Market rent

Update February 2017

NHS England is coming to the end of a process to confirm the funding needed by CCGs to cover increased costs resulting from the move to market rent.

Following our work to agree the correct figures, 75% of CCGs have received their funding from NHS England.  This funding is provided with the expectation that each CCG will pass it on to tenants, and with the direction that it should only be used to clear NHS Property Services costs.

Our local finance teams have been made aware of the funding allocations and are ready to support CCGs where they can. We will continue to work with the remaining 25% of CCGs to confirm the level of funding they require, a process we expect to be completed by mid-March.

Please contact your CCG team for more information. If you are a CCG and have not yet confirmed that the information we supplied is in line with your expectations, please contact england.PSmarketrents@nhs.net as soon as possible.

Background

In the last three years, our business has been through a period of sustained change, with the ultimate goal of building a portfolio of property that is fit for purpose, efficient and cost effective.

An important part of achieving this goal has been the introduction of market rent based charging on all of our freehold properties.

Charging you based on the market value of your property moves us away from the ‘cost recovery’ approach we had used previously, where the cost of running each building has been split between the occupants in proportion to the space they occupy

We expect the move to market rent will benefit both the NHS and our tenants by providing a clearer picture of the true costs of occupation. This in turn will lead to better decisions about cost efficiency and strategic planning.

We appreciate that many of our NHS customers will see their costs increase as a result of the move to market rent, however to ensure any financial impact is mitigated NHS England will be covering any increases in costs.

On 4 April 2016 Pat Mills, Commercial Director at the Department of Health issued a letter to the NHS to set out the background on the move to market rentals along with the reimbursement arrangements.

In their letter, they reiterated that the move to market rents was consistent with initiatives being introduced more widely across central government to improve utilisation and value for money in property occupancy.

It also detailed how the change in charging benefits the wider NHS, namely:

• It helps the NHS understand the true cost of occupation and reflect these transparently.
• It informs decisions about the best location for services and investment.
• It drives better and more efficient use of space.
• The rent is one of a set of actual costs applied transparently to each occupation, allowing invoices to be clearly itemised.
• Itemised invoicing provides clarity about costs for the use of space and services, enabling any inconsistencies to be identified.

The market-rent model applies the standard method of charging in the property industry. The rent paid by each customer depends on the value of the space they use and the terms they have agreed.

Each customer’s rent is determined by applying both:

• The area used by the customer calculated according to their net internal area (NIA) including their proportion of shared areas and applying the relevant valuation principles specific to the use of the building, as defined by the Royal Institution of Chartered Surveyors (RICS); and

• The market rental rate for that letting, taking account of either the values of properties in that location and use type or the bespoke nature of that building, as well as the terms that have been agreed.

How the market rent is applied for our occupiers depends on whether NHS Property Services has a leasehold or freehold/virtual freehold interest in the property:

• Freehold/virtual freehold: Each customer’s market rent will be assessed by an external valuer registered with the Royal Institution of Chartered Surveyors applying recognised professional standards.

• Leasehold: The level of rent payable will be based on our head lease rent. Our customers’ rents will be subject to the same review patterns as our head lease, providing certainty on rent levels between these review periods.

Customers who have formalised their occupations by way of a lease will find that the terms give them greater certainty on future costs.

Ongoing property costs

Commercial occupiers (ie those who are not occupying buildings to provide NHS commissioned services) are already charged on the basis of market rents.
For those customers who will move from cost recovery to market rent, total property costs will not necessarily be any higher than at present but may vary on a region/area basis.

The Department of Health has agreed with NHS England that it will meet any increase in property costs at a national level. The mechanism for compensating commissioners and providers of NHS services is the responsibility of NHS England and will be included in their budget guidelines.
Clarity brought by the new approach will allow customers to agree the appropriate level of funding or reimbursement with their commissioners.

Dilapidations and reinstatement

Dilapidation and reinstatement works reflect a tenant’s obligation to restore the premises to the standard of repair set out in their lease (and any licence for alterations) when returning their premises to the landlord. These are usually assessed towards the end of the lease term. The occupier must carry out the works specified or pay compensation instead of carrying out those works.

In all cases, the dilapidations costs will be agreed with each customer on a case-by-case basis, applying established market practice.

Rent

What each occupier pays for the space they use.

Capital investment

Capital investment on a tenant’s own space is normally funded by the tenant. In the past, former PCTs sometimes applied an alternative approach where they funded tenants’ improvements. NHS Property Services will continue to provide customers with the opportunity of funding tenants’ improvements, where the cost of such capital investment will be recovered through a charge in addition to the rent.

This charge will be captured in invoices under the ‘Rent’ category and labelled as ‘Depreciation’ in the backing documentation. The charge will be amortised over a period which will be the shorter of the useful life of the asset or the period until the expiry of the lease. In the event of a lease ending earlier than the lease expiry date, any remaining balance will be chargeable at the earlier date.

Service charge

A service charge arises in multi-occupied sites or buildings and is each occupier’s share of the costs incurred by the landlord in maintaining the common parts of the building and providing services that benefit all occupiers.

The service charge includes core landlord services – such as heating, lighting, cleaning, security and waste management – and the costs of building maintenance and repairs.

Our service charge also includes rates, utilities and insurance. These costs are apportioned without profit according to the net internal area attributable to each occupier.

We will include a management fee of 10% of the service charge to reflect our costs in arranging and managing the services provided to the building save for business rates, utilities and the Superior Landlord’s service charge, for which NHSPS’ management fee will be at 5%.

Facilities management services

The amount charged for FM services to each customer will be the all-inclusive cost of delivering the services to them.

Management charge for our leasehold properties

Where NHS Property Services holds a property by way of a lease, a management charge of 5% of the rent will be made. This reflects our additional costs and responsibilities in managing a leasehold property on behalf of our customers – such as dealing with our landlord.

VAT

A building can be ‘opted to tax’ by a person with an interest within it – ie by its owner or a person with a leasehold interest in it – in order to recover any VAT incurred on their own expenses. Our invoices will include VAT for applicable services or where the relevant building has been ‘opted to tax’.

Frequency of invoices

Invoices for rent and landlord service charge are issued quarterly in advance and are due to be paid within 15 days of the invoice date. These quarterly invoices are followed by a yearend reconciliation – an additional invoice or credit note – to take account of the actual cost of services provided.