Pharmacy consolidation regulations - Part 3
At the Charles Russell Speechlys pharmacy conference on 23 March 2017 we provided some insights on the new regulations relating to the consolidation of pharmacies. A number of questions arise in the new regulations and we have run a series of three articles in this magazine of which this is the third and final instalment.
As a brief recap from the last two articles, new regulations came into force on 5 December 2016 that allowed two or more (non-internet) pharmacies to consolidate their services into one existing site and close the remainder site or sites.
Consolidation can take place between pharmacies owned by either the same or by different owners.
When the latter, a change of ownership application will be necessary. Generally speaking the service and hours of a continuing pharmacy will apply unless NHS England wants to continue the commissioning of enhanced services.
As set out in our previous articles perhaps the most important question the pharmacy owners will be asking themselves is why they should consolidate pharmacies and what the relevant logistical issues are?
In this article we will be looking at some of the key property issues you need to think about before you merge your pharmacy business.
You may of course own the freehold of your pharmacy. If you do then you may be able to consider whether you want to dispose of that freehold property interest and potentially arrange to redevelop it if it is no longer required, or alternatively whether you might want to locate the business into that one property and the appropriate property structure you should put in place to deal with this (for example if you own the property in your name whether you would want to grant a lease to the new merged pharmacy operational business).
If, however, you own a pharmacy lease, there can be various problematic issues that you may need to consider before consolidating your business into one property.
The issues you need to consider are:
- How long do you have left on the lease? Can you terminate it early?
- What are you allowed to use the pharmacy as? If the lease only allows you to use it as a pharmacy and for no other purpose then you would need to approach your landlord to agree a variation of the lease to allow you to use it for something else.
- What does the lease allow you to do in terms of being able to transfer or sell the property (assignment of the lease) or sublet the property?
Most leases would normally allow you to assign or sublet the whole of the property subject to landlord’s consent (not to be unreasonably withheld or delayed). You should ask your solicitor to carefully check the provisions of the lease to see if it allows you to do this and if so you may need to think about selling the property particularly if there is some time left on the lease.
If you want to try agree with your landlord to end the lease early, you would need to approach your landlord and negotiate a surrender with them and they may ask for payment. There would also be potential dilapidations liability (i.e. if the property is not currently in the state of repair required by the lease) that the landlord may require you to either make good or to pay a sum in lieu of that.
Your lease should also be checked to see whether or not you could have a specific break right to allow you to break the lease early. Break clauses can be useful as an early exit from a lease, but whether or not they can be exercised would depend on the conditions attached to them. Most well drafted break clauses will usually only require payment of the annual rent up to the time of the break and for you to give up the property free of occupiers. It usually requires a minimum amount of notice to be given prior to the break (usually 6 months).
Break clauses can be difficult because unless well drafted it may be impossible to exercise them, so if there is the intention to close down an existing pharmacy operation the lease should be carefully scrutinised by your legal advisors to work out what your options are in terms of disposing of that surplus property.
Negotiations should take place with the landlord early on if there are issues so that you can try and surrender the lease or alternatively try and find a buyer if the lease allows you to do so.
If you are not able to sell the lease (for example if the property is currently over rented) you may be looking to sublet instead.
Subletting is where you retain the existing lease but sublet to a third party.
Again, whether this is allowed depends on what the lease says and you need to check what energy rating it has. Under the Minimum of Energy Efficiency Standards which are due to come in on 1 April 2018 you will not be able to let a property if your energy performance certificate (EPC) has a rating of F or below. If you do not currently have an EPC you should check what the current rating is to make sure that this may not be an issue if you chose to merge and try to dispose of a pharmacy by subletting it.
Merger is an attractive option for pharmacy owners if the circumstances and conditions are suitable. The disposal of any surplus property will be one of the key issues to consider as you would not want to have to accrue costs for a property you no longer need which may be of no use to your business.
This article was written by Claire Timmings and was first published by Pharmacy Business on 13 June 2017. For more information please contact Claire at email@example.com or on +44 (0)1483 252 582.
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Real Estate and Construction Newsletter – December 2017
Welcome to our December newsletter, bringing you legal insight into issues facing the property industry.