If you are relocating your pharmacy, applying for a new dispensing contract or purchasing an existing pharmacy business, chances are that you are going to take a lease on the high street or health centre pharmacy premises. You may also be thinking of borrowing from a bank in order to facilitate the new venture, or perhaps the premises will be charged to your existing bank as part of its security requirements for your ongoing facilities.
If this is the case, not only do you need to consider whether the lease is sufficient for your purposes but also whether it will be sufficient for the bank. We have seen a noticeable tightening in the banks’ (and their lawyers’) attitudes to security matters over the past few years and for community pharmacy, the premises lease is a key security item. If a bank doesn’t like what it sees (which may in its view reduce its security value) it may state that a matter needs to be addressed as a precondition of the grant of facilities, adding time and cost to your planned process and, in a competitive situation, potentially jeopardising the outcome. We think that this scrutiny is only going to intensify as the challenging economic environment continues.
We suggest pharmacists check in particular the following points (they are just a selection of the most common issues) and, if necessary, discuss them at an early stage with the bank before incurring substantial relocation or acquisition costs
Length of the lease
An average high street pharmacy lease may be in the range of 12 to 15 years; an average health centre lease is usually a little longer. If you are taking a new lease of this duration the bank is unlikely to have an issue. However, if you are taking over a lease that only has five years left to run then the bank may well want to discuss with you whether the lease term can be extended (this could mean an approach to the landlord) so that its term at least matches the duration of any term loan facilities. Basically, if you want to borrow from the bank over seven years, there will need to be seven years left on the lease, at a minimum.
Because of the strategic significance of premises to pharmacy, a pharmacy lease does not usually contain landlord break clauses (allowing the landlord to end the lease early). Any landlord break clause is likely to give the bank cause for concern, for obvious reasons.
If the lease is within the protection of the Landlord and Tenant Act 1954 then (generally speaking) the tenant can request a new lease at the end of the existing lease, unless the landlord wants the property for redevelopment. A bank will prefer that the lease is “protected” in this way, particularly if the lease term is on the shorter side, as noted above.
Not surprisingly, most commercial leases provide that if the tenant fails to pay rent then the landlord can end the lease. We have seen banks request “step-in” rights for pharmacy leases — this means that the landlord cannot end the lease without giving the bank notice and time to meet any arrears (in theory allowing the bank to decide whether to act to preserve its security value).
A bank will want to be able to realise its security (ie, sell the pharmacy) if it has to do so. Leases often contain restrictions on when they can be transferred to another person. A restriction that is qualified to the extent that the landlord may not act unreasonably is likely to be acceptable. A restriction that is unqualified (ie, the landlord can refuse to transfer the lease) may well be a problem.
Consent to charge
A bank will want you to charge or mortgage the lease to it. Fairly commonly, leases will allow this to take place (perhaps needing the landlord’s prior consent not to be unreasonably withheld). However, leases sometimes state that they cannot be charged. In these circumstances the bank is likely to require the landlord’s consent to be obtained in advance.
If any of these matters need to be addressed, this will require the consent of the landlord (and possibly any superior landlord) of the pharmacy premises. Depending on the circumstances and wording of the lease, the landlord may lawfully be able to refuse to comply with the request, or (as a commercial negotiation) charge a fee or expect a payment for doing so. In conclusion, we suggest that you (or your lawyers) read the lease as soon as possible to identify any potential difficulties or think ahead and have these issues addressed in the heads-of-agreement document for any new lease.
Vertex Law are pharmacy specialists, based at 23 Kings Hill Avenue, Kings Hill, Kent ME19 4UA.
Visit www.vertexlaw.co.uk for information or contact Nick Austen on email@example.com, 01732 224018 or Gemma Brown on firstname.lastname@example.org, 01732 224053.