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Freehold or leasehold

May 14, 2019
Property experts from Christie & Co, Sidney Phillips, and Fleurets break down the pub purchasing process for both freehold and leasehold buyers
For both buyers taking their first steps into pub ownership and more seasoned would-be multiple operators, property acquisition can be a complex business – especially given the market’s temperamental nature.
Discussing the characteristics of the pub property market, Andy Tudor, divisional director at leisure property specialist Fleurets’ Midlands office, highlights that it is in a state of near-constant change.
“Before the financial crash, there were very few freeholds coming to the market and those that did were frequently bought by the then very acquisitive pub companies,” he explains.
“Fast forward to 2008 and the recession and the market was relatively ‘flooded’ with freehold disposals for a couple of years.
“The sorts of numbers coming to the market has more recently reduced right back down again, which frequently leads to competitive bidding, particularly for pubs in popular areas.”
With this in mind, here are a range of key hints and tips from industry experts that freehold or leasehold buyers need to consider:
Take specialist advice
Simon Chaplin, senior director, corporate pubs and restaurants, at specialist adviser Christie & Co explains that consulting an industry expert, irrespective of experience or desired tenure, is an essential first step.
“They will be able to advise on the price range in which you should be looking, based on your deposit and experience,” he says. “This will determine if you are a freehold buyer or will be more suited to leased premises.
“Be realistic based on your abilities. While many businesses will have a good trade established, do you have the skills to maintain and improve on it?”
Seek financial clarity
Establishing as clear a picture of both personal and pub finances is essential before getting into the nitty gritty of purchasing a freehold or leasehold, according to Fleurets’ Tudor.
“The loan-to-values available are still a lot lower than they used to be, so the level of deposit required is frequently a lot higher than buyers anticipate,” he explains.
“The best advice is to ensure your own financial position is as transparent as possible; and equally important, get as much financial information about the pub as you can.
“This will not always be possible, however. Pub company disposals, for example, will usually be sold with no accounting information at all.
But if you are seeking a loan from the bank, presenting them with clear, up-to-date audited accounts will help your cause markedly and reduce the level of perceived risk that the bank is taking.”
 
Prioritise title checks
According to Chaplin, there are a broad range of questions that a prospective buyer should ask about an available pub.
“Is the building listed? Historic buildings make great venues, but do restrict future development and need more maintenance,” he explains. “Even being in a conservation area can limit your plans.
“Boundaries, footpaths and historic onerous covenants can be restrictive, and these will ultimately effect value.
“Recently, many buildings have been listed as assets of community value (ACVs). If you are continuing to trade as a licensed premise this should have no effect, but any sale may attract the attention of the locals and will restrict any alternative uses for the building, should the business not be viable.”
Robin Mence, managing director of Sidney Phillips, adds that, for freehold purchases, concentrating on the title – legal proof of ownership – you’re buying trumps trawling through smaller, more technical, details.
Mence says: “People can argue about asbestos surveys and fire risk assessments but I think the most important thing when you’re buying a freehold is the title element of it because how you’re going to operate your business could be very different to your predecessor.”
Get the most site information possible
It may seem basic, but Tudor explains that it’s vital to do as much digging into a pub’s accounts, surveys and reports as possible in order to gain a comprehensive understanding of what you’re buying.
“Accounts are important and give you a helpful overview of the business but they don’t tell you much about the property or its condition,” he suggests.
“Gas and electric surveys, asbestos reports, energy performance certificates and, if needed, a structural survey, will help give you the full picture as well as general due diligence. Make sure you use a good lawyer.”
Investigate value and condition
If information that helps establish a site’s overall condition isn’t readily available, Chaplin suggests that conducting your own research may be necessary to ensure you’re getting a good deal.
“Previous owners may not have invested wisely,” he explains. “You may need a bank valuation but having your own building survey is recommended.
“The property value should equate to around 70% of the purchase price, with goodwill and remaining fixtures in addition.
“If you are borrowing money to fund the purchase then anything outside these parameters may cause an issue, especially if substantial remedial works are required.
“If the property was previously let out on a lease, then the seller may be obliged to charge VAT on the disposal of the asset.”
 
