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Buying or selling pharmacy – legal terminology explained

30 January 2015

Lawyers are often accused of using confusing legal jargon rather than plain English when communicating with clients. 

Whilst legal terminology is often a useful way for a lawyer to condense information, it is ultimately the lawyer’s job to make sure their client understands the advice being given. 

Here we explore some of the more common legal terminology used in pharmacy sales, purchases and lease transactions.

NHS Contract

This is the right for a pharmacy to provide NHS dispensing services.  There is not (usually) a written “contract” but rather a statutory contract evidenced by the pharmacy’s inclusion in NHS England’s pharmaceutical list (ie the list of NHS pharmacies in its area). 

This is different to the inclusion of the pharmacy in the GPhC property register. 

The NHS Contract will typically be the most valuable asset of the pharmacy business.

Asset purchase v Share purchase

This describes the two different methods of purchasing a pharmacy business.

In an asset purchase, the buyer purchases the assets which make up the pharmacy business (the property, NHS Contract, stock and goodwill).

There is a change in the operator of the pharmacy from seller to buyer.

In a share purchase, the buyer purchases the shares of the pharmacy company which operates the pharmacy. The buyer buys all the assets, liabilities and obligations of the company through the transfer of the shares. 

There is no change to the operator of the pharmacy.

Due Diligence

Due diligence is often referred to as ‘DD’ and arises on both asset and share purchases. 

It involves checking all of the relevant documents in relation to the business (eg title to the property and company information), carrying out various searches and investigations (eg title searches, local authority searches, company searches etc) as well as asking a set of questions. 

This is designed to find out information that a prospective buyer of a pharmacy business would want to know to make sure the pharmacist gets what he or she expects. 

It is important that the DD is focused and relevant for pharmacy businesses and should be dealt with by a specialist. 

If the DD is not tailored to the pharmacy business, then the buyer is at risk of not receiving important information. Missing important searches or carrying out unnecessary ones can cost time and money.

Asking irrelevant questions may also frustrate a seller and potentially jeopardise the deal.

Warranties v Indemnities

These typically arise in a pharmacy purchase contract (asset or share purchase). A warranty is a contractual statement (ie a promise) made by a seller to a buyer as to the condition of a pharmacy business or its assets.

For example, the seller may warrant (promise) that there have been no claims, litigation or threatened actions against the business in recent years. If the buyer later discovers that the warranty was incorrect, the buyer may be able to claim damages for certain losses arising from the seller’s breach of warranty.

There are well established rules on the nature and extent of losses that can be recovered.

An indemnity is a more onerous obligation on the seller, being a promise by the seller to reimburse the buyer for loss incurred in respect of an identified liability.

For example, the seller may promise to bear the costs, if any, of unresolved litigation against the pharmacy business.

If the liability arises, the buyer will be able to recover all its loss on a pound-for-pound basis. Indemnities are generally used to cover specific and identified potential liabilities that arise during due diligence.

Disclosure Letter

This letter accompanies the pharmacy contract (both asset and share purchases). The disclosure letter is a letter from the seller of the pharmacy business to the buyer.

It allows the seller to tell the buyer where any warranties are inaccurate and if the seller does so, the seller will not be liable for a breach of warranty. 

It also enables the prospective buyer to find out additional information about the business and identify any potential problem areas before the purchase is concluded.

AGA

This is used in the context of a transfer of a lease of pharmacy property. In order to transfer a lease the prior consent of the landlord of the property is normally required. 

The landlord’s consent will usually be conditional on the seller (tenant) entering into an AGA. An AGA is an Authorised Guarantee Agreement. 

This is a guarantee given by a seller to the landlord confirming that the buyer will perform the tenant covenants in the lease.  The form of the AGA may be set out in a schedule to the lease.

Licence to Assign

A ‘licence to assign’ is the formal document from the landlord giving the seller consent to transfer a pharmacy lease to a buyer.

The licence may also give consent to a charge if the buyer needs to finance the purchase by way of a mortgage over the property. 

The licence may also include consent by the landlord to requested changes to the lease (eg a change in the use of the property).  The lease may require that the licence is in the form of a deed.

SDLT

SDLT, or Stamp Duty Land Tax, is a tax charged on land transactions, when you purchase or lease pharmacy land. 

The amount payable varies depending upon the value of the transaction as well as whether the pharmacy is freehold or leasehold.

The buyer must notify HMRC of the transaction and send payment within 30 days of completion to avoid penalties and fines.

Stamp Duty

Stamp Duty is payable on a share purchase and is charged on the transfer of shares for more than £1000.

The amount payable is 0.5% of the price paid for the shares rounded up to the nearest £5 and must be paid by the buyer within 30 days of the transfer. 

Share transfers should not be accepted by a company until evidence of payment of stamp duty is provided.

The above is a general overview and we recommend that independent legal advice is sought for your specific concerns.

This article was written by Asfa Javed.

For more information please contact Asfa at +44 (0)1483 25 2521 or asfa.javed@crsblaw.com