Would you buy a Pub Co Tied Lease? Not Likely, Read On.
One of the biggest problems in the Pub Co Tied Lease Sector is that you have two factions in the Industry, you have Pub Co’s and all their supportive companies and so called specialists, the other faction are the lessees, who have very few supportive companies and far less specialists acting for them.
The Pub Co faction have access to all the most costly legal advice, the lessees when they need costly legal advice, have invariably run out of money, in addition, in many cases taking legal action under those conditions is a sure fire disaster.
Having taken legal action in a Small Claims Court against the Official Receiver, on so called good legal advice. The judge was about to award me compensation of a few thousand pounds, the barrister acting for the Official Receiver said that the Receiver could not be seen to be negligent, they would take it to the High Court, which would cost in excess of £50K, I had to withdraw and got caught for the barristers costs. The moral of the story is that Pub Co’s cannot be seen to be negligent or failing and they have the money to ensure that they win or the Lessee withdraws on a range of different disputes.
The Pub Co Model is in theory based on the long established Family Brewer Tied Tenancy system, which worked for years with long term tenants, where Family Brewers knew exactly what their market share was or is within their estate and what every pub should be doing called Fair Maintainable Trade (FMT). The total FMT for the estate with off sales and free trade would represent their potential brewing capacity for the year, plus a realistic percentage increase for the next year. They were in business to sell beer, not vastly over estimate FMT.
The Pub Co’s have screwed this system by peddling their Tied Lease Pubs using technically adjusted normal Commercial Lease formats, whose responsibilities far exceed the Tied Tenancy agreements, with dire results for the unwary.
What was a career for life with a Tied Tenancy from a Family Brewer, a Pub Co Tied Lease is now, in may peoples view, a question of how long you can survive with the conditions of the Tied Lease, all perfectly legal, you go in with your eyes shut or half closed and hit the panic button when they are fully open, unless you are retail genius, an amazingly slick operator or multiple operator.
Sadly nobody tells you every aspect of a Tied Commercial Lease, with all the individuals who purport to provide the information that you need to take a commercial lease and the ultimate nasty sting in the tail with the Authorised Guarantee Agreement (AGA) when you hopefully assign the lease. LINK
Having had the unfortunate experience of the Chairman of Fleurets sitting next to me for a business lunch, he mistakenly assumed that I was a Pub Co Surveyor and proceeded to expound his theories and actions to gain suitable rent increases for his Pub Co clients. LINK
It was patently obvious that he had no idea or experience about running a pub, the same would apply to the bulk of commercial agents, very few have ever run a pub, let alone a successful pub.
I was appalled at his comments, which were based on historic dealings with Family Brewers, who previously provided accurate figures of turnovers, barrelage, external issues affecting the estate and individual pubs.
The term Comparables, FMT and Reasonably Efficient Operator (REO), formerly Competent Operator, were acceptable within the Brewers Estate, because the tenants in the main were long term publicans, their barrelage and rents were related and identifiable by many years records.
With the formation of Pub Co’s and the so called Pub Co Model the above terms were put into immediate use as the basis for rent and rate calculations.
Comparables, the immediate assumption was that any pub that looked vaguely similar to the pub being assessed, in a ten mile plus radius should be rented and rated on any reasonably successful similar pub, in fact cherry picked, from the horses mouth. All local issues were to be ignored, like a depressed area, bad access, village by passed by a new major road etc., no back up statistics, especially if the pub had been recently purchased in a takeover.
FMT, the over estimation of turnover on a similar basis, even one of Enterprise Inns Consultants, in an unguarded moment, said the over estimation of FMT across the country would need a 50% increase in brewing capacity, yet the pub sales were shown to be dropping.
REO, a new Lessee with no experience and minimal training cannot be an REO, but the rents are based on an REO, very little in house training after moving in occurs or the Lessee has insufficient spare time to use further training benefits.
Good Family Brewers with a Tied Tenancy know the value of further training, they want stability within their estate.
With Pub Co’s, there is always another would be Lessee, 2,800 Retailer Failures in two and a quarter years with one Pub Co and confirmed correct by an ex Area Manager on the spreadsheet, which was also sent to the Government Inquiry.
