There may be a number of situations where a pharmacist wishes to vacate and dispose of the pharmacy lease before the end of the lease term. Aidan Welton from Charles Russell Speechlys sets out the most common ways to do this…
This is where the lease contains a clause allowing a pharmacist to end the lease early. Break clauses may state specific dates that a lease can be terminated or be ‘rolling’, allowing termination at any time, often after a certain date.
There are usually strict provisions to be complied with when exercising a break clause to ensure effective termination, such as the timing, manner and correct person you must serve the break notice on. Conditions often include the payment of all rent and other sums due under the lease and providing “vacant possession” of the pharmacy. In certain circumstances a penalty sum may have to be paid.
Failure to comply with the conditions will mean the break is ineffective and the lease will continue. This can be a costly mistake.
This is where a lease is transferred to a third party (the assignee) who steps in as tenant under the lease.
Pharmacy leases usually set out the circumstances under which assignment is permitted.
Typically assignment of part of the pharmacy will be prohibited but assignment of the whole of the pharmacy will be permitted with the landlord’s consent, which should not be unreasonably withheld or delayed.
When considering consent applications, the landlord will review the financial standing of the assignee to ensure that the assignee will be able to pay the rent and comply with the other lease obligations.
Leases often permit landlords to impose conditions when giving their consent. A pharmacist may be asked to enter into an Authorised Guarantee Agreement (AGA) requiring them to guarantee the performance of the lease covenants by the assignee. If the assignee does not pay the rent or is otherwise in breach of the covenants, the landlord could ask the pharmacist to pay any outstanding rent or remedy such breach. Other conditions may include a requirement for the assignee to provide a rent deposit or guarantee.
This is where the existing pharmacy lease remains in place and a pharmacist grants a further ‘under’ lease to a third party. Underleases can be of the whole or just part of the pharmacist’s leased area. The pharmacist would become the direct landlord of the third party and remain the tenant under the existing pharmacy lease, therefore retaining the same liability to pay rent and observe its other lease covenants. Consequently, the underlease should be drafted on the same terms as the pharmacist’s lease.
Underletting would mean that a pharmacist would therefore not step out of the picture altogether and depending on the obligations in the underlease, could have some management responsibility.
As with assignment, the usual position is for underletting to be permitted with the landlord’s consent, which must not be unreasonably withheld or delayed. There are often conditions in pharmacy leases requiring certain terms within the underlease.
Both assignment and underletting would require the pharmacist to be responsible for the Landlord’s professional costs.
Usually a pharmacy lease will permit the pharmacist to share the property with other companies in the same group of companies subject to certain conditions which are usually less stringent than for assignment or underletting. The pharmacist would however still remain liable to perform the lease obligations.
Although not a right or obligation specified in a pharmacy lease, a pharmacist may be able to agree with the landlord that the lease is terminated early – a surrender. It is up to the landlord to agree to a surrender and the landlord may require the payment of a lump sum to do so.
If a pharmacist no longer needs the property, their best option would be to exercise a break (if available), agree a surrender or apply for assignment. Underletting and sharing of occupation may also be options, although the pharmacist would still need to pay the landlord rent and comply with the other lease covenants.
Every pharmacy lease is different and you should seek specific legal advice to ensure compliance with lease terms.
This article was first published in pharmacy business on 12 July 2018.