What is the difference and which one is appropriate for pharmacies? Stephanie McGrath explains

There are different types of commercial agreements that a pharmacist will come across during the course of business, including agreements that document occupation of business premises.

A pharmacist owner will likely come across the following three types of premises agreements:

  1. Lease – A landlord grants to a tenant a legal right to exclusive possession of a premises to carry on business for a specified period of time in return for the payment of rent and other monies (e.g. outgoings);
  2. Licence – A licensor (being the person who has the legal rights to occupy the premises) grants a licensee a mere contractual right to use the premises to carry on business in return for the payment of a licence fee and does not grant exclusive possession of the premises.
  3. Sublease – A sublease is the creation of a lease stemming from a head lease. Basically, the tenant grants to a lease to subtenant, with the landlord’s consent for a term that expires before expiry of the head lease.

Whether a lease, sublease or licence is appropriate requires a sound understanding of the key characteristics these legal documents, noting that a Court will look at substance over form.

That means, despite the language used in premises agreements, a Court will look at the actual nature of the agreement and relationship of the parties in reality.

The fundamental differences

There are key legal differences between a lease and licence that must be considered when deciding what is appropriate to document an arrangement between a pharmacist and another party in respect of the business premises.

As stated above, a lease grants an interest in land which gives a tenant exclusive possession for an agreed period of time. However, a licence is a more flexible arrangement and does not afford the same security, as licences are usually for an ongoing period until terminated by a party.

Unlike a licence, a lease runs with the land. If the landlord sells the premises then the new owner must take the premises subject to the lease. This is not the case with a licence and if ownership of the land changes, then the licensee does not have any rights against the new owner of the land unless the licence is transferred by agreement between the old owner, the new owner and the licensee.

If a tenant defaults under its lease, a tenant has certain statutory rights under the retail leases legislation (if applicable) in the case of default, and to apply to a Court to reinstate its lease if the landlord has terminated it due to the tenant’s alleged default. Courts will generally provide relief for tenants who are able to remedy the default, for example, by paying any outstanding rent. These protections are not available to a licensee of premises.

When to grant or take a licence vs a licence

1. If you are a pharmacist taking occupation of a premises (e.g. establishing a new pharmacy, relocating to a new premises or buying an existing pharmacy) you would want exclusive possession and tenure of the premises. For that reason, it is always best to try to obtain a lease directly from the premises owner. However, sometimes, a direct lease is not feasible e.g. where you are buying a pharmacy from an owner that operates under an existing sublease and the seller wants to transfer you the sublease. In that case, you should look at obtaining the landlord’s consent to grant you a direct lease in the event the sublease terminates. In any event, you need to conduct legal due diligence to look into why the seller needs to hold a sublease (e.g. is the premises Crown land or an airport site?);

2. If the tenant under the lease for the premises is not the pharmacy owner, a sublease or a licence needs to be granted by the tenant to the actual pharmacy owner. For example, if the pharmacy owner uses a service company or trust to provide the premises, staff and equipment to the pharmacy owner (as is the case in historical ownership structures) or where the tenant is actually the owner of a medical centre who will sublease space on the land to the pharmacy owner and medical practice separately.

3. If you are a pharmacy owner with extra space, you might be considering subleasing or licensing that space to other allied health professionals. In that case, you would likely offer a licence rather than a sublease for the following reasons:

  • your landlord will not allow subletting but will allow sublicensing (however, if we are involved early in the process, we can assist you to obtain approval of the landlord from the outset of the lease to permit subletting or licensing at your discretion for health-related uses);
  • the term of occupancy is going to be less than 1 year and will not be subject retail leasing legislation e.g. if an allied health professional only requires a short-term arrangement; or
  • you or an allied health professional require greater flexibility g. you are providing space to an allied health professional who requires on-and-off ongoing use of the space.

Pharmacy ownership legislation considerations

In the current pharmacy climate it is dangerous for you to assume that you can prepare or negotiate the legal terms of your own lease or licence.

Premises agreements are fundamental to the goodwill of the business, your ability to obtain relevant PBS approvals from applicable state and territory pharmacy authorities and Medicare, and can expose you to significant financial or legal consequences.

Importantly, all premises agreements and other commercial arrangements in respect of pharmacy businesses are being heavily scrutinised by the applicable pharmacy bodies for compliance with the pharmacy ownership legislation.

Accordingly, once it is decided whether a lease, sublease or license is appropriate to document the premises arrangements, it is important to ensure the documents are reviewed and/or drafted by an expert lawyer.

Further information

If you require any specific information or assistance to protect your interests and ensure compliance with the pharmacy ownership legislation, please do not hesitate to contact the writer on (03) 8628 2039 or stephanie@robertjames.com.au.

Stephanie McGrath is a Senior Associate at Robert James Lawyers practising in commercial law with a focus on health, business and property across Australia. Stephanie’s significant pharmacy experience includes buying and selling interests in pharmacies Australia-wide, advising clients in relation to compliance with the requirements of different State and Territory Pharmacy Regulatory Bodies, applications to Medicare, applications and objections under the Pharmacy Location Rules and Ministerial Discretional Applications, partnership disputes and much more.

Disclaimer: The content of this article is intended only to provide a summary and general overview on matters of interest. It is not intended to be comprehensive nor does it constitute legal advice. You should seek legal or other professional advice before acting or relying on any content of this article.