Keep it Legal
A Declaration of Trust is a useful tool for independent practitioners to protect valuable property investments and exposure to unforeseen liabilities.
Lisa Davison explains how they are especially important now with pressures on the healthcare sector sparking more professional disputes.
With the uncertain economic climate and pressures faced by healthcare professionals, it is more important than ever for practitioners to protect individual property investments
And doctors should ensure that their existing structure is robust enough to sustain long-term demands on private practices.
What is a Declaration of Trust?
A Declaration of Trust is a legally binding agreement which sets out the arrangements governing any jointly owned or leased premises.
Each owner’s share in the premises;
How income and expenses of the premises are shared;
The procedure and timetable for purchasing a retired or deceased partner’s share of the premises;
The basis of determining the value of the premises;
What happens if there is negative equity in the premises;
Property owners’ rights and obligations in respect of the premises pre- and post-retirement, including loans.
When Is a Declaration of Trust required?
Private practitioners will usually need a base in which to provide their services, whether this be a room in a private clinic as an individual or standalone purpose-built premises for the practice.
Such occupation may be documented by way of:
Licence – if occupation is shared with other users or access times are limited;
Lease – which may be of whole or part of a building;
Freehold or long leasehold investment – where premises are purchased often with other partners and often with bank or other third party funding.
However property is held, there may be significant investments and/or liabilities involved – whether this be rent or licence fee payable under a lease or licence arrangement or mortgage payments payable on investment property.
To share or limit those liabilities, practitioners often join together to pool resources and cost.
A Declaration of Trust should be considered in any property arrangement where more than one practitioner or property owner is involved.
Co-ownership of property creates a trust in land and unless otherwise documented, each co-owner has an equal beneficial share in the premises.
Rebutting this presumption is therefore particularly important when individual partners’ investments in the premises are different.
Practitioners generally document and regulate their business with a formal partnership or limited liability partnership (LLP) agreement.
However, it is best practice to also enter into a separate Declaration of Trust between the property owners.
This is because when new individuals join the practice, there is a risk that the change is not dealt with correctly, which could potentially create an agreement at will.
When an agreement at will is created, the provisions of any formal partnership or LLP agreement no longer applies and any provisions within that agreement protecting the valuable property interests are therefore no longer enforceable.
Under an agreement at will, all partners of the practice have the prospect of claiming a share, even if they have not paid for it and that includes a share in the practice.
A separate Declaration of Trust survives a change of practitioners, ensuring that the intentions relating to the premises are not lost, which ultimately protects the investment of the property owners.
Declaration of Trust and lease liabilities
As mentioned above, a Declaration of Trust may also be applicable to leasehold premises. Like freehold property, a lease may only have a maximum of four names on the legal title.
There may, however, be more than four partners in the practice or four property owners.
Technically speaking, those individuals named on the lease are those individuals on the hook for the liabilities under the lease.
Liabilities are often expressed to be ‘joint and several’, meaning each individual named on the lease is potentially exposed to the entire liabilities due under the lease – this could include all rental payments, any service charge payments and dilapidations.
This clearly would not be the intention of the individual partners and is cause for concern for any partner, not least a partner who has since retired and left the practice.
This can be addressed by all partners entering into a separate Declaration of Trust, which declares not only that all partners have an equal right to occupy the premises but also makes it clear that the obligations arising under the lease are to be shared by all the partners – whether equal or not –not just those whose names appear on the face of it.
Upon retirement of a partner, there is a risk that a retiring partner could remain liable to the landlord under the lease; for example, under an authorised guarantee agreement (AGA). An AGA is essentially a form of guarantee which may be required from the landlord on an assignment of the Lease.
As an extra layer of protection, the Declaration of Trust should further state that a retiring partner should be fully indemnified by the ongoing partners of the practice – as they are the parties with control of the funds and day-to-day management of the practice.
With the pressures facing professional partnerships in the healthcare sector, we have seen a dramatic increase in the number of professional disputes.
A well thought out and comprehensive Declaration of Trust not only is vital to protect individual investments, but is also a tool to minimise the risk of disputes going forwards.
Used correctly, a Declaration of Trust provides the added benefits of allowing flexible funding options through unequal or third- party investments, enabling flexibility in terms of property ownership outside of the practice and provides a clear distinction of liabilities as part of succession planning and retirement of partners.
Lisa Davison (right) is real estate partner at law company Hempsons
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