Don’t rule out cheaper premises
“Of course, the price will vary from region to region and on the size of business,” Chaplin states.
“Over recent years, pub disposals have seen run-down sites come to market at lower prices, but the investment needed can be substantial.
“At the other extreme, great businesses can be operated out of modest premises.”
Gauge existing commitments
A solicitor should cover all the legal requirements but they may not be experts in the business, Chaplin explains.
“In many cases, you will be buying goodwill in addition to the property. This is based on the current and potential levels of trade, so analysis of the accounts and current business are essential.
“Accounts may be historic so asking for VAT returns or up-to-date till records is useful in order to see that the trade has not dropped.”
Moreover, Chaplin adds that a site’s previous operator may have made reservations or commitments that, if ignored or not honoured, could damage a business.
“Forward bookings are also important to be aware of if the venue holds weddings and functions.
“Taking a look at what is booked in and for when, plus deposits paid, is important as they may mean you need to continue to honour these, and you don’t want to find them unexpectedly.”
Understand current staffing
Chaplin highlights that it’s important to understand what existing staff a new buyer would have at their disposal before taking on a new pub.
If current staff can’t deliver a buyer’s plans to transform an existing venue and operation, issues could arise if a new buyer attempts to have them replaced.
“A large cost of running a business is staff, and the Transfer of Undertakings (Protection of Employment) (TUPE) come into play on the sale of a business,” he explains.
“If a buyer is looking to make wholesale changes then this can be an issue as the current staff may not be suited.
“Getting a clear understanding of the staff position early on can save issues later.”
Does the licence suit your ambitions?
“Licensing can be troublesome so make sure you know the licensed trading hours and type of licence,” Chaplin suggests.
“Ensure that it allows you to trade as you wish. If not, changes to planning and licensing can cause delays.”
The variety of differing owners
“Traditionally pubs were owned and leased out by the brewers. In the past 30 years,
this has changed with pub companies acquiring and then selling large swathes of pubs,” Chaplin explains.
“As a result, we now have numerous non-brewing investment companies owning and leasing pubs.
“This has, in turn, seen a wide range of lease and tenancy agreements being put in place.”
Sidney Phillips’ Robin Mence adds that different landlords can bring different standards, checks and licensee approval procedures with them.
“If it’s a pub company or brewery, they will normally expect the proposed lessee to provide cash flow projections, business plans and the like as well as references, whereas a freehold private owner may be a little bit more relaxed.
“Credit checks also need to be done. However there are thousands of different individual freehold owners and everyone takes a different view on it.”
Is it a new leasehold or assignment?
Mence explains that a new leasehold buyer will have a very different experience of purchasing to someone taking on an existing lease. Mence says: “If they’re purchasing an existing lease – taking an assignment – they have to go through an assignment procedure; an approval procedure with the freeholders.”
However, Mence adds that someone purchasing a new lease may find themselves in a more drawn-out process as the purchaser and landlord need to agree the terms of a newly created lease as opposed to stepping into an existing deal.
“If you break it down, the two major dynamics that slow down a freehold purchase are funding and checking the title. Whereas in a leasehold purchase, while you may have funding issues, you’ve got the approval process, and then you’ve got agreeing the terms of the lease.
“These aren’t relevant if you’ve got an existing lease, although you do have to go through an assignment process.”
Do you need a plan or references?
“On a leasehold deal, you must obtain landlord’s consent, and this may entail preparing a business plan,” Chaplin explains.
“Even if it is just for your own sake, it is worth spending some time on putting together a well-prepared plan.
“A landlord may also ask for references so think about who you could nominate –trade suppliers, existing landlords, previous employer or other professionals you have dealt with.”
Build a lease timeline
Chaplin stresses that establishing the length of a lease is increasingly important given the broader range of landlords – such as pub companies, brewers, individuals, or private investors – currently operating in the UK.
“Traditionally, leases used to be for 20 year periods or there were three to five- year tenancy leases. Now they vary, and you need to know your rights to renew the lease at the end of the term,” he says.
As highlighted by Sidney Phillip’s Robin Mence: “It would appear that the major pub companies are looking more towards shorter leases because of the MRO  (market-rent-only option) they’re generally looking to provide five-year leases. That is a trend in the leasehold market.”
Chaplin adds that the next rent review, and on what basis it is calculated, should be factored in by leasehold buyers. “Many are based on market evidence, which is
very subjective, and normally subject to independent arbitration if required, but this can be contentious,” he says.
“If a rent review is due within the next 12 months, you may ask the landlord to review the rent early to remove the uncertainty.”
Leaseholds and supply agreements
“Is there a ‘supply agreement’ in place or is the pub ‘free of tie’?
A supply agreement within the lease will obligate you to purchase products through your landlord, who may not be a brewer,” Chaplin explains.
“Free of tie removes this. Dependent on the type of business that is operating, the restrictions of a tied agreement can be minimal, so don’t necessarily exclude them from your search.”
What repair obligations are in place?
“Repair obligations are either for the whole upkeep of the building, or internal only, with many variations in between,” Chaplin explains.
“The landlord is able to force you to carry out repairs and maintenance, so a condition survey is recommended.
“As part of the process, the landlord will carry out a ‘dilapidations survey’ to check the lease repair terms have been adhered too.”
Is the venue future-proof?
Fleurets’ Tudor stresses that a buyer needs to seriously consider a pub’s durability against social and demographic changes before taking the plunge.
“While none of us have a crystal ball, I think it’s wise to ask yourself where you see the property in 10 years’ time?”
“Many of the country’s pubs have been with us for hundreds of years, and will hopefully be with us for hundreds more, but invariably, some operations will be far more durable than others.
“If you think there is a risk that the pub you are looking to buy may be susceptible to changes in social habits or demographic changes, does it have the potential to adapt? If not, does it have any alternative use options as a fall-back?”
 
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