A number of issues can arise on either the sale or purchase of an existing pharmacy lease. Some of these are set out below together with possible ways of resolving these potential problems prior to trying to assign the lease.
Was Stamp Duty Land Tax (‘SDLT’) paid?
Any proposed buyer should check whether SDLT (if applicable) was paid on the grant of the lease and, if payable, request copies of the SDLT returns that should have been filed, along with evidence of payment of the necessary SDLT. If this cannot be produced a purchaser may wish to consider an indemnity clause in the Sale and Purchase Agreement for any outstanding SDLT, interest, and penalties that may be owed to the revenue. Interest on unpaid SDLT runs from 30 days after the effective date until date of payment. The late delivery of a land transaction return incurs a flat rate penalty of £100 if the return is delivered within three months of when it should have been delivered, or £200 if after three months.
Is the lease registered at the land registry?
A pharmacy lease with a term of over 7 years must be registered at the Land Registry, who will then issue the lease with its own separate title number and generally make a note of the leasehold interest on the landlord’s freehold title. The Land Registry charges fees for registration of a lease and the amount of the fee relates to the rent which is payable. The pharmacist’s lawyer can check if registration has occurred by obtaining official copies of the relevant titles from the Land Registry. If the lease is not registered, which sometimes happens, it may be possible to still complete the registrations and which should be done before the buyer completes the purchase of the pharmacy. This should be done at the cost of the seller.
Is Landlord’s consent to assign and charge required?
The assignor will need to check the terms of the lease to see if there is an absolute prohibition against assignment or charging the pharmacy. If so, a landlord will not be under any duty to consider a request. If the lease specifies assignment cannot take place without landlord’s consent, section 19(1)(a) of the Landlord & Tenant Act 1927 implies a condition that such consent cannot be unreasonably withheld. Usually, assignments are permitted subject to complying with certain requirements and obtaining the landlord’s consent. The assignor must make a formal application to the landlord for written consent to assign the lease to the assignee and also for the assignee to be able to charge the property. The application should specify the identity of the proposed assignee and needs to include sufficient information about the financial standing of the proposed assignee to enable the landlord to decide whether to grant consent. It is sensible to provide a bank reference, a previous landlord’s reference, an accountant’s reference, a trading reference and three years’ of audited/management accounts, if possible.A full financial package, references and information on the proposed new pharmacist/ assignee will speed up the approval process.
What is an Authorised Guarantee Agreement (‘AGA’)?
An AGA is a guarantee by the outgoing tenant (the assignor) that the incoming tenant (the assignee) will, until the end of the term of the lease, observe and perform the lease obligations going forward. Whether the landlord is entitled to insist that an AGA is provided depends upon on whether the lease states this or only if it is reasonable to do so. Any seller should be aware that they could therefore potentially be ‘on the hook’ for any default by the incoming purchaser. This risk is usually addressed by obtaining an indemnity covenant from the buyer.
What if the property is dilapidated?
Most pharmacy leases place the onus on the tenant to take on repairs and deal with any dilapidations under what is known in the market as a “full repairing and insuring” lease. An obligation to keep a property in good and substantial repair implies an obligation to put it in good repair to the extent this is not the case. This may mean the property is to be put in a better state than it was at the time the lease was granted.If the property is run down, the buyer should ask for a price reduction equivalent to the possible dilapidations claim by the landlord or the cost of repairing - especially if the lease has a relatively short term left to run.
Is the lease “protected”?
Certain leases have the benefit of rights of renewal pursuant to the Landlord & Tenant Act 1954 subject to certain conditions, including occupancy of the pharmacy. However, a landlord may be able to still successfully object to a new lease on one or more of the statutory grounds, for example redevelopment, or that the landlord wants the property for his own use.
Outstanding rent reviews
Any outstanding rent reviews should be finalised so the buyer knows what rent is payable. Any rent reviews, even at a nil increase, should be properly documented in accordance with the lease terms. Any back rent (usually with interest at base rate) should have been fully paid by the tenant. If not, you should consider an indemnity clause in the sale and purchase agreement of the pharmacy to address this.
This article was first published by Pharmacy Business Magazine on 18th November 2016.