John Grant of Goodman Grant Solicitors explains the difficulties that NHS orthodontists may encounter when the time comes to sell their practice…
Whilst there is no specific reason for it being thus, the majority of NHS orthodontists will have a Personal Dental Services (PDS) agreement rather than a General Dental Services (GDS) contract. Although this may mean they can attract a higher Unit of Orthodontic Activity (UOA) there are a number of consequences that must be considered – particularly if the principal is looking to sell.
The first is that PDS contracts are time-limited; at present, the longest contracts are being renewed for three years. While LATs are likely to grant this, there is nothing obliging them to do so. Indeed, if an LAT were to decline a renewal request, there would be nothing an orthodontist could do.
The second issue is that, unlike GDS contracts, PDS contracts cannot be transferred using the partnership route . Since 2006, NHS practices have been bought and sold by introducing a partner to the contract with the seller subsequently retiring – resulting in a smoothish transition from one principal to the next. As this is simply unavailable for PDS contracts, on the face of it they are unsalable.
In 2006, there was a change in the law that allowed dentists to incorporate their businesses. After years of uncertainty in 2013, NHS England introduced its incorporation policy – effectively making incorporating possible – if by no means guaranteed. For orthodontists, this created the opportunity for the sale of their contracts: by transferring the practice’s assets, including the NHS contract, to the limited company. Then, by selling the shares in the company the value of the practice could be realised.
Unfortunately, the process is far from simple. There are still many considerations can make incorporation very difficult, or the effects of incorporation simply unpalatable.
The most pertinent is the fact that an LAT requires a practitioner to demonstrate a benefit of incorporation to both the patients and/or the LAT itself. Initially, many of the benefits that practitioners were putting forward on incorporation applications were tenuous at best – often they simply declined to offer any at all! – but the LAT would grant the incorporation application regardless.
Nowadays, the LATs’ attitudes towards incorporations have changed. More and more often, they are requesting tangible benefits – and the focus tends to be on the patients. Typically, their requests manifests as a request for extended opening hours; a recent case saw an incorporation application denied because the practice refused to commit to more than an extra hour a week, showing how stringent the LAT can be in this regard.
However, while many orthodontists may not relish the thought of substantially extending their opening hours, they must bear in mind that their contracts, along with the goodwill value, can be worth hundreds of thousands of pounds and this may mean acceding to these requests is far more attractive than would otherwise be the case.
Of course, assuming the LAT does agree to the incorporation in principle, the problems for the contractor will not suddenly cease. At this stage, the LAT will produce a Deed of Novation – which operates to transfer the NHS contract to the limited company. Included in this document are two sections of which practitioners must be particularly aware.
The first is that the LAT will require a guarantee from the contractor that the contractor will personally guarantee the performance by the limited company of the NHS contract. This does not represent a problem whilst the contractor holds the shares in the limited company – it places them in no worse position than they were prior to incorporation. Complications arise, however, after the sale of shares, due to the way in which the deed is drafted unless amended the personal guarantee will continue even after the contractor has sold their shares. The principal may have retired, have no personal involvement in the running of the practice or any control over the volume of UOAs processed and yet still be personally liable if there is under performance. Obviously, this is unfair and has been the subject of High Court proceedings. It should be possible get the LAT to agree to amend the Deed of Novation so that NHS England will only require the guarantee to continue until the contractor has sold their shares, but no formal assurance is available.
Secondly, a Deed of Novation will include what is known as a change of control clause, which subjects any transfer of shares of 10% or more in the Company (which obviously will be the case on a sale) to the approval of the LAT. This essentially puts the decision as to whether the principal can sell in the LAT’s hands. Given the vagaries of the decision making process of NHS England this can be a very uncomfortable place to be! Thus far few LATs have objected to the transfer of shares – as long as the incoming principal is a registered dentist (and in many cases on the specialist register) – but if they were to refuse it would be extremely difficult to challenge that decision.
Those professionals with PDS contracts, such as orthodontists, must consider very carefully their exit strategies. It is crucial to seek the advice of trusted legal professionals to help guide you through the regulatory maze that stands between you and selling your contract.