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Freehold and leasehold matters

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Freehold and leasehold matters

Selling a pharmacy can be a minefield but help is at hand in a new book from pharmacy sales expert Anne Hutchings. In the eighth of 12 monthly extracts, Anne looks at freehold and leasehold property issues.

When it comes to selling your pharmacy, your buyer will need to be satisfied that the business has security of tenure on the premises. Without this it can be virtually impossible to sell a pharmacy. If you own the freehold for your business premises, do you want to sell it along with the pharmacy?

Some people keep the freehold as the rent can provide a future income. If this applies to you, do you own the property personally, or through a limited company that also owns your pharmacy business? If you are trading through a company and you intend to sell that company, you will need to remove the property first if you are going to retain ownership.

There are tax implications involved in doing this, so make sure you take advice. You may wish to sell the premises with the pharmacy. This can work well, but there is a limit to what buyers are prepared to pay.

If the property is valued at more than about £300,000, buyers may become less enthusiastic. If the sale is aimed at first-time buyers, they don’t normally have the funds to purchase a high value freehold. Whether you decide to lease or sell, have a professional valuation done by a local commercial surveyor who knows the area.

Ask the surveyor to give you figures for both market rent and freehold value, which leaves your options open. You would be advised not to use a local surveyor for health centre pharmacies, where different methods of valuation can apply. If you own a health centre premises and intend to create a lease for your buyer, you should consult an expert because health centre rents are usually charged at a premium.

Setting up a lease

If you decide to keep your freehold and set up a lease, instruct a good property solicitor. These are some points to consider:

Length of the lease

The buyer of your pharmacy will require a lease under the Landlord and Tenant Act 1954. This means that the tenant will be able to renew the lease at the end of the term. The tenant will require a minimum period of 10 years on the lease, although sometimes lenders will ask for longer to correspond with the term of the buyer’s loan.

Break clause

It is common for a tenant to request break clauses in the lease, the reason being that if there is a development in the locality that could have a detrimental effect on the pharmacy, the owner does not want to be tied into a long lease.

Rent reviews

These are usually three, four or five-yearly. There is usually a provision for upwards-only rent reviews. At the review dates the rent is reassessed at open market rates or possibly based on an indexation formula.

Repairs and maintenance

It is usually the tenant’s responsibility to maintain the property to a good standard. Don’t be surprised if the tenant has a survey carried out before they sign the lease, so that any major work required can be established as your liability.

Use of the premises

The lease will usually say what type of trade can be carried out from the premises. From a tenant’s perspective the more flexible this is the better, because if circumstances change and the pharmacy relocates, the tenant may wish to sub-let the premises.

Sub-letting or assigning the lease

If your tenant no longer uses the premises they may wish to sub-let or assign the lease to a new tenant. If they sub-let they remain as tenant while granting a sub-lease to a third party.

A lease assignment is where a new tenant takes over an existing lease in its entirety. Similarly, if your tenant sells the pharmacy, the new owner will wish to take on the lease. Usually there will be a clause saying that landlord’s consent (not to be unreasonably withheld) is required.

Leasehold premises

If your pharmacy premises are leasehold you should check whether or not the lease is under the Landlord & Tenant Act 1954. If the lease has less than 10 years to run it will be difficult to sell the business. In these circumstances you should try and renew the lease and have it included under the Landlord & Tenant Act.

Even if the lease is under the Act, if it only has a few years left you may need to try and renew it before selling. This is because your buyer, particularly if they are a first-timer, may need a lease that ties in with the length of their bank loan.

If your lease needs to be renewed, start negotiations with the landlord as soon as possible since lease renewals can take months! Some health centre pharmacy leases are reasonable but there are a number of issues you need to be alert to:

  • They are not always under the Landlord & Tenant Act. If there is no right of renewal it will be difficult to sell the pharmacy. This can usually be resolved by paying the landlord a premium and agreeing to an increased rent. While this is not ideal, it at least enables the problem to be resolved
  • The rent may be linked to various indices that can result in huge increases over a relatively short period
  • Service charges can be substantial.

If you need to renew your lease, be careful what you agree to. You will struggle to sell if you agree to terms that are too onerous for potential buyers. And the higher the rent, the less the goodwill value of the business: this is because rent affects the bottom line profitability, which forms the basis of the business valuation.

  • To find out more about selling your business visit Anne and her team on Stand PG45 at the Pharmacy Show in October.

 


Anne Hutchings has been dealing with community pharmacists for over 20 years and has built up her company, Hutchings Consultants, to be the UK’s largest independent pharmacy sales agency. ‘Selling your pharmacy for all it’s worth’ (£12) can be ordered from Amazon (ISBN 9781 7846 22411) or from Hutchings Consultants. For a free copy (while stocks last) complete the form online at hutchings-pharmacysales. com or send a cheque for £12 (payable to Hutchings Consultants) to Hutchings Consultants Ltd, Maple House, 53-55 Woodside Road, Amersham, Bucks HP6 6AA
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