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Don’t let your pharmacy property transaction unravel because of residential tenants’ rights…

Whether you own or lease the whole of your pharmacy, thinking of buying a pharmacy business or investing in the future, if the property you are looking at is a building which  contains flats that are let out to residential tenants, you need to be careful of the implications of the Landlord and Tenant Act 1987 (the “Act”).

This Act gives residential tenants a right of first refusal to acquire the interest the landlord is selling or leasing in the property in some circumstances.

In a mixed use building containing both a pharmacy and residential flats, the Act will apply if:

  • the building contains two or more flats held by ‘qualifying tenants’;
  • the floor area designated for residential use is more than 50% of the total floor area of the building; and
  • the proposed transaction is a relevant disposal.

A ‘qualifying tenant’ is a residential tenant with a long lease which is not a protected or assured tenancy (including Assured Shorthold Tenancies), a business tenancy, or one which is linked to the occupier’s employment. If a tenant has a long lease or leases of three more flats in the same building then they will not be a qualifying tenant.

The list of disposals that are caught by the Act is long and complicated but, but includes entering a contract to transfer or create an interest in land. This would include the sale of the freehold interest of the property where the pharmacy is located or the grant of a pharmacy lease.

If the Act applies, the landlord has to go through a legal procedure before it can enter into the transaction by serving a prescribed form of legal notice on the qualifying tenants.

It is always best to seek legal advice in this situation, and to do so at an early stage, as this notice must be served strictly in accordance with terms of the Act, the procedure is not straightforward and can cause significant delays to the transaction.

Invalid notices do not discharge a landlord’s obligations under the Act and failure to correctly serve a notice could lead to criminal sanctions, including an unlimited fine.

Once this offer notice has been served, tenants usually have at least two months within which to accept.

The qualifying tenants then, effectively, ‘vote’ on the offer, with one vote allocated for each flat in the building that is let to a qualifying tenant. Tenants’ acceptance of this offer is only effective if more than 50% of those eligible to vote serve an acceptance notice on the landlord. So, if there are 5 residential flats above your pharmacy but only 3 of those are held by qualifying tenants, 2 qualifying tenants would need to serve an acceptance notice in order to accept the landlord’s offer. This majority will also need to nominate a person to purchase the property on their behalf.

If the required majority of tenants do not serve the acceptance notice within the time limit, the landlord can then proceed.

After the valid acceptance of the offer, the tenants remain free to withdraw from the transaction until exchange of contracts. If this happens, a landlord is entitled to sell or lease the property to a third party at any time within the following 12 months, without repeating the notice procedure.

The landlord can also withdraw from the sale by serving a notice of withdrawal on the tenants’ nominated purchaser. However, a landlord choosing this option will not be able to dispose of their interest within the next 12 months and may also incur a costs penalty.

Breaching the requirements of the Act can have serious consequences including criminal liability.

Qualifying tenants can also apply to force their landlord to comply with the Act by serving a notice requiring any failure to be complied with to be rectified, or to force the purchaser or tenant to sell the premises to him or take the benefit of any contract in place if the tenants act within a given timescale.

In some situations, these rights can even be extended to the purchaser’s successor in title. 

Pharmacists need to carefully consider any rights the residential tenants may have before they either sell or acquire pharmacy premises where there are 2 or more long residential leasehold interests in the building. 

Failure to do not only causes significant delays, but could, in a worst case scenario, result in the transaction later being unravelled.

This article was written by Sam Jenkins. For more information, please contact Sam on +44 (0)1483 252661 or samuel.jenkins@crasblaw.com.

This article was first published in Pharmacy Business, May 2016.