The practice premises is often the most valuable asset of the practice. It can also be the biggest liability both in terms of capital expenditure and inherent liabilities. This article looks at ways in which you can limit your exposure to expensive repairs and dilapidations during the purchase process and avoid any unwanted surprises.
Dilapidations is a term generally used to describe the elements of disrepair to property. In more specific terms when looking at leasehold property, this term goes further to look at any breaches of the tenant covenants in the lease insofar as the condition of the property is concerned. This may include:
This will depend on whether the property you are buying is freehold or leasehold.
If your property is freehold, a structural survey will assist in determining whether there are any items of disrepair which need addressing or looking into further. You may agree any one or combination of the following with the seller(s):
If the property is leasehold, you will first need to understand and obtain advice upon the standard of repair you are being asked to undertake or inherit from the seller(s). This could be:
You can limit your exposure by considering any one or combination of the following:
This may be a viable option if you are taking a new lease – particularly if you are taking a new lease from the seller(s). However, where an existing lease is being assigned, this would require a re-negotiation of the lease with the landlord – who is unlikely to agree to water down the standard of repair – unless they are getting something back in return, for example, a longer lease term or an existing break is being waived.
It is worth bearing in mind that if you are entering into a new lease or if an existing lease is being assigned, the landlord will be entitled to carry out a schedule of dilapidations at the end of the lease. This is referred to as a ‘terminal schedule of dilapidations’. You will generally be responsible for the cost of preparing that schedule and for any items in it. The above considerations help to limit the cost of those terminal dilapidations and we would also suggest taking advice from a property lawyer experienced in advising on dilapidations liability to advise upon and negotiate its contents.
Irrespective of how the property is held or the standard of repair required, the starting point is to instruct your professional advisers to review the property position at an early stage so you can look to address and consider the best way forwards for you and your practice.
If you’re looking to purchase a dental practice in the UK, one important aspect to consider is whether the practice is registered with the Financial Conduct Authority (FCA). This article focuses on dental practice share purchases, i.e. where the target practice is operated through a limited company and that limited company has an FCA registration in place.
The FCA is the regulatory body that oversees financial services in the UK. Where a “firm” carries out any “regulated activity” then, unless it is exempt, it has to be registered with the FCA. In this context, “firm” covers dental practice businesses.
In respect of dental practices, we typically see regulated activity in terms of the practice providing certain forms of credit, including offering payment plans to patients.
Sometimes, a practice might be an appointed representative with the FCA – this is where, for example, a payment solutions/finance company (e.g. Chrysalis) offers financing options to patients at the practice and there are certain regulated activities that the practice can do on the finance company’s behalf. This could, for example, include introducing the patient to them, and passing on their financing options to patients.
If you are considering buying a dental practice, by way of share purchase, you should:
Here are some top tips to assist you on the legal aspects of buying a dental practice:
This is often something that is dealt with in heads of terms and it means that the seller(s) can’t enter into sale negotiations with third parties, whilst you are in discussions with them. It can be a helpful tool to protect your position.
If you pay a deposit at the outset, make sure that there are clear parameters as to when this is released to the seller(s). You
will no doubt want to make it clear that, in some circumstances, the deposit may need to be returned to you – for example, if you decide not to proceed because of something adverse that comes out of your due diligence review.
The structure of the transaction will dictate what CQC registrations will be required. It is important to get started early with the application process as CQC applications can take many weeks to process. You should bear in mind that if the transaction doesn’t progress as quickly as expected, then it might mean having to re-submit the application. There is a knack to submitting the registration at the right time – not too early, but not too late. Your solicitor should be able to guide you through that process.
Whilst lawyers will negotiate on your behalf, there are some matters that are purely commercial and are much more easily dealt with through direct communications between the parties. Maintaining a good relationship with the seller(s) will assist with this and can also help keep momentum on the transaction.
Your advisers will usually assist you with legal and financial due diligence, and you may also carry out your own operational due diligence. It is important to keep on top of the due diligence and to refresh it if there are any delays in the transaction. Taking the time to properly consider the practice, its liabilities, and any potential risks can save you money in the long run – and avoid any unpleasant surprises following the acquisition.
To ensure you are paying a fair price for the practice, you may wish to undertake an independent valuation. If you are obtaining third party funding for the purchase, a lender will require an independent valuation in any event.
A property survey (if buying freehold property) and/or a schedule of condition or schedule of dilapidations may be appropriate when purchasing a leasehold interest to highlight any items of disrepair, any dilapidation liability under the lease and how that can affect valuation of the property. Your advisors can assist in negotiating a satisfactory solution with the seller(s) to limit your liability.
Consider funding options at an early stage. Understand what the security package looks like – will a legal charge be required over the property? Will you be required to provide a personal guarantee?
Property can be purchased freehold or leasehold. Buying a leasehold property might be more complex but is less of a capital investment. If the property is leasehold, you will need to consider the length of the lease – can it be renewed? Is the term left of the lease acceptable to your funder? Can the lease be assigned/transferred to you without any restrictions? Does the landlord require a rent deposit or guarantor? Note that leasehold property could involve third party landlords which need to be engaged early in the process to avoid delays.
There are many pitfalls when buying a dental practice. Make sure you avoid them by seeking advice from experienced and specialist professionals – surveyor, accountant and lawyers. A professional team with sector specific knowledge is invaluable and will stand you in good stead when buying your practice.