Fix the lease before you list the pharmacy

If your pharmacy lease has two or three years left and no renewal options, fix it before you list. Not after a buyer appears, and not during due diligence when a closing date is already on the calendar. In the deals we work on at PharmacyBroker.ca the lease always changes the listing price, sometimes by half or more, and without a renewal option you cannot get the price you want unless you hand the buyer a very large discount. Our minimum is 10 years remaining including options, because that is what every lender we have worked with needs to write a 10 year loan.

This is the last article in our Lease is Everything series, and it is the practical one. The earlier articles explain why the lease decides financing, value, closing and what you keep. This one gives you the sequence: eight steps, in order, from pulling the documents to sending the landlord consent package the day the letter of intent is firm. It ends with the seller and buyer checklists.

The first document we ask for

When an owner calls about selling, the lease is the first thing we ask for at intake. Before the financial statements, before the prescription counts. Arash has signed leases in every format a pharmacy can take, from street plazas and medical buildings to closed-door and compounding units, and he reads the lease the way a buyer’s bank will. Without a good one we are hesitant to take the listing, because we know how the conversation with the lender will go.

So here is the message to anyone sitting on a lease with two or three years left and no options: go fix it. A buyer’s lender sets the loan amortization from the years remaining on your lease including solid options. Two years of lease means two years of amortization, which no acquisition loan can carry, so the buyer either pays a fraction of the price in cash or walks. The pharmacy might be excellent. The lease makes it unfinanceable, and in our experience that can move the number by 50 percent or more.

The target: at least 10 years including options

Our minimum before listing is 10 years remaining, counting firm term plus renewal options that a buyer can actually use. Every lender we have worked with applies the same rule of thumb: amortization follows the remaining lease including options, and in the current market that means up to 12 years of amortization when 12 years remain. Ten years of lease supports a 10 year loan, and a 10 year loan is what makes a pharmacy at 5 times EBITDA financeable with a normal down payment. Our first article covers what the bank accepts in detail.

Options only count if they are real: the tenant alone can exercise them, they pass to a buyer on assignment, and renewal rent is set by a mechanism that works without a fresh agreement. An option that dies when the lease is assigned is a hope of renewal, and lenders do not lend against hope.

Why it is worth the trouble: one pharmacy, three leases

Take our standard pharmacy, $300,000 of normalized EBITDA and a value of $1.5 million at 5 times, and change nothing but the lease. These are illustrations from our model (8 percent interest, a $50,000 annual reserve, a 1.25 debt service coverage floor and a lender advancing at most 80 percent of price). They are not market data or a bank commitment.

Scenario A is the pharmacy with the lease fixed. Scenario B is the same pharmacy after a landlord used a sale to push rent up $30,000 and the lender declined to count a weak option: the price drops by $285,000 and the buyer needs more than $200,000 of extra equity on top, which shrinks the buyer pool. Scenario C is not a pharmacy with a discount. It is a two year income stream plus whatever the fixtures fetch, and many lenders would decline it.

Price is not proceeds either. If the landlord’s consent comes with a $75,000 concession the seller has to fund, the $1.5 million becomes $1.425 million. If the buyer also wants a $100,000 holdback because you are staying on as guarantor, cash at closing is $1.325 million. Both deductions trace back to the lease, and both are smaller when the lease is fixed first.

The sequence: eight steps before you list

Start as soon as you know you will sell. A year ahead is good. Two is better.

1. Pull every document

Assemble the whole lease file, not just the lease: the original lease, the offer to lease, every amendment and renewal, side letters, any guarantee or indemnity you or your holding company signed, prior landlord consents (a previous assignment, a banner change, a renovation), the current rent statement and the last two or three years of additional rent reconciliations for CAM, taxes and insurance. If something is missing, ask the landlord’s office for a copy now, as routine housekeeping. Our guide to the documents to sell a pharmacy covers the rest of the file; this step is the lease only.

2. Check the facts

Before any lawyer reads a clause, confirm the basics yourself.

The tenant matches the seller. Is the tenant your operating company, your holding company or you personally? Who signed as indemnifier? If the pharmacy’s current owner is not the entity on the lease, the sale structure gets complicated and the landlord will notice.

The dates. Write down the expiry date, each option, and the notice window for exercising each option. Many options have to be exercised months before expiry, in writing, and a missed window is a lost option. Note any demolition, relocation or recapture dates as well.

Defaults. Rent arrears, disputed CAM charges, alterations done without landlord approval, lapsed insurance certificates. Each one gives a landlord a reason to delay or refuse consent later, and each one is cheaper to fix now.

