GPs stand firm on pathology rent threats

5 minute read

GP clinics are refusing to yield to demands from pathology companies for temporary rent reductions of up to 50% amid dramatic revenue falls sparked by the COVID-19 crisis

GP clinics are refusing to yield to demands from pathology companies for temporary rent reductions of up to 50% amid dramatic revenue falls sparked by the COVID-19 crisis.

Practice managers and owners interviewed by The Medical Republic said the negotiations were proving tough because some pathology providers were not being transparent about how much they were hurting financially.

When GP landlords initially received a letter or phone call from their pathology lab requesting rent relief, their first response was to ask for more information about how much revenue the pathology business had lost due to the pandemic.

But some pathology providers were not forthcoming with this information, practice managers said.

This made it difficult for GP landlords to know whether a 50% rent cut was necessary for the survival of the pathology company, or whether the pathology tenants were being opportunistic or making ambit claims as a negotiating tactic.Some practice managers said they’d offered to drop rents by about 20%, or had proposed other temporary financial arrangements to ease cash flow – but pathology companies were often not meeting them halfway.

“While they say they’re negotiating, they are not really negotiating – they reject a lot of things out of hand,” said one GP who preferred to remain anonymous because of the sensitivity of the negotiations.

In a few instances, pathology providers were simply paying half of their due rent without first reaching an agreement with the GP landlord.

The Medical Republic has been told of pathology labs playing hardball in rent negotiations by threatening to break their leases if the GP clinic did not agree to forgo rent – something many pathology clinics are legally entitled to do because they have premature termination clauses in their rental contracts.

If a pathology company did break its lease using this clause, this would effectively reduce to zero the rent that a GP landlord could receive from pathology for the next six months due to a government ban on new pathology lab leases being established where the previous lab closed.

However, business experts are urging GP practice owners not to back down in their rent negotiations despite large pathology companies seemingly having more bargaining power.

“GP clinics are in a much stronger negotiating position than they might think because the pathology companies need the business that GPs do,” Dr Sean Stevens, the chair of the RACGP’s business of general practice specific interests network and the chair of the WA faculty of RACGP, said.

“Everything is a negotiation. And just because people ask for a certain percentage doesn’t mean that they have to get it.”

Moreover, pathology companies probably did not fall under the federal government’s code for COVID-19 commercial rent reductions because they had a turnover that was greater than $50 million per year, Brooke Glastonbury, a lawyer and principal at Macpherson Kelley in Sydney, told The Medical Republic.Outside of the code, pathology companies were still entitled to ask for a rent decrease, but landlords were not obliged to grant this request in full – particularly if those companies refused to provide detailed information about revenue losses, she said.

GP landlords were also currently not bound to any particular timeframe in making a decision on accepting rent cuts, she said.

However, GPs landlord should be aware that there were now new laws being passed by the state governments they would need to comply with in relation to re-negotiating rental contracts during COVID-19, she said.

GP landlords also had to comply with The Red Book, which explicitly bans financial incentives for pathology referrals, Dr John Deery, the chair of Australian GP Alliance, said.

It was possible that decreasing rent in line with reduction in pathology referrals could go against The Red Book principles, he said.

The requests for 50% rent reductions were coming from private pathology labs, as well as from giant pathology chain Healius.

While the month-on-month revenue losses of private pathology providers are not generally made public, listed companies such as Healius have an obligation to regularly share earnings forecasts with the market.

As numerous GP practice managers have pointed out, the request for 50% rent cuts doesn’t square with a recent ASX announcement made by Healius which suggested the company was still in a strong financial position.

On 14 April, Healius announced to the ASX that pathology revenue was “down in the order of 30% or more overall, but starting to show some signs of stabilisation and recovery”, and that “COVID-19 tests and GP telehealth consultations [were] partially offsetting drop in other presentations”.

The Medical Republic contacted Healius for comment but did not receive a response before the print deadline.

While Sonic Healthcare has requested rent reductions from some commercial (non-GP) landlords, the Sonic Pathology arm of the business has not.

(Correction: This article originally stated that Sonic Healthcare had requested 50% rent reductions from some GP landlords. That is not accurate; Sonic Healthcare has only requested rent reductions from some commercial non-GP landlords. The Medical Republic has asked Sonic Healthcare exactly what percentage rent reductions have been requested and is awaiting a response.)

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