This year has ended with a set of different concerns from those with which it started. While 2022 has seen the end of most COVID-19 restrictions and a return to pre-pandemic “business as usual”, both individuals and practices alike face threats from financial uncertainty and instability. The likelihood that these risk factors will last for some considerable time feels like the only safe bet.
In times of needing to carefully examine practice outgoings and financial commitments, undertaking an audit of legal concerns and risks is sensible. In the first part of this miniseries, we consider the practice property lease, as well as customer contract negotiations and termination.
Practice property – lease terms
If you are occupying a property under a lease, it may be worth trying to renegotiate the lease terms to try to cut costs where necessary.
You could negotiate a possible rent reduction or a rent-free period with your landlord. They might be inclined to agree if it means they can keep you as a tenant. However, there is no guarantee that your landlord will agree to this, and even if they did, they may request that you cover their legal costs in varying the lease.
It may not be cost-effective for you to front the landlord’s legal fees and your own if the rent has not been reduced by much. It is a good idea to undertake a cost–benefit analysis before any terms are entered into between you and the landlord.
Surveyors, valuers and estate agents are helpful if you are wishing to determine the open market rental value of a property. If you are paying too much rent for the current open market value then this may persuade the landlord to reduce the rent
It may be beneficial to consult a wide range of professionals before entering negotiations with a landlord. Surveyors, valuers and estate agents are helpful if you are wishing to determine the open market rental value of a property. If you are paying too much rent for the current open market value then this may persuade the landlord to reduce the rent. If you are paying too little rent when compared to the open market value, then it may be best not to bring this to the landlord’s attention yet.
Certain clauses in a lease add more value compared to others. For example, a lease that is within the protection of the 1954 Act is much more valuable than a lease that is excluded. If you are in the beginning stages of negotiations, then this is good to bear in mind as you may wish to assign your lease in the future, and this is a desirable clause for potential assignees.
It is always best to think about the bigger picture when considering renegotiating the terms of an existing lease or thinking of terms for a new lease. It may be beneficial to concede on less important clauses in order to be successful with the more valuable clauses.
Contract – renegotiating or leaving customer contracts?
Given the current economic climate and global markets as a whole, when it comes to commercial contracts and existing financial commitments at your practice, what can you do about cost-cutting and how quickly can you achieve change?
Contract variations
Most contracts will permit variation if agreed on by both parties in writing. This is useful as sometimes it might be necessary to vary a particularly onerous term in the contract which is causing the other party particular difficulties. This may be due to economic and market factors, thus impacting the core objective of the agreement.
By varying such provisions, it will allow the contract to continue and remain workable for both parties, rather than resorting to or looking to enforce any termination provisions under the contract. If there is an amicable solution between the parties, varying the contract to reflect this will help preserve the commercial relationship.
Pricing
Usually, a supplier will have a provision in their terms and conditions (T&Cs) that allows them to increase prices year-on-year in line with inflation. However, some T&Cs will also provide for general price increases in instances where the supplier’s costs have increased. These are particularly important for your practice to spot and to be aware of, especially in the current market with rising costs, inflation and raw materials.
Usually, a supplier will have a provision in their terms and conditions that allows them to increase prices year-on-year in line with inflation
It is also worth looking at what payment terms are included in the T&Cs and whether invoices can be settled later than usual, eg on a monthly or six-weekly basis, but being mindful of not breaching the payment terms of the contract.
Termination
Even with all the usual protections in place, unpredictable events can still occur which could impact prices in the supply chain. To best protect your practice in this situation, you may wish to rely on termination provisions on the basis that the contract is no longer commercially viable, if this is an option.
It may seem counter-intuitive, but practices should always have one eye on how to exit a contract with a supplier if the worst were to happen. Most supplier contracts will be for a specified fixed term, but what if you are not happy with the services or products and you are only halfway through a contract? It could be difficult to simply terminate the contract and walk away.
It may seem counter-intuitive, but practices should always have one eye on how to exit a contract with a supplier if the worst were to happen
Even if such a right exists in your favour, sometimes suppliers will have provisions that allow them to charge customers a termination fee for early termination, which is usually the amount of the outstanding fees to pay throughout the term of the contract.
Such costs can be devastating for any practice, particularly as you would have to find an alternative supplier and could end up paying two suppliers over a period of time for the same service. Termination provisions must always be reviewed, especially in line with the duration of the contract.
