Don’t get burnt
by dilapidations

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.

What are dilapidations?

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:

  • Obligation to first put the property into repair – to the extent it isn’t at the date of the lease. The standard of repair in a lease is often ‘to put the property in good and substantial repair’. This is a high standard and can be expensive – particularly if you are liable to repair the structure.
  • Obligation to reinstate any works carried out by the tenant during the term of the lease. Note this could include any works carried out by the seller(s) and/or their predecessors and could be expensive if looking at reinstating lifts, stairways and mezzanine floors for example.
  • Obligation to lay new flooring at the end of the lease. This is a common requirement in modern commercial leases and can be an unnecessary expense.
  • Obligation to comply with statutory requirements. This could include works required to the property to comply with legislation (for example relating to accessibility or sustainability) or could relate to regulatory obligations including holding a fire risk assessment, asbestos report and management plan and dealing with any remedial actions in those reports.

How to limit your exposure:

This will depend on whether the property you are buying is freehold or leasehold.

Freehold property

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):

  1. The seller(s) to carry out the remedial and/or reinstatement works prior to completion of the purchase.
  2. The seller(s) agree to carry out the remedial works to your satisfaction during an agreed period post completion. This would avoid any delays in completing the transaction but we would advise holding back a proportion of the sale proceeds (referred to as a ‘retention’) until those works have been completed and you are satisfied with them.
  3. You agree with the seller(s) to reduce the purchase price by the value of the repairs or the reduction in valuation of the property where such works are required.

Leasehold property

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:

  • FRI – Full Repairing and Insuring lease. This requires you as tenant under the lease, to be responsible for repair of the whole of the property (whether a direct obligation in the lease or via a service charge).
  • IRI – Internal Repair and Insuring lease. This requires you to be responsible for the internal non-structural repair of the property only. Be mindful that this type of lease may result in a higher rent due to the limited repair obligation.

You can limit your exposure by considering any one or combination of the following:

  • Requesting concessions in the lease which limits your repair obligation. This could include:
    • A schedule of condition from the landlord. This would mean that you would only be liable to hand the property back to the landlord in ‘no worse condition’ than the property was in at the start of the lease.
    • You could also carve out any ‘big ticket’ items such as the roof – particularly if it is not in good condition to start with.
    • You could request a cap on any service charge.
    • With a newly built property, you could request a carve out of inherent liabilities under the lease and/or obtain warranties from the relevant contractors.

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.

  • Obtain a schedule of dilapidations from a local surveyor. You will need to provide the surveyor with a copy of the lease which is being assigned, together with any ancillary documents such as licence for alterations. The surveyor will determine the existing dilapidations liability under the lease – taking into consideration the standard of repair required by the lease, any reinstatement obligations and any breaches of the tenant covenants in the lease. You then have the same options as with freehold property in terms of negotiating a solution with the seller(s), outlined above numbered 1-3. Bear in mind that a schedule of dilapidations is not conclusive but an aid for negotiations with the seller(s).
  • Agree with the landlord to waive any obligations to reinstate works carried out by the tenant (i.e. seller(s) and any predecessor during the term of the lease). Reinstatement obligations are often overlooked and can prove an unwanted surprise at the end of the lease if not addressed sooner.

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.

Considering FCA registration when purchasing a
dental 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.

What is FCA Registration?

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.

Considerations

If you are considering buying a dental practice, by way of share purchase, you should:

  1. Check the registration status of the practice. It is important to check whether the practice is currently registered with the FCA and, if so, if it is an authorised firm or an appointed representative. This can be done by conducting a search on the FCA’s online register. You should also check the details of the registration to ensure that it covers the financial services provided by the practice.
  2. Check the obligations and liabilities. When you take control of a practice that is already registered with the FCA, you will also take on any obligations and liabilities associated with that registration. This may include ensuring that the practice continues to comply with FCA rules and regulations, as well as any fines or penalties that may have been imposed on the practice. Therefore, it is important to fully understand the implications of taking on this responsibility before proceeding with the purchase.
  3. Obtain the requisite authority for your proposed takeover of the practice. In the context of a share purchase, this requires you to submit a change of control application to the FCA – this is because the ownership (and therefore control) of the company will be changing on completion – and the FCA needs to carry out their requisite checks on the buyer. As a result, you will need to submit one of two applications:
    • A change of control application – this is known as a Section 178 Notice. It is important that the application is submitted in a timely manner in advance of completion to avoid any potential issues. It is a criminal offence to proceed with acquiring control in an authorised firm, without FCA approval of the transaction. The FCA has up to 60 working days to assess a change of control case (once it has received a complete application). This therefore needs early action to avoid any delays in the transaction.
    • A cancellation of registration application – if you don’t intend to continue to offer finance to patients, or other registrable services, following your purchase of the practice, and there are no ongoing registrable services, then you may decide to cancel the FCA registration. Generally, the FCA aims to process cancellation applications within 3 to 6 months of receipt. It may therefore, not be the faster option.
  4. Seek professional advice. Given the complexity of the FCA regulations, it is recommended that you seek professional advice in the application process. This can avoid delays resulting from submitting an incomplete application. It can also assist in making the process run more smoothly.

Top tips when
buying a dental practice

Here are some top tips to assist you on the legal aspects of buying a dental practice:

Agree exclusivity with the seller(s)

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.

Agree parameters for deposit

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.

Start the CQC registration process early

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.

Maintain a good relationship with the seller(s)

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.

Carry out thorough due diligence

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.
Valuation

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.

Independent survey

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.

Funding

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?

Understand the property position

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.

Instruct an experienced professional team

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.