Pharmacy premises finance: buying your pharmacy freehold

For most retailers, owning the shop is a matter of rent against mortgage. For a pharmacy it is also about protecting the NHS contract. The contract is tied to listed premises, so a landlord who refuses to renew, or demands a sharp rent increase, has unusual leverage over a pharmacy owner. Buying the building removes that risk. The usual triggers are:

• The landlord offers to sell, often a private investor or a retiring former owner who kept the building when selling the business.
• The lease is running down and a purchase is cheaper over time than a renewal on the landlord's terms.
• A move to better premises, such as a larger unit near a new health centre, within the same neighbourhood.
• Planning for a sale, where the owner wants to keep the building as an income-producing asset after selling the business.

Buying as a sitting tenant is usually the simpler purchase. You know the building, the business keeps trading throughout and the lender can see exactly how the pharmacy performs there. The price discussion often turns on whether the landlord values the building as an investment let to you or as an empty shop, and a sitting tenant can sometimes negotiate between the two.

A move is more involved. The new premises need NHS approval for the relocation, which is generally only granted where patients' access does not change significantly, as Community Pharmacy England explains in its notes on relocations that do not result in significant change. The building must also be registered with the GPhC as a registered pharmacy premises before you dispense from it. Lenders will want the approvals in place, or a clear route to them, before releasing funds, and the fit-out will usually need its own funding through fit-out and refurbishment finance.

The lender's valuer values the property, not the pharmacy. A typical high street or parade pharmacy is valued as a retail unit, with the dispensary fit-out adding little, and the valuation does not include the goodwill of the NHS contract. That means a building that is central to a valuable business may still be valued modestly, and the loan is sized on that figure.

Many lenders offer owner-occupier commercial mortgages at up to around 70 to 75% of value, over terms that often run to 20 or 25 years, depending on the lender and the case. Repayments are tested against the pharmacy's profit, with the rent you no longer pay added back. Where the building includes a flat above that is let separately, lenders treat the property as mixed-use and value both parts. Living in the flat yourself, or lending secured on any home, is outside the scope of what we arrange.

The building can be owned by the pharmacy company, by you personally, by a separate property company or through a pension scheme that can hold commercial property. Each choice affects tax, how rent is paid and what happens when you sell the pharmacy. A building owned inside the trading company is sold with it on a share sale, which raises the price a buyer must fund; a building held separately can be kept and let to the buyer. Our guide to buying premises through an SPV or pension explains the options, and our guide to selling a pharmacy covers the exit side. Take tax advice before deciding.

• Deposit. Typically the balance between the lender's offer and the price, plus costs.
• Stamp Duty Land Tax. Charged at non-residential and mixed rates in England and Northern Ireland; Scotland and Wales have their own taxes.
• VAT on the price. If the seller has opted to tax the building, VAT is added. Because NHS dispensing is zero-rated, most pharmacies can reclaim it, but it must be funded until the refund arrives.
• Professional fees. Valuation, survey, your solicitor and the lender's legal costs, plus any lender arrangement fee.
• Works. Repairs or improvements the survey uncovers, which lenders will not usually include in the mortgage.

Buying ties up cash that might otherwise fund stock, automation or a second branch, and the property is at risk if repayments are not made. A building valued as an ordinary shop can be worth less than you assume if the pharmacy ever closes. Interest rates on property borrowing can move, so check how a rise would affect you. If you would rather keep cash in the business, a long new lease with a fixed review pattern may achieve much of the protection at lower cost. If you already own the building and want to release capital, our commercial property refinance page covers that route.