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Estates issues for social enterprises: recent Department of Health guidance

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If the Health and Social Care Bill is enacted then all NHS Primary Care Trusts (PCTs) will be abolished in April 2013.

The Department of Health and Treasury are in the process of considering where all of the land and buildings owned by PCTs will be transferred to when they disappear.

PCTs have already divested themselves of their provider functions, or are in the process of doing so, as required by the DH’s Transforming Community Services programme. Most of the PCT provider arms that have not been acquired by NHS bodies are being, or have been, acquired by social enterprises.

The Department of Health has recently issued guidance that permits NHS bodies to take transfers of those parts of the existing PCT estate deemed to be ‘service critical clinical infrastructure’. The guidance does not however give social enterprises the same right.

As a result, social enterprises in health currently have no alternative but to consider which other types of occupancy agreements will give them the best prospects of delivering high quality services for their service users. Many of these considerations are likely to be relevant to all social enterprises.

Does the latest DH guidance put social enterprises in health at a disadvantage?

That’s likely to depend on where the premises in question are located, and the state and condition that they are in. The acquisition of a genuinely valuable estate could give social enterprises some additional flexibility, particularly if capital receipts can be generated as part of any estates rationalisation exercises.

There is also the wider question as to whether or not the acquisition of parts of the community health estate by NHS bodies leaves them in a stronger position when it comes to bidding for new contracts when the current batch expire.

The DH guidance does however limit the prospects of NHS bodies generating capital receipts by giving the Secretary of State a right to buy back the property if it is vacated. In addition, clawback provisions will come into play if that option is not exercised.

A further point is that the DH guidance only permits NHS bodies either to acquire all of the relevant PCT’s estate that meets relevant criteria, or to acquire none at all. So the guidance does not give NHS bodies an opportunity to just take transfers of valuable assets and ignore the less valuable ones.

Joe Gannon headed up the Department of Health’s TCS programme and now advises social enterprises. He points out that ownership of freehold or long leasehold land previously owned by PCTs could end up being more of a liability than an asset.

Some buildings may be in a poor condition and need significant investment in order to ensure that they are fit for purpose. Some may be subject to restrictive covenants that limit their use to healthcare use, so that opportunities for disposal are limited. A large proportion of buildings may be occupied by various third parties, some of whom may not be signed up to proper leases. This would lead to a wide range of different landlord liabilities for any owner, with an increased likelihood of expensive disputes.

David Harrison, formerly of Partnerships UK and now also advising public bodies and social enterprises, highlights some further potential complications:

‘Social enterprises would need to raise the money to buy the assets. PCTs would not be able to simply “gift” them. This would lead to heated debate about commercial values, the need for real estate investment funding (with only short-term contracts as collateral apart from the building itself - which would make borrowing expensive) and a lot of transaction costs in terms of professional fees’.

Despite this, some social enterprises have, understandably, queried whether or not they are being treated equally. Siobhan Clarke at Your Healthcare comments: ‘We have security of tenure at the properties we occupy and this offers Your Healthcare the ability to pick and choose where to run services from and most - and even more, given time, will not be ‘buildings-based’. Having said that, there does seem to be something inherently unfair about the fact that NHS providers are being given the right to acquire estate but social enterprises are not’.

So how should social enterprises deal with premises issues when they do not own land?

At present, social enterprises in health are generally entering into short-term leases or sessional licence agreements with landowners. These are usually tied to the service contracts that they enter into, so that if the contract is terminated for any reason - or if it is varied so that a particular service is no longer required from a particular building - the relevant lease or licence terminates automatically. On some transactions, social enterprises have been able to negotiate very flexible arrangements that permit them to vacate individual buildings - or even parts of buildings - on relatively short notice, so as to ensure that they are not tied to ‘bricks and mortar’ beyond the short-term.

For services which are more likely to be subject to market testing and AQP more quickly and comprehensively, this must be a good thing for social enterprises.

The flexibility that a more mobile approach to premises brings also ensures that social enterprises are not left with any tenant responsibilities at premises that they do not need to use, and ultimately, that the business model drives decisions around the estate, and not the other way around.

Sam Hopkins is a partner in the real estate department at Capsticks.

LGCplus.com/SocialEnterprise

LGC’s social enterprise channel, providing the latest local government news, comment and analysis.

In association with Capsticks, specialist law firm for health and local government organisations.

Capsticks

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