Pubs for lease, tenancy or freehold: What’s your best option for owning a pub?


salisbury-700842_1280There is no one-size-fits-all solution when it comes to owning a pub. In an ideal world most people would like the freedom of owning a pub outright, known in the trade as a ‘freehold’ pub.

However, it’s not a realistic option for everyone. Start up costs, business acumen and experience… these are all things which should be taken into account.

In this Pub Landlord Advisor guide, we’ll explore your options for running a pub: tenancy, lease and freehold.

(If you’re a first timer, you might also be interested in the 8 personal traits of a successful pub landlord.)

Read on to find out which one is best suited to you…


Owning a pub as a tenant

It’s estimated that breweries and pub companies own three-fifths of UK pubs. They rent or lease these pubs out to individuals, or alternatively, employ people to manage them.

(The latter is known as a managed pub and it doesn’t really constitute true pub ownership.)

tenancy pub openingBreweries and pub companies will often advertise pubs for sale on a tenancy basis. If your application is successful then you’ll be offered a tenancy agreement which specifies the period for which you are contracted to run the pub.

The tenancy agreement will usually last between three and five years. A the end of that period you’ll usually get the option to renew it.

As a tenant, you’re responsible for paying the rent and managing the pub on a day-to-day basis which includes:

  • Staffing
  • Marketing
  • Bookkeeping and accounting
  • Managing stock
  • Taking responsibility for minor repairs
  • Maintaining fixtures and fittings

The pub tenancy agreement will normally oblige you to enter a ‘beer tie‘ with the owners.

If it’s an actual brewer that owns the pub, then they will largely restrict you to the beers they brew. If it’s one of the pub companies (known as ‘pubcos’), they will restrict you to their preferred brewer.

Some pub tenants (and also leaseholders) may be able to opt out of the beer tie…

An amendment to the law, which came into effect in July 2016, means that publicans tied to a large pubco or brewery – one which owns more than 500 ‘tied houses’ – will have the option of opting out of the beer tie.

The Morning Advertiser offers a useful Q&A with a chartered surveyor about the relationship between the beer tie, rent reviews and how it may help some publicans get a better deal.

running a pub positive  Advantages of a pub tenancy:

  • Smaller start-up costs: The start-up costs for pub tenants is normally between £20,000 and £50,000. This makes it the cheapest, lowest risk option for prospective publicans.
  • Help and support: A good brewery or pub company will provide ongoing help and support. Many of them offer training courses which you must attend before you begin life as a pub landlord. They will give you access to an area manager or business development manager who is on-hand to offer advice and answer any queries.
  • Job security: The Landlord and Tenant Act 1954 ensures that you cannot be asked to leave during the course of your pub tenancy unless you are in serious breach of your agreement.
  • Drink discounts: While the drinks tie means you are missing out on lower prices elsewhere, your brewery may offer discounts of its own. Often a contract agreement will stipulate a sales target which, when reached, earns you a discount on drinks.
  • Outside and major repairs: Again, check your contract terms, but it’s normal for the owners to take responsibility for outside painting and major repairs. Meanwhile, you the landlord will look after the interior and keep up with minor repairs.

button-24804_1280  Disadvantages of a pub tenancy:

  • Product restrictions: When you are in a tie with the breweries you can’t shop around for better deals. And you can forget about getting creative with your beer line-up. This puts your pub at a competitive disadvantage against freehouses who get to pick and choose.
  • Unhelpful pubcos: There are good owners and bad owners. We hear plenty of stories about pub companies and brewery firms who take a hands-off approach when it comes to helping landlords. While you work all the hours under the sun, they’re happy to sit back, collect the rent and take the beer money.
  • Amusement machines: It’s normal for your owners to take a cut from your fruit machines, games arcades and other such button-bashing fonts of gambling. They may also restrict what machines you can use.
  • Unsellable tenancy: You cannot take on a pub tenancy in the hope of selling it on for financial gain. Also, breaking out of your tenancy early may incur significant monetary penalties.

Owning a pub as a leaseholder

A pub lease bartenderhas many similarities to a tenancy agreement.

You pay rent to the property owner, i.e. the brewery or pub company. However, you take on a wider set of responsibilities for repairs and maintenance.

