VALUATION & THE LAW
Mandated Changes to Pathology Centre Rentals & Implications in Practice. A brief summary of the recent mandated changes surrounding pathology centre rentals, how this impacts valuation practice and a summary of the guidelines for these valuations.
Recent amendments to the Health Insurance Act 1973 have imposed limits on the rents that can be charged by dental clinics, hospitals and medical practices to pathology collection centres. The recent changes, which came into effect on 1 July 2018, prevent landlords from subleasing space to pathology providers at rents that are more than 20% above the market rental value for the area (CBRE, 2020). Whilst collection centres generally only comprise less than 50 sqm, Dahm states that before legislative intervention and enforcement, pathology collection centres typically bring in approximately $15,000 to $25,000 p.a. for every full-time GP in a medical centre (the Guardian, 2020). This meant that rental values were previously significantly above the market rental value of spaces with other commercial uses. The changes have been justified on the basis that without intervention, benefits will create a conflict of interest and increase the costs of pathology services. According to the 2018 Red Book, loss-making pathology collection centres will be targeted, as well as collection centres that are paying higher rentals to keep a competitor out AVI ISSUE 2 2021 PAGE 5
of the space (The Red Book: Guidance to Laws Relating to Pathology and Diagnostic Imaging, 2018). Recent Legislative Changes S 77 of the Health Insurance Regulations (“Regs”) 2018 defines market value as “the amount that a willing purchaser would have had to pay to a vendor who was willing, but not anxious to sell”. General wellestablished legal principles relating to market value are included in this definition, including each party acting ‘knowledgably and prudently’ and entering into an armslength transaction. According to Regs s 76, a payment or consideration given for property, goods or services will be deemed “substantially different” from market value if the difference is more than 20% of the market value. To limit the rental charged by landlords, the regulations introduced the concepts of “permitted” and “prohibited” benefits. Permitted benefits are intended to allow reasonable commercial
leasing and business practices, whereas prohibited benefits are defined as those that “would be reasonably likely to induce a requester to request any of those kinds of services from a provider” (Act ss 23DZZIK(1)). Further to this, prohibited benefits encompass benefits that are “related to the business of rendering pathology services or diagnostic imaging services, as the case requires” (Act ss 23DZZIK(1)). According to the 2018 Red Book, these may include benefits “related to the number, kind or value of pathology or diagnostic imaging requests made by a requester to a particular provider” and consist of “the provision of staff or equipment at the premises of the beneficiary – whether full time, part time or on a visiting basis – for the purpose of providing pathology or diagnostic imaging services”. The implications of these developments are that if rent is over 20% above market value, it will contravene s 23DZZIK(1) of the Act, however there is some ambiguity as to how this should be determined by valuers. The definition of prohibited benefits further extends to outgoings and shared lease costs, and requires that
