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Tuesday 27 September 2016
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What is the difference between notional and cost rent, and how are these set?

Q: What is the difference between notional and cost rent, and how are these set?

A: The rules and procedures relating to the reimbursement of rent for medical premises are contained within the General Medical Services (GMS) Premises Costs Directions 2004, known more simply as 'The Directions'.(1)

The purpose is stated to be "to reimburse practitioners the rent and rates of the practice accommodation by reference to what each practitioner pays or is deemed to pay".(1) Essentially, under The Directions, the occupying GPs receive a rent for the accommodation provided they are undertaking NHS services through a GMS contract.

There are two main forms of reimbursement, namely current market rent (CMR)/notional rent and cost rent. The former is a rental assessment of the value of the premises, with the latter being, as the name suggests, rent based on the cost incurred in acquiring a site and developing the premises.

CMR is applicable where a practice rents space from a third party under a lease. Notional rent applies where the premises are owner occupied. In this case, the rent is assessed based on notional lease terms, which assume a 15-year term and tenant internal repairing obligations with the landlord responsible for external and structural repairs together with insurance. Where the property is leased, reimbursement will be the lower of the contracted lease rent or CMR. While reimbursable rent is reviewed on a three-year cycle, this does not always coincide with the review date on a 
third-party lease.

The level of rent is generally set by the adviser to the primary care trust (PCT), which will typically be the district valuer (DV), but can also be an independent surveyor acting for them. Regard will be given to comparables of both new and older premises, with adjustments made for size, facilities, location, age, etc. It is applied to the net internal area, which will exclude structural walls, lobbies, lifts and stairwells, together with staff WCs and, typically for a well-designed medical centre, would be circa 90% of the gross internal area. Rent will also be applied to parking spaces and VAT will be in addition where this is payable to a landlord under a lease.

Historically there has been a pattern of rents increasing at perhaps 3-5% per annum but the rate of growth has been impacted by the recession. DVs are seeking to argue low increases for current reviews and, where there is open market evidence to the contrary, landlords of leased premises can now refer rental disputes to independent experts or the NHS Litigation Authority to seek to ensure the rent is agreed at a fair and reasonable level.

The second form of reimbursement is a cost rent, which is effectively an amortisation of the actual cost of the land acquisition and development over a period of years. However, very few, if any, schemes have been assessed on this basis over the last 10 years. Cost rent was generally used to enable schemes to be developed where there was considered to be a particular need and where otherwise it would have been uneconomic. This may be because of exceptional site conditions, abnormal development costs, or being in a remote or deprived area with low rents.

Cost rent tends to be above notional rent and is not subject to review, but there is a requirement on the practice to convert to notional rent once the mortgage is paid off. Furthermore, the practice can also apply to convert to notional should the notional rent exceed the cost rent.

In rare occasions, DVs are agreeing to rent reimbursement on new schemes over and above notional rent where there are exceptional circumstances and where this can be supported under 'value for money' criteria. However, these do not tend to be termed cost rents but are effectively linked to the project cost and are sometimes referred to as 'appraisal led'.

Under both notional and cost rent, reimbursement is only applicable where the property is deemed adequate under a list of criteria that relates to suitability for its use, size of rooms, accessibility for the disabled, etc. Furthermore, it must represent value for money approved by the DV. Where areas of a building are not in use by the practice for the purposes of their contract, these will generally be excluded from reimbursement. This may be rooms sub-let exclusively to, say, a dentist or where additional floor space has been developed to meet future expansion needs but is not yet required by the practice.

The important message is that the assessment of CMR or notional rent can be complex. In order to ensure reimbursement levels are maximised, it is essential to take appropriate expert advice.


Reference
1. Department of Health. GMS Premises Costs Directions 2004. London: DH; 2004. Available from: http://www.dh.gov.uk/en/Publicationsandstatistics/Publications/Publicati...