Most pharmacy leases require landlords to insure their buildings against a number of risks, including fire, lightning and flood. If a pharmacy is damaged or destroyed by one of these risks, it is usually the case that insurance proceeds will cover the cost of reinstatement and that the pharmacy lease explains who is responsible for repairing the damage and who pays any excess and/or shortfall.
Where there is damage or destruction caused by a risk which is not insured against (“uninsured damage”), the position is not so clear. This is because some leases do not deal with what happens when there is uninsured damage.
WHAT RISKS ARE UNINSURED RISKS?
Terrorism is often quoted as a risk that is not covered by insurance and which landlords do not generally insure against. Insurers are also increasingly withdrawing other risks from their policies, most commonly flood and subsidence.
WHO REPAIRS UNINSURED DAMAGE?
Under their leases, pharmacists are responsible for repairing the whole of the property let to them. Most repair obligations are limited to exclude damage by a risk that the landlord has insured against. However they often do not deal with what happens following uninsured damage.
Where a pharmacist has a lease of a whole building, if their repair liability is not limited to exclude uninsured damage, they will be responsible for reinstating the building out of their own pockets. Where a pharmacist has a lease of part of a building, such as a pharmacy within a health centre or a ground floor shop, their landlord is likely to be able to recover the cost of reinstatement of the uninsured damage through any service charge. Either way, this could potentially be very costly.
WHAT IF THE PHARMACY CANNOT BE USED?
If a pharmacy is unusable following uninsured damage, a pharmacist may not only find themselves responsible for the cost of reinstatement, but might also have to continue to pay the rent, service charge and any other sums due under the lease even though the property cannot be used.
WHAT TO DO ABOUT UNINSURED RISKS?
Uninsured risks need to be considered when pharmacists are looking to buy an existing lease, take a new lease or renew a lease. Most landlords are alert to the difficulties caused by uninsured risks and are willing to agree to make it clear within a lease exactly what happens if the pharmacy is damaged by one of these risks. It will, however, often depend on the bargaining positon of the parties as to whether a pharmacist can shift the responsibility for uninsured risks onto their landlord. As a result, the below provisions should always be negotiated by a pharmacist at heads of terms stage:
Repair - Landlords will often agree that pharmacists will not be responsible for the cost of reinstating uninsured damage. To ensure this, a lease will need to exclude both insured and uninsured damage from a pharmacist’s repair obligations and prevent a landlord from being able to recover the reinstatement cost through any service charge. Pharmacists would however, remain responsible for any damage where such damage could be attributed to their act or default and damage to their own contents or fixtures and fittings.
- Rent - Most leases allow for a suspension of rent if a pharmacy cannot be used following damage. This suspension of rent should also apply where the damage has been caused by an uninsured risk and ideally should include service charge and other sums due under a lease.
- Reinstatement – Landlords will usually agree for an option for them to reinstate a pharmacy to be included within a lease. It is often agreed that a landlord will have a certain period to decide whether they want to reinstate at their own cost. During this period, a pharmacist would not be able to terminate the lease. This gives a landlord certainty that once reinstatement is completed, they would have a tenant to occupy the pharmacy. If a landlord does decide to reinstate, they would have an agreed period within which to carry out the reinstatement works. If the works are not carried out by the end of this agreed period to enable the pharmacy to be used, there should be the right for a pharmacist to terminate the lease and move to alternative premises. There should also be a right for a tenant to terminate a lease if the landlord fails to elect either way.
Uninsured damage can be costly to a pharmacist in terms of money, time and business. Pharmacists may need to make alternative premises arrangements to continue trading whilst a pharmacy cannot be used. It is therefore important to ensure that the above matters are covered during lease negotiations. This will ensure that a pharmacist will not need to pay rent on two properties during reinstatement, that they cannot be held responsible for exorbitant reinstatement costs and that they can relocate their business if the pharmacy is not once again unusable within a reasonable time period.
Originally published in P3 magazine and Pharmacy Business, January 2016