Questions with Answers before you take a Tied Lease (Part 2)
1. What happens if I fail to pay the rent?
You are normally evicted at very short notice within the terms of the lease, you do not have the protection of Residential Property, even though you may be living on the premises. All rents are paid in advance, normally between one month to three months, usually by standing order or direct debit.
2. What happens if I fail to pay the Business Rates?
Then local Authority will take you to court eventually, if you do not have enough money to pay they will put the Bailiffs in, who will take goods to the value of the debt with costs. They normally remove part or most of the Fixtures and Fittings (F&F), this affects the Landlord because the property within the lease conditions has to have enough (F&F) to continue trading, you cannot sell or remove the bulk of the F&F, even though you paid for them, depending on the lease wording.
3. Why do I need a Survey?
Everyone buying a commercial property, especially a lease should have a Schedule of Condition, to validate the state of condition PRIOR to the handover date. If there are outstanding wants of repair or decoration, then either the Landlord or the previous Lessee is responsible, if it is left until a later date, no action can be taken without documentary proof agreed with the Landlord or his Agent. We have had certain BDM’s who claimed that a Survey was carried out at each Lease Assignment, this was not true, the lessee had nothing in writing or a copy of the so called survey.
4. Why do I need dated photographic evidence of any survey faults?
Normally a surveyor will have dated and photographic evidence of any areas that are of concern, but you need copies agreed with the Landlord at that time. If you do not and the original surveyor is no longer available, you may have problems when the Landlord claims for dilapidations at the end of the lease or assignment.
5. Why do I need approval to carry out improvements to the property?
You must have the Landlords written approval for all alterations or improvements, otherwise he can insist that it is all put back the way it was at the start of the lease.
6. Can I sell or change the Fixtures and Fittings (F&F)?
If the property had no F&F whatsoever and you have brought them in, you can do what you like with the F&F. If the F&F are listed with the lease, as with a Pub Co Lease, you can sell or change them, because you have paid for them, but they must be replaced so that the business can continue trading. You need a legal explanation of what you can do without breaching the terms of the Lease.
7. Why do I have to pay a deposit to the Landlord and how much?
Please click on the link for a general guide to commercial lease deposits Rent Deposit Article June 2011
8. What is the Authorised Guarantee Agreement (AGA) and the implications for me?
This is a nasty sting in the tail, when you assign a lease, it makes you responsible for any losses incurred by the Landlord caused by the assignee for the duration of their time as lessee on your original lease. It is possible, with some Landlords to buy yourself out of the AGA, it is now being used as source of additional revenue by some and it is worth finding out how much it will cost you.
9. Do I have to use the Landlords Insurers?
With Landlords owning a lot of properties they frequently have a clause in the lease saying that you have to use their insurers, in a number of cases, in stead of being cheaper it is more expensive than doing it yourself through an independent insurance company. If you do insure the property yourself the Landlord will insist on being notified on the policy, should you fail to pay the premium, they are normally given a short period to obtain cover.
10. Does the Landlord have right of entry to the premises at any time?
It depends on the terms of the lease, though a landlords inspection is normally notified in writing. This can happen at short notice if the Landlord has reason to believe that the property is being neglected, used for questionable activities or unauthorised alterations.
11. Why do I have to have Brulines or similar as a monitoring system?
All Tied Pub owning Landlords are terrified of lessees Buying Out, because they know that products can be bought substantially cheaper, by dealing direct with suppliers. The fines that they impose are normally far in excess of any additional profit made. There are many articles on the inaccuracy of monitoring systems, which means that flushing gallons of water though the beer lines on cleaning, can cause questionable results.
12. How many qualifications do I need to take and which ones?
You only need the basic Licensing Exam to get a licence from the Local Authority, you need the EHO Food and Hygiene course, plus everyone involved in dispensing or preparing consumable products, always check with the EHO that your business will be in, their requirements can vary. If you are not sure where your business will be, your local EHO will give you guidance. In addition Cellar Management.
13. How long will these courses take and how much do they cost?
The cost of courses can vary from area to area ,
14. How much training will I get after I have taken on the lease?
It is essential to get additional in house training, the initial training does not make you a Reasonably Efficient Operator (REO), this only comes with experience and further training.
15. How much training do I need to become a Reasonably Efficient Operator (REO)?
You would need about three years profitable trading, with basic qualifications to comply with obtaining a licence and ideally on site training, which many companies do not do, they may send you details of changes in the Licensing and EHO legislation. Three years profitable trading was defined by the then Chairman of the BII, be assured you need that experience.
Landlords Supply Tie
16. What is the Supply Tie?
The supply Tie is everything declared in the lease, normally it is wet stock (Beer, Wine, Spirits, Soft Drinks etc.)
