What do pharmacists need to know to be better armed when negotiating new leases? Stephanie McGrath explains
I have been assisting several clients lately who have had run-ins with their landlords over issues they thought were straight forward matters.
However, those tenants soon found out that what they considered ‘normal’ was not the same view as the landlord.
Mostly, the issues stem from a general lack of understanding by landlords about legal requirements (such as activating an approval number) and professional requirements of pharmacists (including dispensary layout and visibility).
In some cases, either my client or the landlord assumed their lease included what they deemed a ‘standard’ clause. As any good lawyer knows, nothing is standard. Your rights as a retail tenant are dependent upon the terms of your lease and the relevant retail leasing legislation in your State or Territory.
My recent experiences have caused me to wonder about the lesser known issues which are common to me as a commercial lawyer, but which if pharmacists had more knowledge about, they would be better armed when negotiating new leases.
1. Relocation rights
Relocation is most relevant for shopping centres but can also apply in other circumstances too, e.g. where the pharmacy is located in a smaller complex or series of premises all owned by the same landlord. It is worth addressing before you sign the lease, whether you are willing and able to sustain your business if you had to relocate.
Sure, the landlord would have to provide some type of comparable premises and pay some form of compensation. But generally speaking, these terms are not defined in retail lease legislation and so the lease (usually drafted by the landlord’s lawyers) is likely going to limit what is comparable or limit the extent of compensation to the written down value of fitout.
Do you have an expert lawyer in your corner with great attention to detail who can advise you on the tricks and traps in your relocation clauses?
2. Pharmacy approvals
Whatever your intention for your pharmacy model is, a well-drafted lease subject to the necessary approvals from applicable State or Territory authorities, and where applicable, the Department of Health, will save you a lot of headaches (e.g. where you intend to operate as a PBS-approved pharmacy but you are required to take occupation and commence paying rent before receipt of all required approvals and licences.
3. Advertising and signage
Does a tenant have rights to the exterior of the premises? Good question. It all depends on the terms of your lease. Most landlords will assert control over the exterior of the premises or building within which the premises is located and most leases will reflect this.
Some poorly drafted leases might be silent on the issue and or attempt to assert landlord rights but not well enough. For those reasons, rather than have a dispute later, it is a good idea to negotiate terms in your lease either including the exterior walls and shop front in your premises or expressly giving you rights to install signage and advertising material on the outside of your premises, or from within your premises with visibility to the outside.
Those rights will likely be subject to landlord consent. What’s important is that your lease does not permit landlord’s consent to be conditional on a discretionary power to exert control over the exterior at its discretion, including withdrawing consent to your signage and advertising.
There has also been a lot of commentary this year about declining valuations for shopping centre leases. Retailers are being encouraged to start renegotiating for lower rents.
It is worth engaging a strong and expert retail lease negotiator with experience in pharmacy and retail leases to assess whether you will have a likelihood of successfully re-negotiating your rent.
Generally speaking, it is very difficult to vary an existing lease. Normally, and depending on the rental climate of the time, a tenant would be more likely to be successful obtaining landlord agreement to vary terms of an existing lease (such as rent) where the tenant can submit an enticing commercial proposal for the landlord.
I have seen rent for a pharmacy in one shopping centre recently drop by almost half of its original rent when the lease commenced several years ago. I was not involved in the rent re-negotiations, but based on the information I was given, it appeared the decrease was negotiated as part of an agreement to extend the lease term (rather than by way of option).
While the tenant was locked in for a longer period, there was a significant drop in rent over the remainder of the term. This was especially appealing for the tenant who was looking to sell his pharmacy.
Other ways to seek the best commercial terms for your pharmacy lease include:
1. Market reviews
If your option for a further term is approaching, most leases will require a market review of rent at the commencement of the option term. It is worth having a look at your lease to clarify the length of term you have left and method of rent review.
If a market review will apply to an upcoming option, you should ensure that you follow the rent review procedure under the lease, including making a detailed submission to the valuer regarding current market rents for pharmacies, together with supporting evidence tailored to the pharmacy industry and your particular location.
2. Location rules
In my 27 September 2019 article I explored what effect the closing of the “back-filling” loophole in respect of the Pharmacy Location Rules would have on shopping centre pharmacy tenants. To reiterate, if applying for an additional second approved pharmacy (where the large shopping centre has between 100-199 commercial establishments) or additional third approved pharmacy (where the large shopping centre has at least 200 commercial establishments) in a large shopping centre, applicants will need to provide evidence that no approved premises have relocated out of that large shopping centre in the 12 months prior to the date of application.
The new rule restricts the ease with which landlords of large shopping centres may grant leases to new pharmacies in their centre. As a result, the new rule could present as a potential advantage for some pharmacists already within a large shopping centre when negotiating their leases with a formidable landlord.
3. Thinking outside the square – Pharmacy model
Does the landlord view your pharmacy as an integral tenant in its retail precinct? For example, you might be part of an existing or planned medical hub offering a convenient total health service to the community, or you might be a member of a popular pharmacy franchise that the community respects. This may present an attractive business model to a landlord.
In addition, you might consider what aspects of your pharmacy could be improved to re-engage with existing customers and connect with the next generation of customers. Consider your layouts, fixtures, customer access, advertisements and visibility. In many cases, landlords are willing to provide incentives to assist tenants with improving the premises where it is going to benefit all parties including the landlord and the community.
If you require any specific information or assistance, please do not hesitate to contact the writer on 8628 2039 or firstname.lastname@example.org.
Stephanie McGrath is a Legal Advisor 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.