Contract terms are longer, varying from 10, 15 to 20 years-plus, and if you’re lucky there is the potential to sell the lease on for a financial gain. This is one of the biggest attractions of a lease compared to a tenancy agreement.

The purchase cost for a leasehold pub can range from £50,000 to £250,000.

There are two different types of lease:

  1. An existing lease – where the current leaseholder (i.e. the publican) is selling their lease. If the pub is performing well this might come at a premium. This is often known as the ‘goodwill premium.’
  1. A new lease – where there is no current leaseholder. There is usually no premium. The pub may have been vacant for a period.

running a pub positive  Advantages of a leasehold pub:

  • Pub sale profits: If your pub performs well commercially, there may be a chance of selling the lease at a profit. Check your contract terms because there will usually be a minimum amount of time you need to own the pub before you can sell it on. A period of two years is common.
  • Stability for the committed: Longer contract terms offer a greater sense of stability and the opportunity to plan longer term.
  • Help and support: As with tenancy arrangements, ongoing help, assistance and training should be available from the brewery or pub company.
  • Striking a balance: Goes some way to reaching a middle ground between the lower risk nature of a pub tenancy and the independent spirit of a freehouse.

button-24804_1280  Disadvantages of a leasehold pub:

  • Greater responsibility: The lessee will usually take on a wider set of responsibilities for repairs and maintenance. This will usually include external repair work.
  • Extra start up costs: Far less than a freehold but usually greater than for a tenancy. These include, legal fees for a solicitor (to scrutinise the lease terms – very important), a structural survey from a property surveyor and extra money to cover stamp duty.
  • Commitment required: The lengthy contract terms means that a long term commitment is essential. When the going gets tough, will you have the bloody mindedness to see it through?
  • Tied up: Most lease terms will stipulate a beer tie. So, sadly you still won’t be able to summon your entrepreneurial spirit by negotiating better prices and selecting more enticing beer ranges. See the above ‘Owning a pub as a tenant’ section to read about changes in the beer tie law.
  • Unhelpful pubcos: As with a tenancy arrangement you are beholden to the owners. Some are more useful than others.

Owning a pub as a freeholder

owning a pub freehold gardenTo own a pub freehold is to buy it outright. You are not a tenant; the property is yours. And that means far greater up-front costs.

The Morning Advertiser recently reported that the average freehouse price currently stands at £726,862. Prices can range between £60,000 and £1.5m. Most lenders will require you to provide 30% of the asking price.

In other words, you need plenty of money at your disposal! For that reason, experience running a tenancy or leased pub is normally recommended before you take on a freehold establishment.

The biggest attraction of a freehouse is that you have complete control over the beers you stock, enabling you to shop around for the best deals. This can save you a lot of money in the long-term.

The other major plus is that your property will most likely increase in value. Especially if you’ve managed it well and increased the pub’s takings.

Let’s round up all of the pros and cons…

running a pub positive  Advantages of a freehold pub:

  • Beer tie freedom: You have complete freedom over your product range. This allows you to negotiate the best deals and order the drinks that you think your customers will prefer.
  • Property value increase: If the pub’s value increases during your tenure, there may be an opportunity to sell it on at a substantial profit.
  • Long-term planning: The fact that you own the pub means that you can plan for the long term. You can assess your investment decisions over a long period and be free of the potential disruption of rent reviews.

button-24804_1280  Disadvantages of a freehold pub:

  • Bigger start up costs: You really do need some serious financial clout from the outset. Sourcing substantial loans can take a lot of work and persuasion based on detailed business plans and cold hard market data. Higher start up costs also means greater financial risk.
  • Minimal support: Freedom from the breweries and pub companies is a good thing in many respects. However, it also means you don’t get access to their support and advice networks.
  • Negotiate trade agreements: While you can make major savings from being free of the beer tie, it also means you have to commit your own time and energy into drawing up agreements with breweries.
  • Structural surveys and repairs: You will need to pay for a thorough structural survey before buying a pub. You will also be solely responsible for ongoing repairs and maintenance.

The next step…

You’ll now have a better idea of which pub ownership option best suits your circumstances.

The next step is to research the current pub properties on the market and come up with a detailed business plan.

 

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