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The types of pub agreements

May 14, 2019
Go back 30 years or so and anyone looking to take on a pub as their their future business had just two choices: buy a freehold or sign up to a brewery tenancy.
The former was expensive, and still is. The latter was always attractive as a cheap entry to the trade and low rents were available, too – brewers were mostly interested in shifting beer volumes and making money on the margin they got from selling it to the tenant.
Agreements were simple, usually for a three or five-year term that could be con-tinually rolled over. Tenants would rent the same pub for decades and pass it on to their children. A pub could stay in the same family for generations.
These ‘traditional’ tenancies are still widely available, though rents are higher and, in tougher market conditions, they tend to change hands more frequently.
The big break from tradition came in 1988 when Grand Met, brewer of Watney’s beers, came up with a new idea.
The Inntrepreneur Lease offered a 20-year term, lessees were fully tied and responsible for all repairs but, crucially, the lease was assignable. The ‘sell’ was that an enterprising publican could build up a business and sell it on at a profit.
Notorious agreements
It quickly became notorious for bankrupting licensees, partly because of flaws in the deal and partly because in the early years there was a recession on.
The concept, though, stuck. The big brewers forced into rethinking their strategies by the 1989 Beer Orders launched their own long leases in the 1990s seeking a more distant, less paternalistic relationship with their tenants.
Pubcos, too, as they grew into early 21st-century giants, looked to a mix of tenancies and leases that could attract a range of licensees from those who wanted a substantial commercial opportunity to those hankering for a more relaxed lifestyle business.
The long lease model relies for its success on a more entrepreneurial licensee who is attracted to running a pub less for the lifestyle and more for profit. Anyone committing to a long lease must be sure about committing to a higher risk business for the chance of greater returns.
And an ambitious licensee might be
disappointed in the money they can make from a traditional tenancy, unless they go multiple and build up a chain of outlets.
Inntrepreneur, however, broke the mould for what prospective licensees might expect from a deal and flung the recruitment net wider as far as brewers and pubcos were concerned.
Although one thing didn’t change. Lessees, like tenants, were still tied to their landlord when it came to buying beer, and frequently other goods.
Paying more for beer
It isn’t just the restricted choice that could be an issue. Tied licensees are paying considerably more for their beer than they would on the free market, yet they often find themselves in competition with freehouses that can do just that.
This differential is known in the trade as the ‘wet rent’. In theory the extra cost is traded off against a lower rent. Getting this balance right is key to the sustainability of a tied tenant’s business, and it’s not a straightforward calculation.
A wet-led, or rather beer-led, pub is more sensitive to increases in beer prices, while a food-led house or one that sells a lot of wines and spirits has more interest in keeping down the dry rent.
And if there’s a sudden dip in trade, because beer sales are down, the wet rent will follow it, meaning tenancies can be more resilient in hard times.
Another potential advantage in being tied lies in the support that a brewer or pubco might bundle up into the deal. This might range from financial advice to training, and from promotional activity to investment in the pub itself.
Key to delivering this is the landlord’s local business development manager, who might go by a variety of job titles depending on the company. Having a good relationship with them is an important part of the deal for a tied tenant.
Offering more support
Many companies now offer an agreement with enhanced support, known as a managed tenancy or franchise.
This is not really like a typical business franchise, but is aimed at inexperienced licensees who might benefit from a closer relationship with the pub owner which, in return, gets to see the books. That’s not something every independent business person would appreciate, but it does give newcomers a bit of extra security.
For many, though, the tie-free grass will always look greener, and in recent years the larger pubcos have relaxed the tie somewhat – though only where they feel the licensee and the pub are right for free-of-tie.
One firm, Wellington Pub Company, has, since 1998, specialised in hands-off free-of-tie leases and has more than 800 on its books, nationwide.
In 2016 the statutory Pubs Code gave tenants of companies with more than 500 houses the right to request a free-of-tie
offer from their landlord, along with an independent assessment that the higher rent they’re expected to pay has been calculated fairly (see box).
The impact of the market-rent-only option, as it’s called, has only just begun to play itself out, but it has certainly changed the game.
The modern tenanted and leased marketplace is one of great variety and opportunity. But you need to be clear about your ambitions and secure a deal that gives you the best chance of success.
Honest and open relationships
Pub owning businesses these days like to see themselves as partners in your enterprise, and it’s a good idea to take them at their word and start out with an honest and open relationship.
“Our philosophy is to empower our publicans to run thei​r business their way, in the heart of their local communities,” says Nick Light, managing director of Ei Publican Partnerships, the country’s biggest player.
“We offer a variety of agreements for people looking to run a pub, from those taking their first steps on the ladder to more experienced operators, and we offer all the help and support they require to develop a successful business.
“This includes business-building activities to increase footfall, extend customer dwell time, improve margin and boost turnover.
“Our agreements include the Retail Partnership Tenancy, which offers a fixed term of five years, to greater levels of support on pricing and retail standards with the Beacon Partnership Tenancy.
“There’s also the option of our 10-year incentive lease, as well as the opportunity, at selected sites, to negotiate a free-of-tie lease for 10 or 20 years.”
Traditional three-year agreements
Charles Wells, meanwhile, continues to offer traditional three-year tenancy agreements across its 180-strong estate centred on Bedfordshire.
“It’s your business; you employ the bar and kitchen staff of your choice and pay their wages,” explains commercial director Peter Wells. “Outgoings such as utility bills, business rates, insurance and tax will also be your responsibility.
“Meanwhile, you benefit from the expertise and resources of Charles Wells’ retail development managers, marketing, finance and customer-support teams.
“Depending on your experience, your level of funding and the pub in question, we’ll offer you either a Fixed Term Agreement, an opportunity to acquire first-hand experience of running a pub without committing to a more long-term agreement, or a Renewable Tenancy Agreement that’s typically suited to partners with experience of running their own pub.”
 
