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.

What is the FCA?

The Financial Conduct Authority (FCA) is the regulatory body overseeing all financial services in the UK. Any business which carries out ‘regulated activity’ must, unless exempt, be registered with the FCA. In this article, we will look at the key considerations around FCA registration when looking to purchase a dental practice. We will focus specifically on practice share purchases, i.e. where the practice in question is operated through a limited company with an existing FCA registration, and the key considerations in this scenario.

FCA principals and authorised representatives

To legally engage with regulated financial activities, firms must be either directly authorised by the FCA or registered with them as an appointed representative. Typical regulated financial activity by a dental practice would include patient credit/finance systems, such as a payment plan for their ongoing dental treatments. Commonly, the practice acts as an appointed FCA representative of another authorised firm, for example a payment solution company/financial services firm (i.e. Chrysalis), who offer financing options to the practice’s patients. The finance company, known as ‘the principal’, manages the accounts and transactions, whilst the practice carries out certain regulated activities on its behalf, such as introducing patients and providing their financing options.

What to think about when buying a dental practice

If you are considering buying a dental practice through a shared purchase, there are certain considerations you should take into account when doing your due diligence:

1. Firstly, ensure you check the existing registration status of the practice you are looking to buy. Not only is it important to know whether it is registered, but also in what capacity; is it an authorised firm or an appointed representative of another company? You can check the status on the FCA’s online register, which includes the details of any financial services provided by the practice.
2. When taking control of a practice with existing FCA registration, you will inherit any obligations and liabilities associated with that registration. These could include ensuring continued compliance with FCA rules and regulations, and dealing with any potential fines or penalties the practice has received. It is essential to have a solid understanding of what these responsibilities entail and be prepared to take them on before completing the purchase.
3. When taking over a dental practice via a shared purchase, you must ensure you obtain the required authority. As the ownership (and therefore the control) of the company will change upon completion of the sale, you must submit an application to the FCA, to enable them to perform their necessary checks on the buyer. There are two choices of application, depending on your intentions for future regulated activity:

• • If you intend to continue offering financing options to the practice’s patients, you must submit a change of control application, known as a Section 178 Notice. It is a criminal offence to acquire control of an authorised firm without FCA approval. The FCA has up to 60 working days upon receiving the completed application to carry out their assessments, so it’s important to submit as early as possible to avoid any potential delays to the purchase.
  • If you decide not to offer finance options or any other registrable services to patients after purchasing the practice, it is recommended to submit a cancellation of registration application. The FCA aims to process cancellation applications within 3 to 6 months of receiving them, so this process is much longer.

4. FCA regulations, and the applications themselves, are extremely complex. We recommend seeking professional legal advice and guidance during the application process to avoid potential delays to your purchase caused by submitting a potentially incomplete or incorrect application. Our dedicated team of corporate solicitors for dentists can assist you in buying a dental practice and submitting your FCA application, making the process run as smoothly as possible.

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.