Dental Transactions…What could possibly go wrong?
When it comes to buying or selling a dental practice it’s vital that you have dental specialist accountants and solicitors on hand to ensure you avoid some of the common pitfalls that can befall buyers and sellers in a transaction. Here we set out our top 8 things to look out for.
- Selling a company and the NHS contract isn’t in the name of the company
This is very common because NHS England doesn’t have to consent to issuing the NHS contract in the company’s name and dentists often wish to avoid the risk of NHS England putting the NHS contract out to tender and the hassle of having to obtain their consent.
Consequently the NHS contract remains in the name of the seller (not the Company). From a deal perspective this can result in delays and increased legal fees for the seller. This is because in order to transfer the NHS contract to the buyer the partnership route will need to be used. This involves the contract holder entering into partnership with the buyer (this has to be an individual so if the buyer is a company, one of its directors would have to take the NHS contract into his or her personal name). In order to follow the partnership route you have to firstly, apply to the CQC to register the partnership as a provider, which can take approx. 12 weeks and secondly, once the CQC has approved the partnership registration, you have to serve a 28 day notice on NHS England in order to convert the NHS contract into a partnership contract.
This can also result in extra work on the buyer’s side. If the buyer is obtaining bank finance and is using a company to buy, the bank will need to accept that the NHS contract isn’t going to be held by the company which is borrowing the money. The bank may require that a subcontract or management agreement is put in place to make sure that the income moves to the company.
If the NHS contract was in the name of the company which is being sold at the outset then the partnership route wouldn’t need to be used as the contractor would remain as the company and the bank would take normal security over that company.
- The lease/freehold property is in the wrong name
We have had instances where a previous partner is still one of the registered proprietors of a freehold property at the Land Registry or a named tenant under the lease.
If a freehold property, in order to remove them you will need them to sign a transfer document to transfer title to you. This can cause problems if you are no longer in contact with the previous partner or if they have moved abroad.
In relation to the lease, the same applies in that they would have to sign a transfer document to transfer the leasehold title. An added complication is that often you have to obtain the consent from the landlord before you can transfer a lease. This can be time consuming and you could also have to cover the landlord’s solicitors’ fees.
On a share sale, a buyer (and any funding bank) will want the property interest to be held by the company. Therefore, in addition to the share transaction, the transfer of the lease or freehold title to the company will also need to be dealt with which will increase costs (and timescale if the lease transfer needs landlords consent).
- The NHS contract contains a change of control clause
NHS England has been known to include a change of control clause into the NHS contract as a pre-condition to its consent to an incorporation. A change of control clause provides that if ownership of the company changes (i.e. shares are sold) then the consent of NHS England is needed before the shares can be transferred. If this consent isn’t obtained then it is a breach of the terms of the NHS contract. These clauses are troublesome and time consuming because a buyer will want this consent to be obtained before proceeding.
- Lease contains a restriction on charging
Most buyers obtain bank finance to buy a dental practice and most banks take a charge over the practice property as security for the finance. This issue arises where a property is leasehold and the lease either contains a complete prohibition on charging or has a provision which says that the landlord has to consent to the charge.
In order to obtain landlord’s consent your solicitor will have to approach the landlord, who will then most likely appoint their own lawyer to advise them on the consequences of allowing a charge. The seller may have to cover the landlord’s solicitor’s costs.
If there is a complete prohibition on charging then the lease will need to be varied to allow charging, this needs the landlord’s consent and we have found in a few instances that the landlord asks for a payment in order to provide their consent or requires an increase in the rent level as a pre-condition to its consent.
- Personal guarantee
In this scenario, on incorporation the dental practitioners entered into a novation agreement, which is an agreement which says that the NHS contract will be issued to the limited company on the same terms as the previous NHS contract with the sole practitioner. It says that the limited company takes on responsibility for liabilities under the NHS contract, historic and future. As part of this novation the dental practitioners were required to sign a personal guarantee of the company’s obligations under the NHS contract. This guarantee is unlimited in time.
Understandably, on selling the company the sellers want to release this guarantee otherwise they will be liable personally under the NHS contract when the buyer owns the company and when performance of that contact is entirely outside of their control.
The seller’s solicitors will therefore have to approach NHS England and ask it to release them from this guarantee. NHS England does not have to consent and it may ask for the new directors to provide a guarantee in place of the current guarantors.
- Defective Planning permission
On reviewing the property information it became clear that the planning permission allowing use of the property as a dental practice was time limited and had expired 8 years previously. This wasn’t acceptable to the buyer or to their funding bank and indemnity insurance was not available.
The seller therefore had to apply for an extension to this planning permission, which was granted but it delayed the transaction by 3 months.
- Regular underperformance of UDA target under the NHS contract
Once a breach notice has been served the NHS may ask for a reduction in the contract value if the target is subsequently not met at any time throughout the duration of the NHS contract. Often the NHS deals with underperformance by way of clawback but if breaches are persistent it may seek a reduction in the UDA target and therefore contract value.
In this instance a buyer will most likely want the seller to give an indemnity, which is a promise to reimburse the buyer £1 for £1 for any loss for any breach of the NHS contract which occurred prior to completion, technically, if the NHS subsequently reduces the contract value for underperformance due to the fact that there have been previous breach notices then the buyer could seek reimbursement from the seller for the amount of the reduction.
- Practice does not have the necessary CQC registration
Quite regularly we come across instances where a company is being sold but the CQC registration is still in the name of the dental practitioner and not the company. Less common are instances where a practice is not registered with the CQC at all! The CQC can impose financial penalties for failing to register and the need to apply or re-apply to the CQC is likely to cause delay to any transaction timetable.
It is sensible to ask your solicitor to check the terms of the main documents relating to your dental practice at the beginning of the transaction to identify and formulate a plan of action for dealing with any of the above issues.
As first published in The Probe.