A Guide To Buying and Financing Pharmacies with Short Leases

In our original guide to buying a pharmacy, we mentioned the lease as one of the things you need to be aware of when browsing potential listings. A short lease can hamper your ability to raise finance. Traditionally, UK lenders that do offer loans to pharmacists looking to buy a leasehold will only finance you for the duration left on the lease. However, many lenders will instead simply refuse to lend if you try to raise funds to purchase anything other than a freehold property. 

But with so many pharmacies now on the market at attractive prices, you shouldn’t have to let the opportunity pass you by. Here at Rangewell, we can help you arrange finance for a short lease pharmacy regardless of your circumstances. We’re experts who work day-in, day-out with lenders, which means we know exactly which ones are interested in financing short-lease properties and the right approach to make your application succeed. 

However, before you actually apply, there are lots of things you can do that will increase your chances of securing finance. Follow these tips and your application will be more likely to attract lender interest as well as superior rates and terms….

How purchasing a leasehold business works

Raising finance to make the purchase is only one part of the process. The rest is mainly a legal process named an assignment, where the seller/current tenant (the ‘Assignor’) transfers their lease to you, the buyer, (the ‘Assignee’). 

This must be done with the landlord’s formal consent and usually comes with protections in place for the landlord, including an Authorised Guarantee Agreement that states the assignor will repay the landlord for losses incurred should you, the assignee, default on payments. 

The landlord will assess you as a buyer, performing due diligence to ensure you’re going to be a reliable tenant that can repay rent. If satisfied, they will grant a ‘Licence to Assign’ and the process can continue. Sometimes the landlord will want additional collateral from you before they grant consent such as a Director’s personal guarantee. 

Negotiating finance throughout the process

Lenders are typically hesitant about short leases – but we can represent your case to select lenders who will instead focus on the overall value of the business rather than the lease to offer a better business loan for pharmacists. 

However, being able to negotiate a longer lease is only ever going to be a positive for your finance agreement – so we’d advise opening dialogue early and trying to get the lease extended as soon as you can. 

As with a standard pharmacy purchase, lenders will assess your overall business plan, intended structure, history as an owner, credit history etc. They’ll do their own due diligence into the business that’s up for sale and all of these things will impact your offer. 

Work with Rangewell and we’ll guide you through this entire process, making it easier than ever to secure finance even for a leasehold pharmacy. We’ll build your business case, facilitate a discussion with the landlord and even help you choose legal representatives to best manage a pharmacy purchase. 

Before you’re granted any funds, however, you’ll need to understand and pursue the extension of the lease to improve the lender’s offer. 

Understand the existing lease

When listing a business leasehold, the seller should ideally seek permission to extend the lease to its maximum possible length, as it allows them to charge the maximum value for the property and helps alleviate the justifiable concerns of buyers. 

While the seller is legally obligated to seek consent from the landlord before the sale, there’s still no guarantee to a buyer that the landlord is going to accommodate a lease extension. They may have other priorities for their property that conflict with your intended pharmacy plans. 

In the recent case of a large chain selling off their pharmacies at scale, the leases aren’t being renegotiated because the vendors are prioritising speed and discounted pricing. The lease is, in many cases, either expiring very soon or in the next 2-3 years at most. This leaves the buyer responsible for renegotiating the lease directly with the landlord. 

Before you pursue any real action in the sale, you need to understand exactly what the leasehold agreement covers – not only do you need to know how long is left on it, but you should also try to ascertain what the lease extends to. Some pharmacies situated in units in city centre and retail locations may, for example, have multiple floors or rooms that are either included or excluded from the lease. 

A key aspect of any lease is whether it’s ‘inside’ the Landlord and Tenant Act 1954, which outlines strict conditions for how lease extensions are offered to business lease holders.

The Landlord and Tenant Act 1954

‘The Act’, as we’ll refer to it from now, was brought into being to protect businesses and give them security when leasing property. Business leases are covered by the act unless they fall under certain exceptions or they have agreed to opt-out. 

Exceptions include tenancies with a term of fewer than six months, agricultural tenancies and licences. Landlords can also give notice to the tenant to confirm that the lease will not be protected by the act, which the tenant must then agree to. If the landlord issues this declaration in less than 14 days before the lease is granted, the tenant must issue a statutory declaration to consent to it. 

