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Most pharmacy leases require landlords to insure their buildings against a number of risks, including fire, lightning and flood. If a pharmacy is damaged or destroyed by one of these risks, it is usually the case that insurance proceeds will cover the cost of reinstatement and that the pharmacy lease explains who is responsible for repairing the damage and who pays any excess and/or shortfall.
Where there is damage or destruction caused by a risk which is not insured against (“uninsured damage”), the position is not so clear. This is because some leases do not deal with what happens when there is uninsured damage.
Terrorism is often quoted as a risk that is not covered by insurance and which landlords do not generally insure against. Insurers are also increasingly withdrawing other risks from their policies, most commonly flood and subsidence.
Under their leases, pharmacists are responsible for repairing the whole of the property let to them. Most repair obligations are limited to exclude damage by a risk that the landlord has insured against. However they often do not deal with what happens following uninsured damage.
Where a pharmacist has a lease of a whole building, if their repair liability is not limited to exclude uninsured damage, they will be responsible for reinstating the building out of their own pockets. Where a pharmacist has a lease of part of a building, such as a pharmacy within a health centre or a ground floor shop, their landlord is likely to be able to recover the cost of reinstatement of the uninsured damage through any service charge. Either way, this could potentially be very costly.
If a pharmacy is unusable following uninsured damage, a pharmacist may not only find themselves responsible for the cost of reinstatement, but might also have to continue to pay the rent, service charge and any other sums due under the lease even though the property cannot be used.
Uninsured risks need to be considered when pharmacists are looking to buy an existing lease, take a new lease or renew a lease. Most landlords are alert to the difficulties caused by uninsured risks and are willing to agree to make it clear within a lease exactly what happens if the pharmacy is damaged by one of these risks. It will, however, often depend on the bargaining positon of the parties as to whether a pharmacist can shift the responsibility for uninsured risks onto their landlord. As a result, the below provisions should always be negotiated by a pharmacist at heads of terms stage:
Repair - Landlords will often agree that pharmacists will not be responsible for the cost of reinstating uninsured damage. To ensure this, a lease will need to exclude both insured and uninsured damage from a pharmacist’s repair obligations and prevent a landlord from being able to recover the reinstatement cost through any service charge. Pharmacists would however, remain responsible for any damage where such damage could be attributed to their act or default and damage to their own contents or fixtures and fittings.
Uninsured damage can be costly to a pharmacist in terms of money, time and business. Pharmacists may need to make alternative premises arrangements to continue trading whilst a pharmacy cannot be used. It is therefore important to ensure that the above matters are covered during lease negotiations. This will ensure that a pharmacist will not need to pay rent on two properties during reinstatement, that they cannot be held responsible for exorbitant reinstatement costs and that they can relocate their business if the pharmacy is not once again unusable within a reasonable time period.
Originally published in P3 magazine and Pharmacy Business, January 2016
For more information please contact Michelle Noble on +44 (0)1483 252 522 or at email@example.com