3. Have a lawyer read the provisions that decide a sale

You want someone who reads commercial leases regularly. We consider this one of the most important parts of a pharmacy transaction, if not the most important, for anyone with a succession plan. Ask the lawyer to report on seven things: the transfer and assignment clause, change of control (does a share sale need consent?), recapture or termination on an assignment request, the renewal rent mechanism (if it says market rate, how is market rate set, and can it go down as well as up?), demolition, relocation, and what happens to your guarantee after an assignment. Article 5 explains the clauses that protect a sale and article 7 covers demolition and relocation. This is general information, not legal advice. Have your lawyer read your lease.

4. Find out what a buyer’s lender will need

You will not know the buyer yet, but you know what their bank will ask for, because every lender we have worked with asks for the same things: a lease term including options that covers the amortization, which in the current market means 10 to 12 years; a landlord waiver covering the bank’s security over the pharmacy’s assets; an estoppel certificate confirming the lease terms and that there are no defaults; and proof of insurance, including fire coverage. Lenders want these settled about four weeks before closing.

One correction that comes up often. Matching lease to amortization is lender practice, not a government program rule. The Canada Small Business Financing Program rules we have read contain no clause tying the loan term to the premises lease, and that program finances asset purchases only, caps term loans at $1 million and rarely covers a pharmacy acquisition on its own. The requirement that matters is your buyer’s bank’s.

5. Negotiate the extension or the amendments now

This is the step that moves the price. Go to the landlord as the owner who intends to stay, and ask for what the sale will need: enough firm term and options to reach 10 years or more, options that pass to an assignee, a renewal rent mechanism with defined numbers, and an assignment clause that says plainly the pharmacy may be sold and sets objective conditions for consent. Arash’s own lesson from his early leases is to state in the lease that the pharmacy may be sold and to make assignment as easy as possible. Most landlords accept this at the start. Some make difficulties later, at assignment, when they know there is a deadline.

Confidentiality rarely conflicts with this. Tenants ask for longer terms all the time, for refinancing, renovations or peace of mind, and nothing about the request says sale. Negotiate calmly, over months if needed, with no buyer in the room and no closing date on the calendar. That is the whole advantage of going first.

Expect the landlord to ask for something. In our experience that is higher base rent, defined increases over the new term, or a guarantee. Decide in advance what you will give.

Worth conceding: a reasonable step in base rent, a clear schedule of increases (buyers and lenders prefer a defined number to a vague one), a guarantee that ends with the current term, and the landlord’s reasonable legal costs.

Not worth conceding: options that are personal to you and die on assignment; a market-rate renewal with no mechanism and no floor or arbitration; a demolition or relocation clause exercisable during the term, which can make the pharmacy unfinanceable on its own; a guarantee that runs into renewal terms or survives an assignment; a recapture right triggered by a consent request; or an assignment clause that gets harder than the one you have.

Run each proposal through the model in the table above before you say yes. A $30,000 rent increase costs $150,000 of value at 5 times. Ten years of financeable term is worth a great deal more than that.

6. Clean up the defaults

Pay the arrears. Settle the disputed CAM reconciliation, or at least put your position in writing. Get retroactive approval for the alterations. Put a current insurance certificate on file. Then ask the landlord for a written statement that the lease is in good standing. You will need the same thing, as an estoppel certificate, for the buyer’s lender later, and a landlord who has given it once gives it again more easily.

7. Decide share or asset, then read the lease against that choice

Decide with your lawyer and accountant whether the sale is more likely to be a share sale or an asset sale. Share sales are more common now because sellers want the lifetime capital gains exemption; asset sales favour buyers and also happen often. The lease may treat the two differently. An asset sale needs an assignment and the landlord’s consent. A share sale leaves the tenant company in place but may trigger a change of control clause that needs consent too. Check whether bringing in a partner counts as a transfer. If the lease is unclear, add it to step 5.

8. Prepare the landlord consent package in advance

Build the package before there is a buyer, so only the buyer’s details are missing. In the deals we work on landlords may ask for a business plan, a resume, a credit check, references, a guarantor and, depending on the buyer’s financials, a meeting. All of this is within the landlord’s rights, and buyers should not resist it. Follow the form the lease requires and include the assignee’s correct legal identity and ownership, experience, financial capacity, proposed use and the closing date, with a secure way to pass financial information.

Send it the day the letter of intent is firm and the purchase agreement is being drafted. The sooner the better. Aim to have consent, the waiver and the estoppel in hand about four weeks before closing, and line the College filing up to the same date: a change of direct owner application at least 30 days before the effective date in BC, and at least 45 days in Alberta and Ontario, with other provinces setting their own lead times. If the landlord is slow, extending closing by a few days or a couple of weeks is not a problem. A consent that has not been requested until month five is. The sale timeline shows where this sits in the process.

