Pub Leases or Tenancies, Serious thoughts (Barrel-Dregs)
Thinking outside the Box (Updated)
The misconception by the majority of people not involved in the licensed industry is that it is a pretty straightforward business with cash flow, profitability and capital growth.
The old brewery tenancies were just that, you had a trip round the brewery, someone gave you instruction on keeping beer, the area manager came round once a month and gave you ideas and you were the village or community hub, that is no more.
It is not a straightforward business any longer, it is now highly complex and a hot bed of legislation, far in excess of running a conventional retail business, where training, moral responsibility and professionalism are vital to the survival of the British pub and the whole licensed industry as we know it.
The old Family Brewers had a voluntary system that worked and was successful, many insisted that would be tenants did a course at Donhead in Dorset run by the old Brewers society, it was a tough, thorough two week course, if you passed.
The Brewers then put all newcomers in a training pub for at least a year and if suitable, progressed to a pub to suit their talents and after due period, if they showed flair a promotion pub and were defined as a Competent Operator or Reasonably Efficient Operator.
The in house Estate Surveyor, by the use of Comparables, looking at similar pubs within the immediate area, having an intimate knowledge of the Fair Maintainable Trade available for a Competent Operator, could assess a fair rent, though in reality they knew exactly how much rent was appropriate to each Pub within the Estate.
The system worked and was fair, the Brewers were in business to sell beer, not property speculation, if their pubs were over rented and the tenant was struggling, beer sales dropped, which defeated the reasons for brewing beer and other products.
Comparables was an acceptable term and adopted by the RICS, with the creation of Pub Co’s and leases it has been totally abused.
With the advent of leases on a large scale, the new Pub Co’s capital growth was peddled as the main incentive for taking a lease and it was low cost entry into the licensed industry, both are totally misleading.
Capital growth is minimal because of the rent levels, low cost is highly questionable, you need at least £60K to operate effectively with deposits and other commitments, most of which you will not see back unless you are extremely fortunate.
One major Pub Co stated publicly some time ago, that the lease value is of no interest to them, it should be because it is the measure of viability and profitability of their pubs.
Before the recession really got a bite on the industry, the failure records of one Pub Co were sent to me anonymously, showing 5,800 pubs changed over in two and a quarter years, the majority listed as Retailer Failure, this is a bad indictment of their recruiting and training system, also their long term treatment of their lessees.
The details were checked and confirmed correct, I sent them to the BISC at that time and said since it came to me from an unknown source it could not be used as evidence, but could raise some embarrassing questions, which it did, fortunately the BISC was not under oath otherwise certain prominent executives would have been jailed.
Having owned and run a number of pubs and aligned businesses, including leasing out pubs, I speak with a degree of first hand knowledge.
My initial reasons for becoming involved in these issues were the definition of Competent Operator or Reasonably Efficient Operator, as defined in the RICS Guidelines.
Competent Operator/Reasonably Efficient Operator CO/REO
The rental levels set by the RICS are for a Competent Operator.
The RICS do not, nor ever have run pubs the very few Chartered Surveyors who have taken this step now realize that the field of pub valuation is far wider than that perceived as a Surveyor with all the trading issues that affect the market.
The RICS Valuation Committee would appear to consist of a number of members whose main income is derived from perpetuating these rental levels and supposed high and all too frequently unattainable standards of a Competent Operator.
A body like the BII should have been consulted as to the qualifications and professional experience required to meet the standard required for a CO/REO which they were not, because of historical reasons.
Sadly the BII is no longer a body that I would turn to for advice on this subject, having just resigned as a long standing CBII.
It is now common knowledge that rents have been escalated without consideration of viability, to enhance freehold values for a number of Pub Co’s to fund further expansion.
The companies involved have a debt mountain of billions, making their survival very questionable, should interest rates rise, or an even bigger drop in business than that caused by the smoking ban and the present recession.
Previously there were two valuations for freehold pubs, one was bricks and mortar, the other turnover, both fluctuated according to the buoyancy of the market.
For tied pubs, in the main it was “In Goings”, based on Fixtures and Fittings and Stock at Valuation, possibly a degree of Goodwill in special circumstances.
Fixtures and Fittings on changeover, most tenants showed a loss on the price that they had originally paid, but the tenant made a good living and in some cases an exceptional living.
Commercial property freehold values are based on rents as an investment value or Bricks and Mortar in difficult times.
The Pub Co’s and their supportive surveyors have ignored the previous established methods of valuation and applied commercial property valuations based on rents, which would be perfectly acceptable if the rents were based on viability and there was no supply tie.
But the methods used involving Comparables is totally flawed, as explained to me by the Chairman of a national firm of Chartered Surveyors.
To assess a rent for any pub, he would take a number of similar pubs within a ten mile radius.
He already knew what their rents were and their supposed FMT for those pubs, so apart from a cursory inspection and based on previous figures from records, he can put whatever value he chooses, that has the vaguest similarity to the pub in question.
What he failed to grasp was that by Cherry Picking pubs outside the pubs normal catchment area he is effectively ratcheting rents higher and higher.
This caused me considerable concern, since he had absolutely no idea about the pubs existing business which is, its market share at that moment of time.
Unlike the old Brewers Estate Surveyors, who knew very precisely how much available business there was in an area, Comparables ignores the fact that there may be five pubs in the catchment area, one may be closed with Nil business, three may be doing a limited business, otherwise the closed pub would be operating.
All these factors have to be taken into consideration as they used to be, to arrive at a realistic overall available business to establish the rent and a profitable FMT for the licensee.
Any growth above 5% is taken from another pub, are they going to reduce the rent on that pub, not on your life, consequently the rents are ratcheted higher and higher at every review, unless you go to arbitration or similar system, where common sense may prevail and occasionally does not.
The major problem with Surveyors is, since they have never run pubs, every pub is different, every licensee is different, with different skills.
Pubs have evolved from village or town boozers, very few were built to sell food, with the present legislation, the majority have endless problems without spending thousands of pounds on making the pub, staff or customer friendly and I speak from experience, having rebuilt a number of pubs.
This is one of the appeals about British Pubs, some need excessive staff, others the kitchen is too small, the dining room is in the wrong position, the bar can only operate with two bar staff, the problems are endless, but it all adds up to the quirkiness of the British pub.
These Surveyors cannot apply a set of numbers based on a different catchment area, for ease of convenience, every factor has to be calculated and brought into the equation and it is not.
Drive by valuations should be illegal.
They also fail to understand that business is finite and not infinite, growth is minimal and the market is falling, if one Pub Co added up their total predicted FMT against their actual sales, they would probably find that an over estimation of at least 50% existed.
The other key factor is that the business that a licensed property has is its market share at that moment of time, the pub market is actually falling for a number of reasons well documented elsewhere, any growth come from an adjoining business, are the rent and rating assessors going to reduce the rent and rates on the properties that have lost that business, not a cat in hells chance, this flawed and misused system ratchets rents and rates higher at every assessment.
We need a body to define the available business in an area, the definition of Competent Operator and a fair assessment of FMT.
It should not be left to the RICS, they have never run pubs and have absolutely no idea how different one pub is from another, likewise trading areas, staff availability and so on, as any good licensee knows.
If you agree with my views, please pass this on to anyone that it may help and email email@example.com, the tree needs a massive shake to get leased and tenanted pubs back to profitability and a career for life.
The Market Rent Option, should be an opportunity to unite the Industry, sadly too many Pub Co’s are fighting it without considering the real benefits.
Potboy South West
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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.