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Beware the pitfalls of automatic contract renewals

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Pharmacy owners invariably enter into a variety of agreements as part of the normal course of business.

 

By Mike Jaczko, BSc. Phm, RPh, CIM®

 

Unfortunately, I see many owners have not read their contracts before they sign them. This is always a bad idea because what you don’t know can hurt you!

In some cases, you may hear an agreement referred to as “standard form”, implying that it contains no provisions which may be prejudicial to you. All agreements you sign create rights in your favour and obligations you must fulfill – that is equally true for “standard form” contracts. Pharmacy owners owe it to themselves to understand fully the benefits and rights as well as the costs and obligations associated with the contracts they sign.

The term or duration of your contracts warrant attention. The term of your contract is usually quite clearly stated. However, many contracts contain renewal provisions. A renewal can be: (i) automatic, where the term is automatically extended unless one of the parties advises the other that the contract will terminate at the end of the current term, or (ii) optional, where one party has the ability, at his or her option, to trigger a renewal term by giving notice. Failure to understand how a renewal works for a particular contract can lead to unintended consequences.

Automatic renewals are often seen in equipment lease and banner agreements. In today’s pharmacy business environment, a pharmacy could lose the ability to negotiate a fresh agreement at the end of the term because the agreement has automatically renewed. In the event that the agreement is automatically renewed for a further term, the pharmacy owner may miss the opportunity to renegotiate a banner agreement, or even walk away. Some banner agreements permit the pharmacy to terminate the banner agreement on relatively short notice, which can mitigate the impact of an automatic renewal.

Optional renewals are most often seen in occupancy leases. Rent for the renewal term is sometimes specified or can be subject to negotiation (failing agreement, the rent is often determined by arbitration). If the tenant fails to properly trigger the renewal, the landlord is free to set the rent without regard to any specified renewal rent or the threat of an arbitrator imposing rent. In such circumstances, the pharmacy owner tenant may have little or reduced negotiating power to strike a fair deal, or, if the lease specifies a favourable rental rate for the renewal period, the tenant may miss that opportunity.

In either case, recognition of the notice periods involved and taking appropriate action within those notice periods are the key to ensuring that you position your pharmacy business to its best advantage.

Pharmacy owners should review their contracts to understand the renewal mechanisms, think about what the best course of action will be – taking into account their circumstances – and create a reminder system to afford ample warning of impending notification to ensure they are not hit by a failure to comply with the requirements of the contracts. Retaining knowledgeable legal counsel with experience in the pharmacy industry is a must!

Mike Jaczko, a pharmacist by background, is a portfolio manager and partner of KJ Harrison, a Toronto-based private investment management firm serving individuals and families across Canada. For more information on this topic, email mjaczko@kjharrison.com.