Choosing the right agreement for you
Simon Hall, director of licensed property agent Fleurets, gives advice:
“The key to a successful pub business, run under a lease or tenancy model, is to find the right opportunity and the right agreement. 
“There are a wide variety of deals to consider, from joint venture operations, to arms-length institutional long-term leases, to short-term flexible tied tenancies, all of which can be viable as long as terms fairly reflect the risk and reward.
One of the biggest decisions you have to make is whether to consider a tied or free-of-tie deal.
Tied deals are often more accessible requiring a lower cash investment to get set up. For these reasons they are often better suited to less experienced operators with limited funding.
Having said that, some of the most profitable pubs are held on tied agreements by experienced multiple operators who operate them under management.
Free-of-tie agreements will give you higher gross profit margins, but rents will also be higher, and these leases will almost always put the responsibility for repairs on the tenant with no business support.
The most important aspects of any lease agreement are those with large financial implications:
Repairing obligations
Make sure you know what internal and external repairs you will be responsible for. It could be roof replacement or the central heating system. Establish what needs to be done at the outset and by whom, and what might need to be done before the end of the lease.
Rent
Is the rent affordable? How does it get reviewed? If there are fixed uplifts, like RPI increases, will these make the rent unaffordable? What would happen if new competition changed the trading potential of your pub – could you still pay the rent?
Security/guarantee
What happens if the business fails? It’s not only about the cash bond but also the personal guarantee you may have signed up to. Can the landlord call on your personal wealth to pay rent and bills or will it be capped?
The tie
It’s critical there’s a fair balance between rent, the extent of the tie and discount levels. Make sure you’re fully aware of the effect of the cost of products on your profitability and that this is reflected in the level of rent you pay.
The pubs code and MRO:
Following a series of parliamentary inquiries, a statutory pubs code was introduced in 2016 to regulate the relationships between those pub operators with more than 500 houses and their tenants.
It threw into the mix a compulsory market-rent-only option, or MRO, which gives existing tied tenants the right to request a free-of-tie deal at certain trigger points in their lease term such as at rent review or renewal.
Should they elect to go free, they will, of course, have to pay a higher rent. An independent assessor may determine whether the increase is fair.
Even if a licensee decides going free is not best for their business, having the option may be an effective lever to improve their tied deal.
For licensees looking for a new agreement, however, MRO has, in the words of Michael Erridge, “shifted the dynamic” of what’s on offer.
He founded his company, MDE Pub Consultants, to guide licensees through the ‘minefield’ of the new legislation and has noticed pubcos are more reluctant to market the kind of longer lease agreements during which the MRO option will be triggered.
“The pubs code has been very good for existing tenants with a decent lease and length of term,” he explains. “MRO rights have empowered them to renegotiate terms to a more favourable tied deal or a free-of-tie agreement.
“However, it hasn’t helped those seeking to enter the pubs game as it has generally narrowed the range of agreements available – to either shorter term tenancies, or franchise-style agreements.
“It makes sense for pub-owning businesses to offer traditional tenancies to mitigate their exposure to MRO. If the term is only five years with no rent review cycle and no Landlord & Tenant Act protection then there is never a ‘trigger’ event.
“You could seek to negotiate a free-of-tie lease at the outset but if the rent becomes a stumbling block there’s no right to refer to an independent assessor. So it very much comes down to negotiation, and often you will not even get an offer.”
 
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