Why you should not buy a Pub Lease. without serious Pub Management experience.
Buying Pub Leases:-
This is probably the biggest leap into the dark that any sane individual takes when he makes a career move, whether this is caused through boredom with their present job, redundancy or a casual drinker who believes he can run a pub better than the person running the pub, the reasons are endless.
We have for years run a free web site in the vain attempt to stop people buying Pub Leases without doing a serious investigation into the viability of the pub and what their onerous responsibilities in respect of the lease actually are.
My colleagues and I have tried to help far too many people in serious financial trouble with Pub Leases, the reasons are many, the people are honest hard working decent people, who had no idea about the nasties that lurk in a pub lease and the way that these technically legal nasties can be manipulated by unscrupulous Pub Co’s.
They like me, got fed up with a boring well paid job and took a leap into the dark, without doing extensive research into the viability of the project, I fortunately bought a run down freehold freehouse, not a Pub Co. lease calling itself a freehouse.
I had advised a couple of licensees on refurbishing their pubs, with amazing results, this has to be the way forward, not only do I have a living but capital appreciation to boot, at that time there was serious money to be made in running pubs. Brewers were in the business of selling beer, leases were very few to say the least, apart from genuine freehouses, most pubs were short term brewery tenancies until the Pub Co’s. appeared on the scene, http://www.buyingapub.com/?p=1191
Pub Leases were peddled by the bulk of the Pub Co’s as a means to capital growth and a good living, a number of us have worked hard providing information to the various Government Inquiries, to attempt to rectify the vagaries of many companies approach to decent people taking Pub Leases.
As a result legislation has now been passed with the aim of rectifying all or some of these anomalies, many of the Pub Co’s are looking for any and every loophole to exploit, they are prepared to spend a fortune on the very best legal advice to keep the “Status Quo” or as near as can be.
The legislation is a minefield and may take years to sort out.
The following information is not to put you off buying a pub, but to raise some advisory points that are vital to your well being, especially if you run into problems, should you decide to buy a Pub Co lease.
Finding a Pub or Licensed Property.
The Internet is the first port of call under, Licensed Commercial Agents, Pubs for Sale, Licensed Property, the variations are fairly substantial, it will give you a list of Commercial Agents with Pubs to sell.
The Morning Advertiser, either on line or from your Newsagent, which will need ordering or Daltons weekly.
1. When dealing with Commercial Agents, you will appear to get the feeling that you have insufficient money to buy whatever they have on their books, according to the person you deal with, they don’t tell you that, but that’s how you feel when you walk away afterwards.
Having bought a considerable number of commercial properties, those that know me keep quiet, those that don’t always try it on, one reason is selling finance, if you stretch your initial budget with additional borrowing, they get added commission.
They don’t lie about the business potential, they are economical with the truth, and in many cases have little or no idea about the short comings and potential of the individual business, always remember, these companies do not work for you their client is the Vendor or the Pub Co. selling the lease.
It may cost you for professional advice, but it is worth considering, I was subject to a very clever fraud on one pub, the VAT, Income Tax etc. were all verified by his and my accountant, the details are on the web site. The only thing that made me seriously question the Turnover was the lack of cutlery to do the level of business shown on the accounts.
2. Always use a Solicitor who is used to Licensed Commercial Property, do not use a House Conveyancer or Residential Property Solicitor, especially with Leases, it is a minefield.
Even so, he may suggest that certain clauses are in all Commercial Leases and are normal, don’t accept this get a detailed breakdown of what it commits you to and how draconian it can be if you run into trouble.
3. The Vendor is seldom available after the first two initial visits, especially if the leased business is struggling, which sadly many of those that are for sale, are.
You may get a couple of days guidance with the Vendor, but only after you have exchanged contracts and are totally committed.
4. Your first encounter with a representative of the Pub Co will be all smiles and enthusiastic chat, extolling the virtues of this amazing pub. The present lessee has to leave for family reasons, normally an ageing, sick, close relative, very few will tell you straight up that, they are working their socks off and not paying their way.
If you get the slightest whiff that they are on a Rescue Package, drop it like a hot cake, though the chances are that you won’t know this until the Vendor has departed. A Rescue Package has a variety of names, it means that they are in debt to the Pub Co, consequently they demand cash with order, which totally screws the existing cash flow and expedites their demise, they invariably get the lessee to sign over all their Fixtures and Fittings to the Pub Co in lieu of the debt. This ensures that the F&F cannot be sold, since they no longer belong to them, the Pub Co will without a large injection of cash, take the lease back and sell it on, with in many cases a copy of the last decent years trading, definitely not the current year, whose accounts have not been completed yet.