If the landlord will not extend

Some landlords will not give more term, whatever you offer: a redevelopment plan, a lease they consider below market, or simple indifference. You still have four routes, and none of them is pretending the problem is not there.

Price it honestly. Set the asking price on the lease you have, not the lease you hoped for. A pharmacy for sale with four years of term is worth what a buyer can finance over four years, less the renewal risk they are taking on. A realistic number sells. An optimistic one sits, goes stale and sells for less.

Widen the buyer pool to equity. A short lease does not stop a buyer who can put more cash in, it stops a buyer who needs a 10 year loan. Experienced owners adding a store, groups and investors with capital can live with a shorter amortization, and they will price the risk.

Let the buyer negotiate a new lease as a condition. Some landlords who will not extend for the current tenant will sign a fresh lease with a new, creditworthy operator, because they get to reset the terms. Make the new lease a condition of the purchase agreement and let the buyer run that conversation with you alongside. Be aware that a new lease often means higher rent, which lowers forward EBITDA and the price you can ask.

Wait and work the relationship. If you are not in a hurry, keep paying on time, keep the premises in good order, and keep talking. Landlords change their minds when the building’s plans change. Overholding month to month at the end of the term is not something we recommend. We have seen it, and it only works where the relationship is strong and the landlord will commit in writing to a lease with the buyer. Without that, there is nothing for a bank to lend against.

The seller checklist before listing

A compact version of the full list. Have your lawyer adapt it to your province and your lease.

• Assemble the signed lease, offer to lease, every amendment, renewal, side letter, guarantee and prior consent.
• Match the lease tenant and guarantors with the business owner and the planned sale structure.
• Diary the expiry, every option notice window, cure periods and any demolition or recapture dates.
• Confirm the renewal options survive an assignment and are not personal to you.
• Confirm the renewal rent mechanism is complete and can operate without a fresh agreement.
• Read the definition of transfer for share sales, change of control, new partners and amalgamations.
• Confirm the buyer approval standard, the information the landlord can require, the response deadline and what silence means.
• Identify any recapture, termination, profit sharing or mandatory new lease provision before you make a consent request.
• Obtain express release language for the original tenant and every guarantor and indemnifier, and check whether any guarantee runs into renewal terms.
• Verify that permitted use covers what you actually do, including compounding, opioid agonist treatment and any clinic arrangement.
• Identify relocation and demolition triggers, notice periods, compensation and the regulatory work a move would force.
• Resolve arrears, disputed charges, unapproved alterations and insurance gaps, and get a good standing letter.
• Reconcile the additional rent statements and know your end-of-term restoration obligations.
• Confirm what the landlord will sign for a lender: waiver, estoppel and any non-disturbance from the landlord’s mortgagee.
• Document every agreed improvement in a signed amendment. Never market a verbal assurance as a secured right.
• Set an achievable lease condition deadline and outside date in the purchase agreement.

The buyer checklist

If you are looking at a pharmacy for sale, the lease is your due diligence too. The short version:

• Obtain the complete signed document chain, including the head lease if the pharmacy is a subtenant.
• Confirm who holds the leasehold interest and that the landlord has authority to consent.
• Verify the remaining firm years, each option, its conditions and every notice deadline.
• Get written confirmation that renewal, signage, parking and other material rights transfer to you.
• Identify recapture, demolition, relocation, continuous operation and termination clauses.
• Separate the assignment of the existing lease from any request for a longer term or new rent; they are different negotiations.
• Reconcile base rent, CAM, taxes, utilities and management fees against at least the recent reconciliation statements, not a seller estimate.
• Review permitted use against zoning and against your plans for the pharmacy.
• Get your lender’s actual lease requirement in writing: term, accepted options, amortization, coverage test and equity.
• Keep the lease and financing conditions open until the signed consent, waiver and estoppel are acceptable to your lender.
• Confirm the seller’s release covers the right parties and does not quietly leave you sharing a guarantee.

Both checklists are also available as a PDF and Word download: the pharmacy lease checklists.

Start now

Everything here is easier a year before a sale than a month into one. Pull the file this week. Book the lawyer this month. Open the extension conversation before anyone knows you are thinking of selling, and keep the consent package ready so it goes out the day the letter of intent is firm. This is general information, not legal advice. Have your lawyer read and negotiate your lease.

When you are ready, request a valuation and we will read the lease first, the way a buyer’s bank will. If you would rather talk it through, book a consultation. And if you are on the buying side, our current listings show the lease terms up front, because we have already asked.