Michael Royden explains what’s involved if you sell a practice but retain the surgery premises.
In many of the practice sales that the Thorntons dental team deals with, the surgery premises is owned by the principal, and the question arises as to whether they will also sell the surgery premises. This will vary from one sale to another. However, in most cases the seller wishes to dispose of the premises at the same time. That tends to be the neatest outcome, realising all of the value in the practice in one transaction.
That might be the perfect solution for a retiring principal. In such cases, we prefer to have the property value agreed at an early stage. The offer from the buyer at the outset regularly states that the property will be purchased at market valuation. Ironically, however, it is more common for property values to be a disappointment for a seller, by contrast to goodwill values, which are sometimes a pleasant surprise. We therefore recommend that the buyer be required to have a valuation be carried out at an early stage of the sale negotiations.
There are, however, instances where the buyer doesn’t wish to buy the premises. In such cases, the seller could be faced with becoming a reluctant landlord. It is therefore important that the seller understands what retaining the premises will mean for them.
The first consequence is tax related. On the sale of a practice, the seller should in most cases qualify for something called Entrepreneurs’ Relief. In general terms this means that they should pay Capital Gains Tax of 10% on the gain generated by the sale. This will also apply to any gain on sale of the premises if they are sold along with the goodwill and assets of the practice. If the premises are retained, and subsequently sold, they will only be able to benefit from Entrepreneurs’ Relief if they are sold within three years of the sale of the practice. If they are retained for more than three years, the tax will be at a higher rate. Entrepreneurs’ Relief, like most tax reliefs, is complex and so a seller should seek accountancy advice on the tax treatment of their sale.
A good investment?
Don’t despair though. There is a market of buyers who are interested in owning surgery premises, which are seen as a good investment. It may therefore be possible to sell the premises to such a buyer shortly after the sale of the practice.
In addition, when you become a landlord, you will take on various practical responsibilities regarding the premises. You also have a risk, however small, that the practice doesn’t perform well going forward, leaving the buyer in financial difficulties and you struggling to secure your rent. Hopefully that risk is minimal, and of course if the practice is NHS committed, the rent should be reimbursed by the Health Board.
You will need to arrange for a lease to be put in place, and your solicitor will assist with that when the practice is being sold. The buyer will of course similarly wish to have the security of a properly drafted, written lease so as to ensure that their occupation of the surgery isn’t at any risk. The terms of leases vary, but there are certain key aspects which you will find in most:
- Rent – most obviously, the rent should be very clearly stated. This should include payment dates with the rent being paid in advance. There may also be circumstances where you require to charge VAT on the rent. Properly chargeable VAT is generally capable of being reimbursed by the Health Board despite a dental practice not being registered for VAT
- Review – the rent stated in the lease will be the starting point, ordinarily calculated by a surveyor. However, from your point of view you would wish the rent to be reviewed periodically to ensure that the real return from the property doesn’t decrease over time. The timing and basis of rent review should be carefully considered so that the seller maximises the review on each occasion
- Term – the period of lease is important. From a seller’s point of view, a longer term is better in terms of having a secure investment, and if you choose to sell the property to a third party, that will increase the value to them, and therefore hopefully the price too. The buyer will also wish to ensure that the lease runs for as long as their bank funding, so that they have comfort that they can’t be required to remove from the premises
- Repairing and insuring – there are a number of variants to this, from the tenant having full responsibility, to the landlord being responsible for external repairs, etc.
Whilst some sellers only reluctantly agree to become a landlord after the sale of the practice, with a bit of thought and the right advice, it isn’t necessarily a bad outcome, and they may find that the arrangement works well for them for the future.