Ask the Pub Co Representative if the Lessee is on a Rescue Package, Cash with Order or any similar arrangement that is different to the Pub Co’s. normal trading agreement and would they confirm it in writing to you, as soon as possible.
Don’t sign anything until you get this confirmation, verbally it can be denied later by an unscrupulous Business Manager.
5. The representative will want a Business Plan, I have seen too many where they assume that they are going to set the world alight. A very sobering thought, the Business that the Pub has at that moment of time is it’s Market Share at that time, in the majority of the country there is a limited or falling market. To increase your market share you need to take business from another similar business and they will fight to retain it. So do not make any wild estimations of your expected business, keep all projections below 10% per annum. If you project anything over that, the Pub Co will say you are under performing and in the event of cash flow problems, you are then a statistic classed as Retail Failure or similar words.
Some years ago the failure rates of one Pub Co were in the order of 2,800 in two and a quarter years, the majority were listed as Retailer Failure, the details were sent to the Government Select Committee, which a number of embarrassing questions were asked, the numbers are not that high now, but they are still unacceptable.
The failure rate in leased Pubs has always been unacceptably high, not the weekly closure figures but the term known in the industry as the “Churn”, people failing and being kicked out and replaced by too many decent and honest people, these statistics never see the light of day and only come to light when a Senior Whistle Blower passes them on.
Do not assume that the other pubs in the area are being run badly, they may be under management or just a grubby boozer. I had to inspect a seriously grubby boozer, with some very rough people as customers. The licensee was doing in excess of 500 Barrels a year, with no food, he knew what he was doing and was highly successful, never underestimate a pub in your trading locality, especially if the Licensee has been there for years.
6. I have just been helping a lessee who is nearly out of his mind, the Pub Co. Business Manager knew the Vendors turnover was incorrect, because they have a precise record of the wet purchases, since they supply them all, the BM tried to claim that he had been buying out. Be assured, avoid buying out, it will forfeit your lease and cost you a heavy fine. Buying out is buying cheaper wet stock from another source, if the Pub Co. cannot supply the product you need written permission to do so, do not do it without that permission, Business Managers may give you verbal permission, but some will deny it afterwards, it’s a nasty business. The difference between what the Pub Co. charges you and buying out is substantial, it can be between £2-300.00 per Brewers Barrel, this makes competitive profitability very difficult.
The chances of the Vendor buying out in this case is unlikely, to the magnitude of that shown in the accounts. The Pub Co. would have been examining all the stock for evidence of stock not supplied by them. The draymen would report any anomalies, they know very quickly if someone is buying out in quantity. You are also liable for a spot check when you least expect it, in addition you have Brulines or similar on all your beer lines, which records beer flow and it’s precise accuracy is very questionable with beer line cleaning and the volumes of water being flushed through.
7. The serious nasty, your Solicitor will go through the lease and point out the anomalies, the one really serious nasty is the Guarantee Agreement (AGA). The Solicitor will tell you it is in all Commercial Leases, it makes you responsible for whoever you assign the lease to, for any debts owed to the Pub Co., which can be substantial.
I was asked to intervene with a major Pub Co. by the Local Licensing Officer, the Pub Co. were trying to repossess an elderly retired couples bungalow, who had assigned the lease eight years ago and after successive rent increases and overheads, the people who took the lease went bankrupt, the Pub Co. did get some of their money.
Guarantee Agreement was a kick over from Privity of Contract, a very nasty clause in Commercial Leases see the link it was banned in 1995 http://srb.co.uk/wp-content/uploads/downloads/2012/04/SRBchangeinleaselaw.pdf. You do need to read this to understand your responsibilities within the lease.
It is possible to buy yourself out of the Guarantee Agreement and can cost you in excess £8K, this normally applies when you wish to assign the lease. It is an additional Cash Cow as far as the Landlord is concerned, whether they would consider paying for the AGA to be excluded when you sign the lease is questionable, but it is worth considering when you have capital available.
Regardless of the Pub Co. approving your assignees Business Plan and References you are still liable. Sadly, because the viability of many leased pubs being questionable, the failure rate is far too high, the Guarantee Agreement is one clause in pub leases that many people would like to see removed, if people lose most of their money on propping up a failing pub, to then find the rest is taken by the Pub Co.
The Pub Co. get the Pub back and sell it on a new lease, all perfectly legal and the lessee who assigned it is liable for dilapidations and the debts incurred by the assignee.
Do not assume that the dilapidations will be a small sum, always have a survey, don’t let any Pub Co, representative tell you that a survey will be carried out by the company at every change, it doesn’t happen, one BDM moved on and left all his lessees with massive dilapidations bills, with this misinformation.
