.

3.20 Land retained for future NHSScotland use can sometimes be leased for seasonal grazing or mowing. The Central Legal Office has standard leases which can be adapted to particular circumstances. Competitive tenders should normally be sought, but Holding Bodies have discretion to relax this procedure where there is no evidence of competing interests. Many agricultural Auction Markets have auctions of land for seasonal grazing. Using such auctions is an appropriate method for leasing seasonal grazing. Before lets are renewed or put out to tender, Holding Bodies should always specifically consider whether there is still good reason for retaining ownership of the land.

3.21 It should be noted that there are significant technical details associated with seasonal grazing and mowing lets with a risk of security of tenure being established by the tenant if these details are not satisfied. Holding Bodies must seek advice from their professional advisers when considering any form of seasonal or other agricultural lease. The Central Legal Office can assist either directly or, in more specialist circumstances, by making use of its contacts with experts in the particular field concerned.

3.22 Where a joint hospital/university medical school development takes place, the arrangements between the Holding Body and the University will be as follows (unless other special arrangements have been agreed with the Health and Social Care Directorates):

3.22.1 where Scottish Ministers purchase a new site for a development, the University must pay a proportionate share of the development costs, plus either a share of the land acquisition costs and a nominal ground rent or a market rent in relation to the ground lease for the land;

3.22.2 where the development is on an existing NHSScotland site, the University must pay a proportionate share of the development costs, plus a market rent in respect of a ground lease for the land; and

3.22.3 where existing NHS premises are to be used, the University must pay a market rent. Where a market rent is payable, it should normally be capitalised and paid as a grassum at the commencement of the lease by the University and the lease granted at a nominal rent.

3.23 Normal terms and conditions should be incorporated in any lease of land or buildings. The following additional provisions should be noted:

3.23.1 where ground lease is proposed the term should normally be for 99 years;

3.23.2 where it is agreed that a grassum will not be paid at the commencement of the lease the rent payable under the lease should be subject to review at no more than 5 year intervals;

3.23.3 a clause to be included enabling a University at any time after the tenth anniversary of the commencement of the lease to serve a notice of the University's intention to cease using the building for the purpose for which it was initially erected;

3.23.4 on receipt of a notice referred to in 3.22.3 NHSScotland to have the option to assume ownership of the building on payment to the University of the market value of the property at the appropriate date. Notice of a Holding Body's intention to exercise this option must be given not later than 6 months before the notice referred to in 3.22.3 expires and the compensation to be paid to the university will be determined by the District Valuer or a suitably qualified external valuer. The lease will terminate on the date the notice takes effect;

3.23.5 if the option in 3.22.3 is not exercised the University will have the right after the expiry of the notice to use the building for University purposes other than the specific purpose for which it was erected providing these purposes are compatible with NHS use. The consent of Scottish Ministers will be required but such consent will not be unreasonably withheld to this other use; and

3.23.6 the University will be responsible for obtaining all consents, building warrants, etc, required under Planning Acts, Building Regulations, Health and Safety, etc in the event of Scottish Ministers consenting to alterations or additions to the building.

3.24 Where the building is shared, the following conditions should also apply:

3.24.1 the lease to define the nature and basis of charging for operating costs; and

3.24.2 Scottish Ministers to carry the insurance risks for damage or loss. (In the event of either, the Holding Body and the Scottish Higher Education Funding Council should jointly consider the question of the costs and assess the apportionment of the cost of replacement/reinstatement. NHSScotland should not be liable for replacement of University equipment or furniture in University areas of the hospital.)

3.25 Where existing NHSScotland accommodation is leased and the arrangement is intended to be on a permanent basis, it will generally be appropriate to grant a long lease - i.e., 21 years and upwards depending on the life of the building. A break option exercisable only by the University to be included at year 10 of the lease.

