If you are looking to sell or let your pharmacy or buy or take a new lease of a pharmacy, careful consideration should be given as to whether the provisions of the Landlord and Tenant Act 1987 (the “Act”) apply. Michelle Noble explains…
The Act is only relevant where the pharmacy is within a building which also contains residential flats and is therefore mixed use. In general, it is therefore more applicable to high street pharmacies.
The Act gives residential tenants of the flats a right of first refusal to acquire the property interest being sold in certain circumstances – for example that could be the freehold of the whole building or a lease of the pharmacy. The right does not arise until the freeholder/landlord has decided to make the disposal and as a result, it is not a mechanism for the tenants to force a sale.
In a mixed-use building containing both a pharmacy and residential flats, the Act will apply if:
• the building contains two or more flats held by ‘qualifying tenants’;
• the floor area designated for residential use is more than 50% of the total floor area of the building; and
• the proposed transaction is a ‘relevant disposal.’
A ‘qualifying tenant’ is a residential tenant with a long lease which is not a protected or assured tenancy (including Assured Shorthold Tenancies), a business tenancy, or one which is linked to the occupier’s employment.
The list of ‘relevant disposals’ that are caught by the Act is long and complicated, but includes entering into a contract to transfer or create an interest in land. This would include the sale of the freehold interest of the property where the pharmacy is located or the grant of a pharmacy lease.
If the Act applies, the freeholder/landlord has to go through a legal procedure before it can enter into the transaction by serving a prescribed form of legal notice on the qualifying tenants.
It is always best to seek legal advice in this situation, and to do so at an early stage, as this notice must be served strictly in accordance with terms of the Act. The procedure is not straightforward and can cause significant delays to the transaction.
Once this offer notice has been served, the qualifying tenants usually have at least two months within which to accept.
The qualifying tenants then, effectively, ‘vote’ on the offer, with one vote allocated for each flat in the building that is let to a qualifying tenant. Tenants’ acceptance of this offer is only effective if more than 50% of those eligible to vote serve an acceptance notice on the freeholder/landlord.
So, if there are five residential flats above the pharmacy but only three of those are held by qualifying tenants, two qualifying tenants would need to serve an acceptance notice in order to accept the offer. This majority will also need to nominate a person to purchase the property on their behalf.
If the required majority of qualifying tenants do not serve the acceptance notice within the time limit, the pharmacy transaction can proceed.
If there is a valid acceptance of the offer, the qualifying tenants remain free to withdraw from the transaction until exchange of contracts. If this happens, the freeholder/landlord is entitled to sell or lease the property to a third party at any time within the following 12 months, without repeating the notice procedure.
The freeholder/landlord can also withdraw from the transaction by serving a notice of withdrawal on the qualifying tenants’ nominated purchaser, but this would prevent disposal of their interest within the next 12 months and may also incur a costs penalty.
Breaching the requirements of the Act can have serious consequences including criminal liability with an unlimited fine. Where the freeholder/landlord is a company, the officers of the company may also become liable to prosecution.
Failure to comply with the Act would not make a completed transaction void and therefore a purchaser of the pharmacy would become the new pharmacy owner despite the breach.
However, under the Act, qualifying tenants who were not offered the benefit of the transaction first, can apply to force the new purchaser or tenant to transfer or lease the property to them, effectively unravelling the original transaction. In some situations, these rights can even be extended to the purchaser’s successor in title.
Purchasing pharmacists need to ensure that their solicitors are raising appropriate pre-contract enquiries with a freeholder/landlord. Alternatively, they can, under the Act, serve notices on qualifying tenants themselves to clarify the position and ensure that the freeholder/landlord has complied with the Act.
Although compliance with the notice provisions of the Act may cause delays to a transaction, the consequences of non-compliance are significantly worse for both parties. Sellers could be faced with criminal liability and purchasers potentially with their purchase or lease being later unravelled.
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 Michelle Noble who is an associate and member of the pharmacy transactions real estate team at Charles Russell Speechlys LLP. Michelle can be contacted on [email protected]