So what do we have a formula for rent increases based on a system that works with Tied Tenancies but wide open to questionable exploitation.
The problem with these so called Pub Experts that have never run a pub, they hide behind the RICS Banner in any dispute and the supposed guiding light for the industry.
What they fail to understand is that Business is Finite in a catchment area, a catchment area could be a half mile radius or in rural Dartmoor could be five mile radius or more.
The business that a pub has is it’s Market Share at that time, any increase is at the cost of another pub or similar business in that catchment area, whatever the catchment area radius, the pub losing the business will in turn fight to retain their business.
Never estimate more than 5% increase in the first year, for the above reasons, in addition if you put in a high percentage and it doesn’t happen, you are in danger of becoming a Retailer Failure in the eyes of the Pub Co.
Now if one of these experts over estimates FMT and the Lessee increases his turnover and his rent is raised, what about the business which has lost the business, is the expert going to reduce the rent or the Inland Revenue reduce the rates, not on your life.
I was invited to the RICS to discuss over renting of commercial licensed property. I pointed out that their surveyors were running out of control with the system that they were using, they all assumed that business was infinite and not finite, ignoring the fact, that over estimation of the FMT has been and is the cause of far too many failures.
Rents should be between 6-9% of turnover, with the lowest turnovers at 6% and up to 9% for the most profitable.
If you have any sort of money making machine on the premises, the Pub Co normally expect a 50% divisible split factored into the rent calculation, what they don’t do is in the divisible split on profits include the massive discounts they get from supplying brewers, effectively increasing your rent for every hundred barrels turnover by £20K plus, annually. An average pub run by an REO should be doing in excess of two hundred composite barrels (all beer sales), which makes a Pub Co Tied Lease a very costly exercise compared to a genuine Tied Tenancy with a decent Family Brewer.
One Brewers Barrel equates to 36 gallons of Beer, so don’t assume that your glib Pub Co Rep, when he refers to a barrel it is normally a firkin, 9 gallons for real ale, more for pressured beer, like lagers 11 gallons, totally confusing for the unwary.
The Family Brewers give minimal discounts to Tied Tenants, but their Tenancies are only liable for minor responsibilities, like internal painting and decorating etc., whereas a Tied Commercial Lease you are responsible for the full maintenance of, in many cases, aged buildings and dilapidations when you leave, these costs can be enormous, without a switched on surveyor when you buy and leave. LINK
So what do we have? A totally screwed system run and administered by people who have never seriously run pubs, to add to the chaos, we have a Pub Code Adjudicator (PCA) to administer the New Legislation being frustrated by the technically legal actions of the Pub Co’s, the Legislation was brought in to create common sense and stability in the Industry.
The Pub Co’s are having a concerted blitz on the New Legislation, which could take years to resolve, they don’t want anything that will affect their major Cash Flow Income, legally the PCA can do little and appears to be fighting an up hill battle with the Pub Co’s Lawyers costly ploys.
The only thing that might bring these Pub Co’s to their senses and comply with the Legislation, is if the never ending stream of honest decent people taking Pub Co Tied Leases stopped, I have dealt with far too many people who had no idea of what happens when they take a Tied Lease, none of the people will tell you everything, some like lawyers, it is outside their brief or they consider it the norm with a commercial lease. Trainers who consider it outside their field, the list is endless, the right questions are either never asked or go unanswered. LINK
Our advice is to not take a Pub Co Tied Lease for the foreseeable future, until the New Legislation is complied with in all respects by the Pub Co’s that it applies to.
By all means take a Tied Tenancy with a decent Family Brewer, even then read all the small print or pay for professional advice, some of the Family Brewers have picked up some of the possibly questionable habits used with the Pub Co Model.
Click on this LINK for the questions that you need Answers to before you spend any money on considering a Pub Co Tied Lease.
Always remember buying a pub is like marriage, “Marry in haste and repent at Leisure”.
The views expressed are not necessarily the editors and www.buyingapub.com accepts no responsibility for them, we do try to avoid offensive or litigious statements being made. They are written by concerned professionals in the industry who feel that these issues should be raised to ensure that all licensees are made fully aware of many hidden pitfalls.
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