Generally speaking, a sale of the whole or part of a pharmacy business from a Vendor to a Purchaser, requires obtaining the pharmacy premises Landlord’s consent to an assignment (Assignment) of the pharmacy premises lease (Pharmacy Lease) from the Vendor to the Purchaser. This requirement is usually specified as a condition precedent under the relevant sale agreement for sale/purchase of the pharmacy business.

To obtain the Landlord’s consent to the Assignment of a Pharmacy Lease, the Vendor and Purchaser will initially turn to the terms of the Pharmacy Lease, which likely sets out the Landlord’s prescribed process, timeframes and requirements seeking its consent to an Assignment. Some examples of the Landlord’s requirements for Assignment include:

  • (i) the Purchaser providing satisfactory financial and business information (to demonstrate it will be able to meet the obligations under the Pharmacy Lease)
  • (ii) the Vendor (as assignor) and Purchaser (as assignee) entering into a deed of consent to Assignment in a form approved by the Landlord; and
  • (iii) the Vendor/Purchaser paying the Landlord’s legal and administrative costs in connection with the Assignment.

Vendors and Purchasers should also note that if the Pharmacy Lease is a ‘retail lease’ a Landlord will generally not be able to withhold consent to an Assignment unreasonably. The retail leases legislation (depending on the State or Territory where the pharmacy premises is located) prescribe certain Assignment requirements in respect of the Pharmacy Lease. For example, in Victoria the Retail Leases Act 2003 (Vic) (RLA) imposes both specific Assignment procedure/timeframes, and also restrictions on when a Landlord can withhold consent to an Assignment (relevant in section (1) below).

To assist pharmacists, below is brief commentary on some key issues relating to the Assignment of Pharmacy Lease:

A. A Landlord May Withhold Consent To Assignment Of Lease (In Certain Circumstances)

There are certain circumstances when the Landlord can withhold its consent to the Assignment, which may be set out in the applicable Pharmacy Lease, or relevant retail leases legislation that is applicable to the Pharmacy Lease.

Generally, a Landlord may withhold its consent to an Assignment where:

  • (i) the prescribed Assignment procedure and/or timeframes under the Pharmacy Lease have not been complied with; and/or
  • (ii) the Landlord (reasonably) considers the assignee does not have sufficient financial resources or business experiences to meet the obligations under the Pharmacy Lease.

The Landlord withholding consent to the Assignment can have serious consequences on the sale of a pharmacy, none more so than the pharmacy sale possibly falling over (i.e. due to a failure to obtain an Assignment of the Pharmacy Lease) at great disappointment to Vendor and Purchaser alike.

B. A Vendor (And Its Guarantors) May Not Be Released From Obligations Under Pharmacy Lease

A Vendor may be surprised to learn that simply obtaining the Landlord’s consent to an Assignment of a Pharmacy Lease does not automatically release the Vendor (and any of its guarantors) from their obligations under the Pharmacy Lease on and from the settlement of the pharmacy business sale.

If the Pharmacy Lease (or Assignment document) is silent on whether the Vendor (and its guarantor(s)) are released from their obligation under the Pharmacy Lease on and from the Assignment:

  • (i) the Vendor and its guarantor(s) may continue to be liable for the obligations under the Pharmacy Lease following the Assignment (when it is no longer in possession of the pharmacy premises) until the end of the term of the Pharmacy Lease; and
  • (ii) where the Purchaser defaults under the terms of the assigned Pharmacy Lease (e.g. fails to pay rent), the Landlord could turn to the Vendor (or its guarantor) to perform these obligations under the Pharmacy Lease (e.g. pay rental arrears, etc).

This could result in a significant, unexpected liability for the Vendor and its guarantors after the sale of the pharmacy.

Positively, retail leases legislation in certain states or territories in Australia provide releases of outgoing tenants and guarantors under the lease (after assignment) in certain circumstances. For example, in Victoria, the RLA provides that none of the outgoing tenant or guarantor is liable to perform any obligations under the lease (or pay to the Landlord and money in respect of amount payable by the proposed assignee) as long as specific requirements under the RLA have been satisfied.

C. Sale of Shares in a Company That Own A Pharmacy Business May Require Landlord’s Consent

A common mistake in pharmacy sales/purchases, is where a Vendor fails entirely to seek the Landlord’s consent to the Assignment of Pharmacy Lease, despite the express terms of the Pharmacy Lease requiring so.

For example, where a company owns a pharmacy business (PharmaCo), and shares in PharmaCo are being sold by the Vendor to the Purchaser (Share Sale), the parties involved may erroneously assume that as PharmaCo remains the tenant under the Pharmacy Lease following the Share Sale, there is no “assignment” under the Pharmacy Lease and thus the Landlord’s consent is not sought.

However, a typical Pharmacy Lease will include a provision that an assignment, or “deemed” assignment, of the Pharmacy Lease has occurred where there is a change in shareholding over a particular threshold or a change or directorship which results in a ‘change in control’ of PharmaCo, and the Landlord’s consent to the assignment must be obtained (using a similar/identical process to the usual assignment procedures).

Where a Vendor assigns a Pharmacy Lease without required Landlord consent, the Vendor is exposed to the risk of its Pharmacy Lease being terminated by the Landlord as a consequence of such default, in circumstances where the breach is not remedied, or not capable of remedy.

As the Vendor’s PBS Approval used for its pharmacy business is tied to the pharmacy premises, amongst other concerns any termination of the Pharmacy Lease will raise the dire prospect of cancellation of the PBS Approval).

Given the above, the key takeaway for all pharmacy owners is that before even commencing any proposed pharmacy business related sale/sell-down exercise, they should seek specialist legal advice regarding the Assignment of Pharmacy Lease process which applies to them. Should you require assistance on similar matters to the above, please contact the co-authors (as below):

Anthony Cannizzo
Partner – Robert James Lawyers
Mobile: 0439 002 012 | Direct: (03) 8628 2012
Email: anthony@robertjames.com.au
Robert James Lawyers, Level 22, 140 William Street, Melbourne VIC 3000
https://robertjames.com.au

Henry McQueen
Associate – Robert James Lawyers
Mobile: 0413 967 037 | Phone: (03) 8628 2000 | Direct: (03) 8628 2008
Email: henry@robertjames.com.au
Robert James Lawyers, Level 22, 140 William Street, Melbourne VIC 3000
https://robertjames.com.au