8. The majority of major Pub Co’s have Codes of Practice which are supposed to regulate their activities, many are expert at at weaving their way round these regulations, added to the fact that the hapless lessee is by then under massive financial pressure to survive and extricate himself from a worsening debt crisis.
New legislation has come in to improve these trading conditions, unfortunately a large number of Licensees have a very strange psyche, they are reluctant to admit that have made a serious error in buying a pub, without realising the implications of the small print and the onerous legal responsibilities imposed on them.
This is exacerbated by the amount of pubs that appear to be doing well, having inspected many thousands of pubs, the majority being leases, behind the scenes many of the lessees are literally working their socks off for minimal real return.
9. The Pub Co’s are expert at exploiting the weakness of a struggling cash strapped lessee, originally they claimed it cost £30K when a lessee went belly up, now they get the lease back with all the F&F and they can write a new lease with new small print, to fit the latest legislation and sell it to the next lessee at a comfortable profit.
Dilapidations are invariably totally over valued, to ensure the lessee sees as little of his return deposit, that is why it is essential to always have a survey with dated camera evidence, not all companies are like that, but too many are.
10. You need an Accountant who is experienced in Pub Co leases and will spot the shortcomings in the Vendors accounts.
The majority of Pub Co’s, have a variety of convenient calculations and methods that they use to extract as much as possible from the lessee.
They supply the bulk or all the Wet Sales to their lessees, they get the maximum discount from the Brewers, you might get minimal discount if you are a Retail Genius, you have little or no chance of competing with genuine Freehouses or Brewers Managed Houses Wet Sales, who enjoy maximum discounts, even more so for multiple operators.
11. The Divisible Split, a method of calculating the profit in a lease, depending on the circumstances it is used to calculate the rent. The Pub Co’s. arrive at a calculation splitting the profit 50/50, what they do not do is include their massive discounts of all products that they control/supply in this calculation.
Not only do they charge in far too many cases unsustainable rents for their leases, if a reasonable proportion of the discounts were passed on far more leases would become viable.
12. Rents should be between 6-9% of Turnover, as they used to be when a pub was a good viable career for life, the lower the Turnover, the closer the rent should be to 6%, because the bulk of the overheads are almost the same, but your profitability is far less, as a quick yardstick.
13. Fair Maintainable Trade, a term used for the supposed available business for a specific pub. The over estimation of FMT, would involve at least a 50% increase in brewing capacity across the country, see Clause 5.
14. If you can, take Tenancy from a Family Brewer, which has limited responsibility time wise and dilapidations, your contract can be for a year with a trial period and the responsibilities are internal painting and decorating. Cut your teeth on that, understand the real profitability, then talk to some Pub Co lessees about viability with their particular company.
It is more profitable to buy a genuine Freehouse, if you have a reasonable deposit and some working capital, the mortgage in real terms works out at less than a lease rent, which invariably goes up.
The AGA, Guarantee Agreement should not apply to leased licensed businesses, because they involve families living on the premises, most having little knowledge of the draconian actions that can be taken by the landlord.
Commercial Leases normally apply to factories, lock up shops etc., without domestic accommodation, most are leased by Limited Companies which can be folded in the event of failure at very little cost to the individuals involved.
Individuals or Partnerships assigning a lease are pursued for any financial shortfall incurred by the Assignee owed to the Landlord, whilst holding the Lease, the Pub Co’s avoid Limited Companies without personal guarantees where ever possible.
Far too many of the Pub Co’s have become expert at forcing licensees out, when they run into problems. The Pub Co having accepted the Business Plan approved the Lessee’s financial state, they know pretty well how much business the previous lessee has been doing, in a number of cases declining to produce these figures as being inaccurate.
The debt to the Landlord, through trading problems, unsustainable rent increases and over valued dilapidations incurred by a failing or bankrupt assignee will be pursued years later, possibly after the assigning lessee has retired.
The Landlords control the rents and the prices of the supply tie, the undisclosed discounts they receive are never made public and they now recoup in selling the existing or new lease.
Note:-I used to own a small Pub Co, which started as leased commercial property, my comments are not “Sour Grapes”. I cancelled the Privity of Contract which was replaced by the Guarantee Agreement, which I took out of all the leases, chasing cash strapped lessees is not my way of operating, you get the leased property back by mutual agreement, to be re let.
You do not have the responsibility of reducing decent people to bankruptcy for the sake of a few thousand pounds, when the lease can be resold at a reasonable profit, the slur that the last lessees all went bankrupt is not a reputation to have on any commercial property.
I would suggest the Pub Co’s. remove the Guarantee Agreement from all their leases and suggest that three months notice by the departing lessee would be a better deal, the lease would also be worth more money.
Sadly the Pub Co’s. have a “Cash Cow” that can be exploited for short term gain and not long term financial stability in the Industry.