A pharmacy lease will come to an end on expiry of its term if a pharmacist vacates before the lease expires. There may however be a number of situations where a pharmacist wishes to vacate a pharmacy and dispose of its lease before the end of a lease term. We set out below the most common methods of disposal.
Assignment: This is where a lease is sold to a third party buyer and the buyer becomes the tenant under the lease.
Pharmacy leases usually set out the circumstances under which assignment is permitted.
Typically assignment of the whole of the pharmacy will be permitted provided that the landlord’s consent is obtained, which is not to be unreasonably withheld or delayed. The landlord will review the financial standing of the buyer when considering any consent application to ensure that the buyer will be able to pay the rent and comply with the other tenant covenants in the lease. The landlord will also want to safeguard the investment value of the property.
Leases often permit landlords to impose reasonable conditions to their provision of consent. These may include a requirement for the buyer to provide a rent deposit or guarantee. Alternatively, the pharmacist may be asked to enter into an Authorised Guarantee Agreement (AGA) requiring them to guarantee the performance of the lease covenants by the buyer. If the buyer 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. Under an AGA, the pharmacist will only be liable until the buyer sells the lease on to a third party or until the lease expires.
Underletting: This is where the existing pharmacy lease remains in place and a pharmacist grants a further lease to a third party. The pharmacist would become the direct landlord of the third party and remain the tenant under the existing pharmacy lease. This means that the pharmacist will retain the same liability to pay rent and observe its other lease covenants. The underlease to the third party however, should be drafted to also require observance and performance of the same covenants. Therefore, if there is a breach of the existing pharmacy lease, there would also be a breach of the underlease. Although a landlord could enforce the existing lease against the pharmacist, the pharmacist could in turn enforce the underlease. Underletting would mean that a pharmacist would therefore not step out of the picture altogether, which they can do on an assignment of a lease (subject to being required to provide an AGA).
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. The comments above concerning the giving of consent and subject to only reasonable conditions also apply to underlettings.
Exercising a break clause: If the lease contains a break clause this would allow 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, such as the timing, manner and correct person you must serve the break notice on. There are often conditions that must be complied with to ensure effective termination. These frequently require the payment of all rent and other sums due under the lease, that you leave the pharmacy with vacant possession and sometimes requiring payment of a penalty sum.
Surrender: Although not specifically included within the pharmacy lease, a pharmacist may be able to agree with the landlord that the lease is terminated early – a surrender. The landlord may ask for a payment before he agrees. A pharmacist's negotiating position will be stronger if it is easy for the landlord to find a new tenant, especially if they will pay a higher rent.
Sharing occupation: Usually a pharmacist can share the property with other companies in the same group of companies. If the pharmacy operates within a ‘group’ of companies, this may be possible depending on the lease terms. The pharmacist would however still remain liable under the lease.
If a pharmacist no longer needs the property, their best option would be to agree a surrender, exercise a break 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. In an underletting, the pharmacist would collect the rent from and ensure compliance by the undertenant with the underlease terms.
Every pharmacy lease is different and you should seek legal advice to ensure compliance with lease terms. Advance planning if you are looking to sell a pharmacy, is therefore essential.
This article was first published in Pharmacy Business, May 2016.