Date: 14 March 2019
If you have any questions about your lease or want to know more, The Guild WA is hosting a Rental & Leasing Information event with industry experts on April 2nd, 2019.
What is the difference and what is appropriate for pharmacies?
We often need to consider the different types of commercial agreements that a pharmacist will come across during the course of business, including agreements that document occupation of business premises.
Three types of premises agreements
A pharmacist owner will likely come across the following three types of premises agreements:
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 usually licences are 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
(a) 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?);
(b) 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; and
(c) 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:
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.
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:
T: (03) 8628 2039
M: 0488 00 24 24
Contact: The Guild WA
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