3.26 No charge should be made for accommodation provided by a Holding Body for use as a shop/canteen and staffed by a voluntary organisation. Where NHS land is made available to a voluntary organisation to erect premises (hospital canteens, shops etc) a nominal rent must be charged. However, other than in these cases, a concessionary lease - whether that be at no rental charge, peppercorn level or at a rental below market level - should be considered only in the most exceptional circumstances. It is important that the cost of occupying property should be transparent.

3.27 Where a Holding Body judges that an organisation or company should receive financial support with the rental of such property, any support should normally be provided in the form of additional funding (e.g., in the case of voluntary organisations, in the form of extra funds from a sponsoring Health and Social Care Directorate) rather than a concessionary rental arrangement, which represents a hidden subsidy.

3.28 Concessionary leases other than in the specific circumstances described above should only be considered, exceptionally, where:

• a voluntary body proposes to use NHS property (which is surplus or temporarily unused or has no foreseeable future use) for a service which complements a NHSScotland service or which would otherwise have to be provided by the Holding Body;
• the financial loss will be matched by an equivalent financial or service benefit to NHSScotland.

3.29 Concessionary leases should not be given to:

• Scottish Government funded bodies - which should seek additional funds from their sponsoring Health and Social Care Directorate.
• Local authorities - which should be covered by Joint financing arrangements.
• Commercial undertakings unless, exceptionally, they provide a service to staff and/or patients (e.g., a bank ) and can demonstrate that the service would be uneconomic if a market rent was charged. (Any granting of a concessionary lease to a commercial undertaking in these exceptional circumstances should follow a full survey and testing of the market to ensure that the competitors of the chosen undertaking were not also interested, except as concessionaires).

3.30 Holding Bodies may grant “concessionary” leases where the total value of the concession is £5,000 or less. Proposed concessionary leases in excess of that amount should be notified to the Accountable Officer in terms of Annex I (before any commitment to granting the lease is made) with the appropriate supporting information. The amount of supporting information needed depends on the circumstances of the case but it should cover the following points:

• A copy of the Property Adviser’s report giving the current market value for both a lease and a sale.
• A statement of the reasons for the Holding Body’s recommendation, including details of the expected advantages to NHSScotland, both general and financial (including an assessment of how the financial loss will be matched by equivalent financial or service benefit to NHSScotland).
• The reasons why the organisation concerned cannot pay the full market rent.
• Details of the other options considered for delivery of the service concerned, including financial details (see Management Section 3).
• Any additional relevant Information.

3.31 The length of a concessionary lease should not exceed 7 years unless there are sound health service related reasons for a longer period (e.g., the tenant proposes to erect a “care in the community” building on the site, in which case the term of the lease should match the expected life of the building). Otherwise terms should be as for a normal lease but with the following additional clauses:

• The property to be used solely for the purpose of the concessionary lease (a “use clause”).
• The tenant to permit the Holding Body to carry out regular checks to ensure that the terms of the lease are being properly adhered to, and that the property continues to be used for the purpose of the concessionary lease.
• The lease to terminate, and the premises to revert to Scottish Ministers/NHS Board as appropriate, if the premises are no longer used for, or are no longer required for, the purposes of the concessionary lease or if an attempt is made to change the use to other purposes.
• If the lease relates to a site which, although not yet declared surplus, is considered non- essential with no future NHS use, it must be a condition that any building constructed on the site would revert to Scottish Ministers/NHS Board as appropriate on termination of the lease (the Property Adviser should be told of any such condition so that this can be taken into account when giving an opinion of value).

3.32 The points on purchase of property, or other form of compensation, mentioned at paragraph 3.14, should be noted since these are issues which are particularly liable to be raised where a concessionary lease is also an issue.

3.33 If it is proposed to renew a concessionary lease on expiry (whether on the same terms or not), the proposal should be evaluated afresh and a fresh notification submitted to the Accountable Officer if appropriate. Holding Bodies must not give prior indication to the leaseholder that renewal will be automatically given. Renewal must always be considered well in advance of the expiry of the current lease.