The move from a cost recovery model to a model where charges are based on an assessment of the commercial/market value of the property, and;

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1 Steve Wilson Director of Financial Control NHS England Finance Directorate Quarry House Leeds LS2 7UE 22 nd January 2016 Gateway Reference Dear Colleagues Re: NHS Property Services Charging Policy 2016/17 Since they took on the ownership and running of the majority of the former PCT and SHA estate in 2013, NHS Property Services (NHS PS) have been working to establish an appropriate long term charging policy to enable them to regularise lease arrangements with all their tenants. Following an initial year in 2013/14 when the company charged on the basis of the historic allocations inherited from PCTs, charging by NHS PS has been undertaken on a cost recovery basis for both freehold and leasehold properties. The recovery of costs relating to the management of properties, including FM services and management overheads, has also been undertaken on a full cost basis. With the exception of some central costs relating to corporation tax, VAT and redundancies, the full cost of running the company and the services it provides has been recovered from the tenants, or in the case of any space that is unoccupied, the relevant commissioner for the property, either the local CCG or NHS England. NHS PS, working with their parent body, the Department of Health, have proposed a series of changes to the charging policy followed in 2014/15 and 2015/16 which will then underpin the formalisation of lease arrangements with all their tenants. The proposed policy for 2016/17 and onwards comprises two main elements. These are: (i) (ii) The move from a cost recovery model to a model where charges are based on an assessment of the commercial/market value of the property, and; A new approach to the charging of vacant space which better shares the risk and incentives between landlord and tenant. NHS PS have engaged with NHS England to discuss the changes to the policy and we are now in a position to write to CCGs outlining the key features of the policies and to appraise CCGs of the financial impact of the change in charging regime.

2 NHS England Key Principles In our work with NHS PS and the DH we established some key principles which needed to be agreed before the revised policies would be acceptable to ourselves. These are: i) There should be no net financial impact on the NHS from the change in charging policy. ii) Any net increase in costs to the NHS, including all commissioners and providers of NHS services should be matched by an increase in NHS England s Mandate funding. iii) Any net impact on admin resources should also be reflected in admin cost limits for NHS England and CCGs. iv) Any move needs to be preceded by a full analysis of proposed prices These principles have been reflected in the policies drawn up by NHS PS and our agreements with the DH regarding funding. We are therefore now in a position to write to individual CCGs setting out the impact of the proposed policies. 2016/17 Charging Policy The full details of the charging policy are being finalised but the main proposed changes are set out in the table below: Description 15/16 Policy 16/17 Policy Freehold Rent Full cost recovery Market rent Leasehold rent Actual rental charge Actual rental charge Freehold management Apportioned share of None (included in fee market rate) Leasehold management Apportioned share of 5% (of rent) fixed fee charge Service charges Actual cost recovered Actual cost recovered Landlord Service charge management fee Apportioned share of 10% (of landlord services) fixed charge FM Services Actual costs recovered FM Contracts established Void space Allocated to lead commissioner Vacant space policy applies (see below) The market rent to be charged for freehold properties owned by NHS PS has been assessed by independent chartered surveyors using appropriate industry standards. The impact of the changes in policy have been modelled on a building by building and tenant by tenant basis with the overall impact being a net increase in costs from 2015/16 to 2016/17 of 60,353k. This increase is across all tenants including CCGs, NHS England and a variety of providers within both secondary and primary care.

