My lease is ending soon – can the landlord make me leave?
Where a pharmacy, dental practice, health centre or care home is located is important for regulatory and commercial reasons, meaning the question of whether you will be forced to look for an alternative site when your lease comes to an end is important and that should be looked into well before its expiry.
NHS contracts are granted in respect of particular premises, so a relocation would involve a contract renegotiation – something most healthcare providers are understandably reluctant to get into – as well as expense and a potential threat to ongoing business. Pharmacists will be keen to be located near to a health centre, dentists and health centres will want to retain existing customer bases and care providers have their own specific requirements in terms of size, flexibility and location. The shortage of suitable premises for healthcare providers means that if a tenant does have the right to stay on after expiry of their lease this can potentially be very valuable and as such will certainly be a factor affecting the value of a healthcare business on sale as well as being on the wish-list for providers taking on a new lease.
Whether or not you have the legal right to stay on after expiry of your lease (called “security of tenure”) will be determined by whether or not the lease is “contracted out”. The law, in the form of the Landlord and Tenant Act 1954 (known to property lawyers as “the 54 Act”) automatically gives most business tenants a right to renew at the end of their lease, and the landlord can only oppose the extension on limited grounds. But often the landlord will ask you to agree before granting the lease to give up this right – a process known as “contracting out”. If the lease is contracted out, a tenant has no right to remain at the premises at the end of the lease unless he or she can negotiate a new lease and the tenant has no right to compensation from the landlord on leaving the premises and no right to ask the court to fix the rent if the landlord does offer a new lease.
Clearly then when negotiating a new lease whether or not it is contracted out will be a key consideration and will make a big difference on price. But the issue is equally critical for healthcare providers looking to take a transfer (assignment) of an existing lease either as part of the purchase of an existing business or as a stand-alone transaction. Identifying this issue early on, as part of a thorough due diligence exercise, will be key in any transaction where a lease assignment is considered. Where finance is required as part of a business purchase, or stand alone, whether or not a tenant has security of tenure may be a deciding factor as to whether a bank will lend money and if so on what terms.
A lease premium is frequently negotiated in relation to a “prime location” lease. What if the tenant has paid a lease premium to the landlord, does this change the position? Unfortunately for the tenant, the fact that it has paid a hefty lease premium doesn’t in itself give a right of lease renewal. If the lease is not protected then the tenant could find itself the subject of a lease bid exercise with its competitors in the future, with the value of the lease premium demanded next time around created by tenant’s own hard work in developing a successful and profitable business at that location.
Finally, healthcare providers should be cautious of their landlords promising to convert the lease from its current contracted out form into a protected tenancy (perhaps for a significant fee). There is legal uncertainty about certain routes to achieve this and expert advice should be taken before any decision is made.