Security of Tenure

When planning the sale of your medical practice it is worth considering where most of your financial value is tied up in your business. In order to obtain a good sales price your practice must be able to demonstrate that it has strong and enduring value to a prospective buyer, long after you are gone.

So, where does the value lie in your medical practice?

• A stable group of doctors on your staff
• Strong and reliable cashflow
• Goodwill
  • The strength of your patient base
  • Your reputation in the community
• A history of profitability
• Security of tenure

Whilst we have covered most of these items in previous articles in this series, Security of Tenure can be often overlooked by practice principals, but it can be one of the most important assets of your business.

What is Security of tenure?

Security of tenure represents the physical stability of your practice premises. A large proportion of your goodwill is tied up in your patient loyalty which in turn is largely dependent on your reputation in the local community and the fact that patients know where you are located and how to get to you.

Being forced to relocate your medical practice at the end of a lease can not only jeopardise your patient base but also cost you hundreds of thousands of dollars to set up your new premises.

On the flip side of this, your goodwill can actually be enhanced if you can secure a new premises which is more prominent, more convenient, offers more space and has greater growth potential. Of course, if you are contemplating a sale, this is best left to the new owners.

Greenfield sites will require significant security of tenure to justify the cost of establishing a new medical practice from scratch. Now days the costs involved in the fit-out of a new premises can range from $1,700 – $2,500 per SQM, depending on the quality of fit out space being occupied.

How do you obtain Security of Tenure?

The best way of obtaining security of tenure is to purchase your practice premises, unencumbered by any potential council rezoning requirements or caveats. Ownership of the premises will not only give you security but also an appreciating asset.

Failing that, the best security of tenure you can achieve would be a long lease, followed by further options to renew (i.e. 5+5+5 years). Before putting your surgery up for sale it is worth trying to negotiate further renewal options with your landlord to give potential buyers a better sense of security going forward.

The pitfalls of Security of Tenure

Having security of tenure over your premises via a long lease can also have its pitfalls. Unanticipated influences in the form of new competition or Government intervention can have a significant negative impact on your business.

Local competition can come in the form of the creation of a new medical centre or major expansion of existing ones. You can suddenly find yourself trapped in a small, ageing medical practice, without the infrastructure or finances to expand to meet the growing competition. A shiny new medical practice across town can also be a very tempting proposition for the doctors on your staff, who may be enticed to move. Before you know it, your doctors and your patients can be poached by your competitors, leaving your practice a shadow of its former self.

Government intervention can come at the local, state or a federal level. Some examples of intervention at the local level would be the loss of your premises to land resumption or road widening. Rezoning or nearby property development approvals can also impact your surgery, both positively and negatively. At the state and national levels, policy changes in relation to public infrastructure, major industry, mining and trade can cause major population shifts which could significantly impact your local community. With the greening of the Australian economy major mining and industrial communities could be considerably affected in the future. Covid 19 and the rezoning of Distribution Priority Areas are more good examples of how government actions can cause unanticipated impacts on your medical practice.

Whilst some of these issues may not be resolved by merely relocating your surgery down the road, they are important considerations if you are about to purchase a practice, sign a new lease or develop a greenfield site.

Lease Termination

There are occasions when your lease may be terminated due to circumstances beyond your control. Examples may be redevelopment of your premises by the landlord or resumption of the land on which the practice is located, by government. Some leases have a demolition clause allowing landlords to terminate the lease due to property developments or other significant changes that the landlord may wish to make to the property. It is important when negotiating your lease, to include compensation in any demolition clause to partially or fully compensate your business for the costs involved in having to relocate your medical practice. This can include loss of revenue, refurbishment costs, goodwill etc. Likewise, it is important to press the government for fair compensation in the event that they resume the land on which your practice stands.

Negotiating a lease

Negotiating your lease can be one of the defining moments in the life of your medical practice. It can set you up for many years of security or uncertainty, depending on the lease agreement you enter into. Needless to say, you will need a commercial lawyer to assist you in reviewing the lease before anything is signed.

So, what are the important considerations before signing a lease?

• Do the premises provide enough space for future expansion?
• Who is the landlord and what is their reputation?
• Does the landlord own other properties in the area?
• Are they reasonable to deal with?
• Do the terms and conditions of the lease agreement represent fair market value?
• What outgoings will you be responsible for?
• How will annual rental increases be calculated. i.e. CPI or higher?
• Is the property under any orders such as heritage listing etc?
• What additions, changes or renovations are permissible?
• Does the property have local Council approval to operate a medical practice on the premises?
• If not are you able to obtain it?

In summary

As we have discussed above, security of tenure is not only critical to the long-term health of your medical practice but can add considerable value when it comes time to sell. Prospective buyers will pay close attention to your security of tenure when making their deliberations about their offer price for your practice. If you are contemplating the sale of your practice it pays to take the time to review the strengths and weaknesses in your security of tenure and talk to your landlord to secure the most favorable long-term lease conditions as possible.

For more specific questions or advice about your surgery’s security of tenure please don’t hesitate to contact me directly on 0416132366

Chris Babich