Tenancies can be ended under the Act through a notice issued by the landlord or tenant under sections 25 and 26, respectively, or through forfeiture due to a breach of the terms. Crucially, it can also be ended by the tenant vacating the premises at the end of the contractual term. 

If you’re buying a pharmacy with a short lease, you must understand how the act will affect the sale and whether you’re protected under it. We’ll help put you in touch with expert solicitors who can navigate the tenancy arrangements and the legality of the sale under the Act and any other requirements. 

Try to extend the sales window

While lenders we suggest to you may entertain short-lease pharmacy purchases, you’re still better off negotiating a renewed lease as soon as possible. Having an agreement in place you can show to lenders puts an added stamp of confidence on the deal and will attract better offers. 

Never accept a seller or selling agent’s promises about lease renewals/extensions. You need to have it guaranteed either by them or the landlord. Sellers will also often demand non-refundable deposits, but you shouldn’t commit any funds to the purchase until you’ve had a chance to talk to the landlord and discuss the lease, its renewable and any other concerns. 

Before paying a deposit, you can negotiate with both the seller and the landlord of the site. The seller will often be pushing for a deposit and trying to complete the sale within a desired completion window, but it’s in your best interest to ask them to extend this window until you’ve talked to the landlord. 

Extending that window is in the seller’s best interest – though you may have to discuss it with them before they consent. Extending the timeframe until you’ve spoken to the landlord means you’ll be more likely to secure a better finance solution and subsequently buy the business. 

Negotiate directly with the landlord

The landlord will have different priorities and concerns when it comes to renegotiating the lease. When you’re unhappy with a lease’s existing timeframe, you can negotiate directly with the landlord rather than deal with the seller.

The landlord may simply refuse, but generally, this is only for a particular reason such as they’re selling the property or they have found something during due diligence that makes them wary about you as a tenant. 

While it’s in their interest to have a tenant in the property, they may not feel a pharmacy business is a good choice for their future plans. You need to talk through their intentions and how your own purchase would impact their ownership of the property. Consider aspects like:

1. Do they have any plans for the building/site that will impact a pharmacy business's ability to operate? Do they intend to redevelop the property? 
2. When was rent last negotiated - some rental prices given to businesses in the past may still be honoured until the lease ends, making the landlord hesitant to renew unless a new rental amount is agreed upon. 
3. Is there potential for expansion? Could you, as a buyer, take possession of adjacent properties/rooms? 

In an ideal case, you’ll be able to agree to a lease extension with the landlord. This may require some concessions from you as a buyer, such as agreeing to update the property and increase its value. In return, the landlord may also offer benefits such as a fixed-term rental cost, a rent-free period or a tenant-only break clause. 

Putting it all together: Rangewell helps pharmacist expand

Recently we worked with a pharmacist that currently owned a single unit but had plans to expand. Their existing pharmacy was successful and they knew that additional units would allow them to grow their brand and customer base. However, they had no real opportunity to pursue this as they had not saved a large deposit and local business listings were rare.

The large sell-off by a national chain meant the pharmacist had opportunities to purchase two leasehold pharmacies that had strong dispensing bases, provided they could secure the finance they needed (including a deposit). 

Unfortunately, the leases on these businesses were expiring imminently and the seller had no desire to renew them. The pharmacist approached Rangewell after being initially refused by lenders. We were able to identify lenders who may offer finance to leasehold businesses. We then worked with the client to strengthen their business plan and helped them negotiate a new lease with the landlord. 

After this, we were able to negotiate entirely on the pharmacist's behalf and secured them a 75% LTV of £740,000 to fund the purchases. We were also able to help finance the remaining 25% deposit with a revolving credit facility built around their business’ own financial forecasts. 

Don’t let a short lease stop you from succeeding

In the strictly regulated world of pharmacy sales, opportunities for expansion can be hard to come by. Don’t let the opportunities afforded by recent industry activity pass you by because of short leases. We’ll arrange the finance you need to make the purchase and grow your business. 

Get in touch to ask any questions you might have about leasehold pharmacy purchases or to get started with an application.