Going GAGA - the problem with pharmacy lease guarantees
You will have previously seen a landlord's consent is usually required to enable a pharmacist to assign or sell their lease to a third party.
It is usual for the landlord's consent to be specified not to be unreasonably withheld or delayed.
On a lease assignment a landlord will want to ensure that the tenant is of sufficient financial strength to be able to comply with the lease covenants (including payment of the rent).
To protect the landlord's position he may require a guarantee from a suitable guarantor to be provided on assignment of the lease. Typically such a guarantor will be a parent or holding company of a pharmacy company or occasionally directors of that company where the pharmacy is owned by a limited liability company as opposed to an individual.
The benefit to the landlord of having a guarantor is that if the tenant defaults or becomes insolvent then the landlord can pursue the guarantor to be able to claim any unpaid rent or for any other breaches under the terms of the lease.
Normally a well advised pharmacy tenant will not allow any directors or individuals to give personal guarantees on the lease as otherwise their individual assets will be exposed.
A recent court decision has caused a number of difficulties where pharmacy tenants are looking to transfer their leases to guarantors. This usually occurs where there is some sort of group company reorganisation and the company which holds the leases is being reorganised so that the lease assets are to be held by another holding company which originally guaranteed the leases.
The results of this recent case mean that an assignment of the lease by a tenant to its guarantor where the lease was entered into after January 1996 is void in law.
This is regardless of what the landlord and tenant might have agreed or even where the guarantor was prepared to give the guarantee and take on the lease.
This case has caused a number of problems for landlords and occupiers of commercial premises where guarantees are often used as a suitable mechanism to ensure that the tenant's liabilities are secured.
The case has been widely criticised because the reason the court made its decision was that the law was changed so it tenants were not supposed to be liable beyond the time that they are a tenant under the lease (unless they gave a specified authorised guarantee agreement when they sold on the lease to guarantee their immediate successor). By analogy a guarantor should not be liable for any longer period than the tenant.
The case has proved controversial commercially as it does not reflect how most commercial organisations including pharmacy groups and companies may want to run their businesses.
It is therefore being appealed and a decision is awaited from the Court of Appeal.
In the meantime, tenants are left with a difficult scenario where if they want to do a group company reorganisation they will not be able to transfer the lease to the guarantor and will have to find some other suitable company which has not provided any guarantee on the lease to transfer the lease to.
One option may be to provide for an assignment of the lease to another newly incorporated company which is then guaranteed by the outgoing tenant under an authorised guarantee agreement which itself is then guaranteed by the guarantor. This is still allowed.
The other alternative is to find another third party company who can be the tenant and see if the landlord will accept alternative security such as a rent deposit.
Any pharmacist who is looking at taking on a new lease or reconfigure their existing lease portfolio needs to carefully consider the position on lease guarantors to avoid a difficult scenario where they may be precluded from assigning to a company that they wish to reorganise their group into as it has previously given a guarantee on the lease.
This article was first published on 17 January 2017 in Pharmacy Business.
This article was written by Claire Timmings. For more information please contact Claire on +44 (0)1483 252568 or firstname.lastname@example.org.
News & Insights
Building Up: Adding Additional Storeys
Read the latest edition of our 'Building Up' publication, focusing on adding additional storeys on existing buildings.
High Court challenge to legality of serious shortage protocols
David discusses Good Law Project's High Court application for permission to challenge the Human Medicines (Amendment) Regulations 2019.