17. How much credit do I get with the Supply Tie?
Normally fourteen days with a lease, with a genuine Freehouse as much as one calendar month.
18. Do I get any discount?
Before you take a Tied Lease is the only time that you can ensure in writing that you will get a discount, they may give you a discount if you are trading above expectations, but don’t rely on that, all companies have different policies and again it is written in the lease. Normally very little discount is passed on.
Discount has for many years been minimal, just recently some Pub Co’s are making concessions on discounts. As a rough guide most Pub Co’s get in excess of £250 per 36 gallon barrel, I received that level of discount with my small company some years ago.
The discount figures are not disclosed, if you do 200 barrels a year that equates to £50K being added to your rent, if they gave £150 per 36 gallon barrel, it will still equate to £20K on your rent. Lack of discounts cut down the competitiveness of your pricing.
19. Do the discounts get included in the so called divisible split of profits?
They are conveniently ignored and go to the Landlords profits. The divisible split is ignored in respect of landlords contribution.
20. Can I buy out in an emergency?
No, unless the BDM gives written permission, do not buy out under any circumstances, the fines are draconian, in a number of cases the beer monitoring system has been inaccurate or too much water has been flushed through the beer lines giving false readings.
21. What happens if I can’t pay my Supply Tie Account?
You normally go to Cash with Order, which ruins your cash flow, the next stop is a Rescue Package. If you can sell the lease before you get that far.
22. What happens if I go on to a Rescue Package?
The Landlord may want you to sign over all your F&F to them, to prevent you selling them, to ensure the business can be sold fully equipped, so you own only the contents of the domestic accommodation. They know without a substantial injection of money that you have little chance of financial survival. I did suggest to the MD of one Pub Co that they gave the lessees a months credit to get their cash flow back on track, the answer was an emphatic “No”, they know that they are very likely to get the keys back and whatever is left of the deposit will come to them.
23. Do I need professional Advice on a Rent Review?
You do, it can be a minefield, you also need to put money aside for a Rent Review, with the right person or company, it can be straight forward, but with someone that has limited knowledge of Tied Leases it can be expensive.
24. The business is Tied, how much increase in the Tied business would you consider realistic?
As a guide any estimation over 5% in the first year is pure speculation. Surveyors and pub owning companies have for many used Comparables, based on vaguely similar pubs within a ten mile radius, as explained to me by the Chairman of one of the larger Commercial Agents, which I disagreed with and discussed with the RICS, the assumption being that business is infinite, which it is not.
Business is finite within an area, especially when you first take over, the business you are buying it’s existing business is it’s Market Share, any growth has to be taken from another business, who will fight to retain that business.
You may have a large employer set up a business close by, which is an additional boost, but it could take several years to increase your market share under normal circumstances.
Your business plan should be conservative any over estimation, could be regarded as Retailer Failure if you fail to make your projections.
25. Can I apply for the MRO (Market Rent Option) with this Pub and how costly will it be and will I be successful in my application, in the event of the Pub Co not granting the MRO can I declare the lease “Null and Void” at no cost to myself?
Normally the Pub Co will fight “Tooth and Nail” to delay or stop any movement towards the MRO (Market Rent Option), you need professional advice on the rent demanded and the vagaries of the Pub Co’s attitude to MRO. MRO if the rent is fair will give you a reasonable chance of running a successful business, with value to your lease, but you do need expert advice and know what you are doing. It should be fair and simple but the Pub Co’s would appear to be trying to block any movement towards allowing their lessees to take up the MRO. Unless the Pub Co confirms in writing that they endorse the MRO at a fair market rent with full cooperation, don’t consider them as a viable business partner or potential Landlord in our opinion. The Deed of Variation (DOV) route is available as confirmed in the PCA guidance issued in August and December 2017 and March this year, but it would appear that none of the Pub Co’s involved are offering a DOV on an existing lease at this moment of time, see Link. At the moment taking a Tied Lease has become a legal minefield and is likely to remain so for some considerable time, the outcome of the MRO could be in serious question.
Lease hand back
26. What happens if I hand the Lease back to the Pub Co?
They will in all probability give you a reduced value on your Fixtures and Fittings on the figure that you paid the Vendor or whatever you spent on replacements. They will normally charge you for all their legal costs, dilapidations and any other outstanding issues. Your deposit will in many cases vanish, we managed to get a lessees full deposit back from one Pub Co, the pub was immaculate in all respects. The deposit took several months to be refunded, regardless of the Pub Co letter saying it would be refunded in twenty eight days, the money is better in their account than yours in their opinion.
Editorial Note:- It would appear that certain Pub Co’s are fighting legally to block the Market Rent Option (MRO), and attempt to keep the Status Quo before the New Legislation came in, it is vital that you get definitive answers to all the above questions without exception, the comment about evasive or unanswered questions is even more relevant.
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