Article by William Tribe
With pubs currently shutting at the rate of 52 a week, you would think that now was not a good time to consider buying a pub but to counter the first statistic, gastro pubs are opening at the rate of 4 a month at the moment.So what are the key things to look for if you are buying a pub?1. Freehold versus leasehold
Freehold pubs are a lot more expensive and most of the pubs shutting in the statistic stated above are in the leasehold category. Once you have bought a freehold pub apart from business rates, your monthly outgoings are probably limited to the mortgage instalments. With leasehold pubs, you have service charge to pay and this can be very expensive. There are limited rights for tenants to challenge exorbitant service charges and business tenants do not enjoy the same legislation which residential tenants have which enables the residential tenants to get rid of poorly performing managing agents and appoint new ones or even take over the management of the property themselves.
Some tenants with strong bargaining strength might be able to negotiate an upper limit on the service charge such that the tenant will pay no more than a set figure sometimes called a service charge ceiling or cap. Of course, unscrupulous managing agents could engineer the figures so that the service charge always hovers around the upper limit of the service charge cap on the theory that the managing agents need to compensate for any years of large service charge expenditure above the cap by taking the full quota in the years when the expenditure does not hit the cap.
Landlords and managing agents do not like service charge caps because their ideal situation is where you have what is known as a “clean lease”. In other words, the Landlord is looking for the tenants to fund all of the expenditure and the landlord is left with no residual liability in relation to the maintenance of the building.
Tenants can often get locked into disputes with landlords or their managing agents which is expensive and it seems that the case law is not particularly tenant friendly when it comes to challenging high or unreasonable service charge figures. There is case law to the effect that the landlord is not obliged to obtain the cheapest prices for services to the building. He merely has to show that he acted reasonably in employing third parties to carry out services and those fees were within the parameters of usual charges for buildings of that character in that locality.
The other downside with having tenanted property is that every time you want to refurbish the pub you have to get professionals involved to prepare detailed drawings and specifications of the works in order to get the Landlords consent for the alterations under the terms of the Lease. Some London firms charge ?1250 plus VAT and more for a bog-standard licence for alterations which is scandalous. Similarly, a licence to assign or licence to sub-let can incur these level of legal fees.2. Tied lease / Free of Tie
Many leases currently on the market are subject to a tie in favour of a major brewer. The major brewers have in recent years been accused of bleeding pub tenants to death with their punitive prices for drinks. It is often the beer and drinks tie which is cited by pubs tenants who are throwing in the towel. The alcohol prices can be so punitively high that the tenant is struggling to clear a profit and with dwindling numbers because the supermarkets are competing with insane prices, it does not take much to push a tenant over the edge. So a pub free of tie is very valuable indeed.3. Location, location, location
Obvious point really but location can have a huge impact on profits. Any person wanting to embark on a new pub venture has got to analyse the demographics and profile of the likely customer base. You need to have a target customer in mind because this will affect everything from the drinks on offer, to the volume and type of music you play, the food offering. The big brewers and pub companies use professional companies who are expert at analysing the demographics of any given area and this then affects the fit out of the pub. Is it a student pub or a locals’ pub or a pub for trendy young people aged 18 to 39. Are people going to walk to your pub or are they going to drive? If they are driving and you are off the beaten track in a remote village, how do you win trade outside the locals in the village? It might mean going for food or drink awards or securing a favourable revue in the Good Pub Guide or getting a Michelin star for your food. People will then try to track you down. The internet can be fantastic for putting a pub on the map.4. Community
So many pubs and restaurants fail because the people running these ventures fail to integrate and fully understand and respect the local needs. You are part of a community and you need to fully embrace that community. Pubs as assets can be sweated. A pub can be multi purpose venue covering ever need of the community from folk nights in the back room, to book club meetings, sporting society meetings. Pubs often have excellent function rooms which can also be used to get the most of the asset. The produce in the kitchen needs to be sourced locally to minimise food miles and this is a great selling point for attracting people to the kitchen.5. Premises Licence
Licensing is a much more straightforward process nowadays. The whole process has been taken away from the licensing justices in the courts and is now dealt with the local authorities. This has inevitably politicised the process as councils are very political animals. Many councillors need votes and opposing a late licence at a popular bar can be a vote winner depending on the area. Applying for a premises licence is a question of filling out a massive application form and paying the exorbitant fee. You need a Designated Premises Supervisor who is the person responsible for ensuring compliance with the licensing laws and any special conditions on the Premises Licence. So the DPS needs to be someone who can be there to ask questions if the police turn up unexpectedly because there have been fights outside the pub. A DPS needs to go on a course to be a licensee. The course is not particularly difficult but it is essential if you are going to be the named DPS.
So there are many issues to consider when buying a pub. This is the briefest of guides. However tap into 22 years of pub buying by booking your free half hour consultation aimed to get you up and started in your new pub.
About the Author
There are numerous issues for a tenant and indeed landlord to consider in the insurance provisions of a lease. If you require a fuller guide to the pitfalls in commercial leases please visit us for a free guide at:
www.commercialpropertyinfo.co.uk
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