Aidan Welton and Richard Flenley from Charles Russell Speechlys look at various lease provisions that need to be fulfilled…
In the run-up to the expiry of a pharmacy lease, a pharmacist’s biggest concern is likely to be agreeing a new lease of the pharmacy with the existing landlord or securing new premises to trade from. However, there are a number of lease provisions that must be complied with prior to or on expiry of a lease, which could be costly to a pharmacist if overlooked.
Most leases will require a pharmacist to repair and maintain the pharmacy to a certain standard. Usually, there will be an obligation to keep the pharmacy in good and substantial repair and condition, which may require the return of the pharmacy in a better condition than it was in when the lease commenced.
Alternatively, the standard might be limited, for example by reference to a schedule of condition. Whatever the standard required, at the end of a lease, the pharmacy will need to be returned to the landlord in compliance with that repair obligation.
Prior to or following expiry of a lease, a landlord should appoint a surveyor to assess whether a pharmacist has complied with its repairing covenant. Where there is a breach of the repairing covenant, a schedule of dilapidations should be produced and served on the pharmacist. This schedule will detail the wants of repair and the relevant costs involved.
If the schedule is served during the lease term, depending on the rights set out in the lease, a pharmacist can generally decide whether to undertake the work themselves or to agree a financial settlement with the landlord.
If it is served after expiry of the lease term, the pharmacist will not usually be able to carry out the work and a financial settlement will be the most common option (unless terms of access can be agreed with the landlord).
The pharmacist should always be alive to any contractual provisions giving rights for the landlord to come into the pharmacy during the term of the lease to undertake works and recover the cost of them as a debt from the pharmacist.
Pharmacists should, in preparation for lease expiry, instruct a dilapidations surveyor to assess what level of repairs the pharmacy needs and their cost (ideally approximately 3 to 6 months pre-expiry). A surveyor will also be able to advise on the best strategy for undertaking works, requesting service of the schedule and negotiating settlement sums.
The dilapidations protocol is a fundamental part of the process and compliance should be insisted upon by the pharmacist and its advisors.
Alterations and signage
Before leaving a pharmacy, it is important for pharmacists to consider what alterations they have made to the property, including what signage they have installed. Alterations would include both installations and modifications inside the premises and anything outside, for example air-conditioning units.
Most pharmacy leases require reinstatement of any alterations and signage by a pharmacist before lease expiry. This ensures that the landlord does not need to carry out those works to the pharmacy before the property is let to a new tenant.
Each lease is different and a pharmacist should always check the reinstatement requirements in their lease. Reinstatement might be automatic or alternatively the landlord may be required to give notice requiring reinstatement by a specific time before the end of the lease term.
It is important to do this check early in the run up to lease expiry to leave time to obtain quotes, instruct contractors and undertake the necessary works.
Any alterations or signage that has not been reinstated in accordance with lease terms will form part of the dilapidations schedule that the landlord will serve.
A rent deposit is a sum of money (usually representing a certain number of months’ rent) held by the landlord against a pharmacy tenant’s liabilities during or after a lease term. A landlord would deduct sums from a rent deposit where a tenant is in breach of the lease – for example (but not necessarily exclusively) in arrears of rent.
On lease expiry, a pharmacy tenant will need to take steps to secure the return of any rent deposit. It seems difficult to imagine that anyone would forget a rent deposit but it does happen.
A pharmacist will need to review the rent deposit to establish the return terms. There should be provisions specifying the timings and procedure for return of the deposit, interest terms and any monies that the landlord is entitled to deduct. For example, if the pharmacy is left in a poor state of repair, the landlord may be entitled to deduct repair costs. This might also form part of any dilapidations settlement negotiations.
If the pharmacy tenant is a company, it may also need to remove a charge in respect of the rent deposit at Companies House.
Steps should be taken in preparation for lease expiry to ensure that a pharmacy tenant does not leave the pharmacy only to later get a large bill for unexpected costs and works. Early legal advice should be sought on lease terms and a dilapidations surveyor should be instructed to establish what works are likely to be required and to allow dilapidations settlement negotiations to commence.
The above is a general overview and we recommend that independent legal advice is sought for your specific concerns. If you require further information in relation to the points raised in this article you should contact Aidan Welton, a solicitor and member of the pharmacy transactions real estate team or Richard Flenley, senior associate and member of the property litigation team, at Charles Russell Speechlys LLP. Aidan can be contacted on [email protected] – Richard can be contacted on [email protected]