Negotiating a lease is never easy and, as competition law changes, pharmacists now have even more to consider when sealing the deal. As pharmacy leases last an average of 15 to 20 years, it’s important to ensure your lease covers all eventualities, say healthcare lawyers Charles Russell. At the company’s conference last month, associate Claire Timmings and solicitor Jennifer Hotston explained the common pitfalls to consider before signing that all-important contract.
1 Check your exclusivity rights
Exclusivity clauses may make sound business sense, but changes to the Competition Act mean these could be deemed anti-competitive in future. From April onwards, the Competition Act will apply to land agreements, meaning exclusivity deals in shopping and health centres might constitute a breach.
But Ms Timmings and Ms Hotston say this is unlikely to have an adverse effect on pharmacies. “It’s always necessary to consider the specific facts of the case, and the Office of Fair Trading expects only a minority will be deemed anti-competitive,” they explain. “If there’s a breach, in the worst case scenario it could veto the whole agreement, but most courts will try to exclude the offending provision.” According to the experts, breaches are most likely to occur in rural locations, where competition is less rife.
2 Negotiate a get-out clause
Pharmacy contracts tend to cover a long period, which means it’s important to have some flexibility if circumstances change. Charles Russell advises pharmacies to negotiate five yearly tenant-only breaks, which would allow the tenant to walk away from the property if it’s no longer profitable. This would ideally include a break allowing you to relocate with the nearest GP practice if the situation arises.
3 Ensure you can renew
Renewing your contract should be a simple step, but complications can arise when landlords have other interests at heart. “Consider that the landlord can refuse to renew under certain circumstances, for example if there’s an opportunity to redevelop the property or they require the property back for their own purposes,” say Ms Timmings and Ms Hotston. They advise tenants to protect themselves by building an option to renew into the contract.
4 Specify your permitted use
Charles Russell lawyers advise pharmacies to carefully consider their permitted use. “If you are classified as a dispensing pharmacy this only allows you to sell medication, while a retail pharmacy includes other products, and a wider retail lease would allow you to sell a broader range of goods, such as mobility aids,” they explain.
5 Verify planning permission
Planning permission is a major consideration when signing your lease, as this can impose a number of restrictions. If your pharmacy only sells a small percentage of retail products, you are classified as a D1 – a non-residential institution. However, retail pharmacies are automatically an A1 classification, which is more difficult to secure. Charles Russell lawyers warn this could be a potential issue for pharmacies located in health centres. “Health centres have a D1 planning classification and the planning consent often doesn’t mention a pharmacy,” explain Ms Timmings and Ms Hotston. “This is worth bearing in mind if your pharmacy has a wider retail use and falls outside of the D1 category.” Hours of use and delivery times are also subject to planning permission, so tenants are advised to check for any restrictions.
6 Authorise alterations
Tenants will naturally wish to make alterations to their properties, but this can sometimes cause conflict with the lease. Even seemingly minor alterations, including changes to the signage, should be approved. “When you’re negotiating the lease, you need to include certain exclusions that will allow you to do certain things to your pharmacy,” say Charles Russell lawyers. “External alterations such as air conditioning, signage and security grilles should be approved in the lease.”
7 Protect against uninsured risks
Damage to your pharmacy is stressful enough without worrying about the terms of your lease. But leases often state that tenants are responsible for repairing damage, and might also stipulate that rent is paid while the property is unused. This can be particularly crucial in cases such as flooding, where the property may be unfit for use over a period of months. “Try to include specific provisions so that your pharmacy is covered,” advise Ms Timmings and Ms Hotston.
8 Review your rent
Rent reviews can be calculated in a number of different ways, and your landlord’s chosen method could make a significant difference to your outgoings. “Most rents will increase along with the Retail Prices Index, but you can look at alternatives such as increasing with the Consumer Price Index,” say the Charles Russell lawyers. Another option is to look at an open market rent, which reflects what a willing tenant would pay for the property in your area. But Ms Timmings and Ms Hotston advise against the option of setting rent according to local health centre traffic. “We wouldn’t recommend that from a tenant’s perspective, as it often doesn’t account for a decrease in numbers, and the number of visitors to the local health centre doesn’t necessarily correlate with pharmacy traffic,” they explain.
Tips for your CPD entry on lease negotiations
Reflect Do I understand how upcoming legislation could affect my pharmacy?
Plan Read this article and review my pharmacy’s lease.
Act Consult legal advice if necessary
Evaluate Is my pharmacy protected against lease pitfalls?