3 The increase is principally made up of a rise in the charge for freehold properties where the market rent is higher than the. This is partially offset by the reduction in charges as a result of moving to the industry standard 5% management fee on leaseholds rather than an apportionment of the. The impact is detailed in the table below: TOTAL No. of Properties 15/16 Budget Rental Charge Landlord Service Charge Mgmt Fee FM Charges 16/17 Mkt Rental % Freehold 1, , , ,489 9,940 42, ,479 69,209 25% Leasehold 1, , ,770 89,968 6,366 21, ,931-6,931-2% Licence 62 7,648 5,167 1, , % Other 9 2,500 2, , % PFI 26 94,188 77,119 12, ,997 92,913-1,275-1% Total 2, , , ,099 17,217 67, ,822 60,353 8% The impact also has an element of regional spread which is shown below: REGION No. of Properties 15/16 Budget Rental Charge Landlord Service Charge Mgmt Fee FM Charges 16/17 Mkt Rental % North , ,449 70,650 5,162 21, ,104 8,967 4% Midlands & East , ,427 63,578 4,793 16, ,269 10,566 6% London , ,901 35,128 2,551 17, ,546 23,295 17% South , ,664 58,571 4,567 10, ,439 17,731 11% NHS PS 4 7,670 4,624 2, , % Total 2, , , ,099 17,217 67, ,822 60,353 8% The split across different categories of tenant is described below: Tenant London Midlands & East North Region South Region NHS Ps Hq Grand Total CCG 7,660,090 2,335,452 2,591,802 4,169,389 (91,224) 16,665,509 Council 51, ,879 93, , ,127 CSU (119,663) 5, , ,116 (55,657) 366,171 FT 2,088,309 (286,855) 497,681 1,032,852 3,331,987 GP 2,677,510 1,884,894 1,797,363 1,001,313 7,361,081 NHS PS 203,107 (11,469) (100,553) 70,836 (10,934) 150,987 NHSE (74,994) 109, ,928 78,433 (31,313) 213,525 Other 1,949,667 2,194,114 1,562,168 3,782,573 (14,840) 9,473,682 Trust 8,859,150 4,190,379 2,144,026 7,002,649 (2,462) 22,193,743 Grand Total 23,294,827 10,566,467 8,967,016 17,730,930 (206,430) 60,352,811 Vacant Space Policy Alongside the proposed market charging policy NHS PS have also proposed a new approach to the charges levied for vacant space. This approach moves the risk of vacant space from sitting solely with commissioners to being shared between commissioners and NHS PS and seeks to align the incentives for resolving issues of vacant space with those best able to take action.

4 Under the proposed policy, costs for realisable vacant space would be charged to the relevant commissioner but this charge will come in the form of a fixed vacating fee, levied at the point of exit by the tenant and calculated on the basis of 12 months costs (or the remaining length of the lease in the case of leasehold properties where there is a break within 12 months) in the case of NHS PS leasehold premises and 6 months in the case of NHS PS freeholds. Following the payment of the vacating charge all costs will revert to NHS PS. Should they dispose of the property or sublet a lease within the 6-12 months they will gain a financial benefit but if it takes longer than one year the cost will sit with them indefinitely. We have agreed with NHS PS that where properties have been vacant for some time prior to April 2016 when the proposed void policy comes into effect, on a case by case basis, the company will consider a the potential to reduce the 12 month vacating fee to 9 months. To facilitate this policy it is essential that you have a clear shared understanding of vacant and realisable space between yourselves and local NHS PS representatives. Funds Flows As part of the agreement, NHS England have ensured that the full costs of the change in charging policy are funded as an additional allocation to the NHS England mandate. Whilst the analysis above shows the direct impact on CCG and NHS England tenants is only 16.9m, the costs borne by providers of NHS commissioned services are ultimately funded within the overall NHS England allocation. We have worked with colleagues in the clinical commissioners finance working group to consider the best way to manage the additional allocation in relation to the addition costs faced by both commissioners and providers. Whilst the fundamental principle that CCGs receive funding based on a funding formula and a distance from target policy and providers receive funding based on a local contract using local or national pricing regimes must be respected, there are significant gains and losses that result from the change in charging regime and these are, in some cases, material sums. We are also aware that the data used by NHS PS to assess the impact on tenants and commissioners of the new charging regime is, in a number of cases, still disputed by the bill payers and any change in current costs may be misstated due to this fact. For this reason we have held the additional funding centrally for 2016/17, while we continue to validate the data produced by NHS PS. We will then allocate funding in 2016/17 on a non-recurrent basis, once the information has been validated by CCGs, to ensure all cost changes are mitigated in 2016/17. From 2017/18 the additional funding has been added to CCG allocations and is included in the 2017/18 to 2020/21 allocations published earlier this month. The impact on individual organisation s will be confirmed when we have finalised the validation of NHS PS data.

5 Provider Costs We expect CCGs to work with their providers to ensure that the impact of the charging regime is neutral in 2016/17 as a transition year. Arrangements in relation to provider costs for 2017/8 and beyond will be considered in conjunction with NHS Improvement and we will write to you in due course concerning these. As the table above highlights there will also be an increase in costs for some GP tenants. The funding for this is currently linked to NHS England commissioners however for those CCGs taking delegated primary care budgets in 2016/17 this funding will need to be transferred to CCG budgets as appropriate. Next Steps Once the details of the proposed polices are finalised NHS PS will be publishing them in final form. In the meantime we will forward each CCG an analysis of the impact for your CCG as assessed by NHS PS, which includes the impact on your providers. We understand there could be issues with the quality of this data and the templates allow CCGs to add comments and highlight potential amendments. Ultimately these issues should be raised with your NHS PS contacts but to support our discussions with them I would be grateful if you could review the data and return to england.finance@nhs.net by close of play on Friday 26 th February Yours sincerely Steve Wilson Director of Financial Control NHS England