Australia: Protecting Your Pharmacy: Lease Conditions that Minimise Conflict

Running your own pharmacy - whilst being very rewarding - can also mean that you spend a considerable amount of time negotiating with both your landlord and your bank or financier.

In fact, one of the harsh realities of running your own business is the need to ensure you comply with the terms of your lease, as well as appeasing your financier who provided the capital for you to set up the business in the first place. Many a pharmacist has found this 'triangular' business relationship somewhat difficult to say the least!

The value of a pharmacy business is tied to its positive reputation or its regular patronage, also known as goodwill. Generally speaking, a large part of that goodwill is a direct result of the location of the pharmacy - if you find the right location, you will find the customers.

For many financiers, their readiness to loan money for you to set up the business will depend on their ability to seek security over the pharmacy, either in the form of a leasehold interest or security over the assets of the business.

How can a financier seek security over a leasehold interest?

Security over the leasehold interest means that the financier is able to access the building for a certain, stated, period of time regardless of whether or not the tenant is in business there. Financiers can seek such a security through two main legal tools:

  1. A Mortgage of Lease

The preferred form of security over the leasehold interest is a Mortgage of Lease. As a pharmacist running your own business, if you default on your loan and can no longer run the pharmacy, a Mortgage of Lease enables your financier (or the appointed receiver) to gain possession of the premises.

This means that the receiver is able to keep the business operating and therefore attempt to maintain the goodwill. Alternatively, the financier or receiver is in a position to sell the business and so recover the debt.

In our experience, it is often difficult to obtain consent to a Mortgage of Lease from a Landlord. Most leases will contain a clause that either prohibits the granting of a Mortgage of Lease or that requires Landlord's consent.

Landlords are often reluctant to consent to a Mortgage of Lease. Their chief concern is that if the financier gains possession of the premises, they could run down the business and so devalue the premises, its stock, fixtures and fittings.

When Landlords do consent to a Mortgage of Lease, they are usually very careful to highlight strict conditions of consent. These conditions might include ensuring that the mortgagee assumes all responsibilities under the lease and does not damage the premises.

  1. A 'Right of Entry'

As an alternative to a Mortgage of Lease, financiers can also seek a Right of Entry. This is different to a Mortgage of Lease in that, if you are no longer able to run the business, your financier will only require access to the premises in order to remove any items that they have financed, such as stock and fit out.

Again, a Landlord will often object to granting a Right of Entry and, where they are consented to, there are usually strict conditions attached - Landlords always have to be careful to ensure that the financier or the receiver does not damage the premises when removing any items from the premises.

Unfortunately, financiers and Landlords have been known to get into arguments over the wording and form of Rights of Entry. Without appropriate advice and representation, you can easily get caught in the middle of a debate between your financier and Landlord about the wording of the right of entry and there is no easy solution to this problem.

What does this mean for you?

Whenever you negotiate your lease, or re-negotiate, you should try and include a clause that requires the Landlord to not 'unreasonably withhold' their consent to your financier's Right of Entry or Mortgage of Lease.

Having a clause to this effect in your lease from the outset, could reduce potential conflict in future years if you ever find yourself in financial difficulty and unable to run the business.

Some Landlords are more accommodating and may even request a copy of your financier's standard Right to Entry at the time of negotiating the lease.

What about security over your Assets?

Financiers may also seek security over the assets of the pharmacy business generally, such as specific or general security agreements.

You should carefully review your leases to determine whether you need to obtain your Landlord's consent before granting such securities over the assets of the business. When you are negotiating a lease, I would suggest that any such clause be deleted or at least limited to those assets relating to the premises only. If that amendment is not agreed to, then you should try and argue for a clause stating that the Landlord must not 'unreasonably withhold' consent to any such security.

In our experience, obtaining a Landlord's consent to any of the securities referred to above can be quite tricky. We always suggest to our pharmacist clients that as soon as they become aware of their financier's requirements, they should review their lease to see whether the Landlord's consent is required for any of the securities being sought by their financier.

If you are fortunate enough to be in the position of negotiating a lease, then some of the amendments referred to above will ensure the consent process is as smooth as possible. Spending a little time negotiating your lease before entering the business, or even when re-negotiating the lease while business is good, can reduce the potential for costly legal disputes and conflict in the future.

Balancing your needs as the pharmacy owner/operator with the requirements of your financier and your Landlord can be tricky. Having access to information and an experienced solicitor who can guide you through the process of negotiating a lease can make all the difference. If you have any concerns in relation to the security being sought by your financier, or the conditions of your pharmacy lease, we would strongly recommend seeking legal advice from someone experienced in the field.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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