Entrepreneurship

The Quick Guide For Aspiring Landlords Looking To Lease A Pub

Cameron Fleming | 16 November 2021 | 2 years ago

Leasing a pub - the quick guide for aspiring landlords

You want to lease a pub – that is excellent news for the prolonging of one of Britain’s most enduring retail sectors. Here is a quick guide to set you off on a successful path. Cheers!

Leasing a pub – starting at the beginning

Your current knowledge of this sector plus the amount of capital you have available will be vital elements when assessing whether you choose to trade on a lease basis or the options of tenancy or freehold. It is a key decision to get right from the start.

Depending on who you ask, you can hear of nightmare tales regarding leases or tenancies in the pub trade. You might hear that a lease or tenancy is a good option for making money or gaining valuable business experience within the industry. There are advantages and disadvantages to both, as with most business deals, and you need to choose the one that suits your specific needs at a point in time.

The importance of pubs in the British economy

Through the many changes in businesses over the past decades, the local pub remains one of the few businesses mainly run by individuals or SMEs. This tradition has maintained its position in the marketplace because of the impressive agility of pub retailers to beat market and economic challenges. These entrepreneurs have continuously transformed their businesses to meet market needs and, in some years, dire economic pressures.

One of the developments was the arrival of pub companies as owners of several properties. Unlike brewery owners of pubs, pub companies focussed on the success of the pub and not on one brand only. This has placed them in an important position in the industry, and they traditionally use their commercial buying power to offer the individual outlets resources, capital, use of their buying power, training and support (marketing or business).

This has seen huge benefits to the market as it has increased the competition levels between pubs, the diversity of offerings to a more demanding consumer and generally has driven up standards. The pub industry is now seen as one of the most inventive sectors in the UK’s property leasing industry.

Breweries dominated the ownership of pubs historically. At the beginning of the 20th century, ninety percent of all pubs were owned by breweries. To expand the individual sales of their own brands, their only option was to wipe each other out. Jump forward to the 1980s and there were only six large breweries left.

This fierce fight for market share, linked to pub outlets, meant that each pub was severely limited in what they could sell. The breweries naturally included restrictive limitations on the pub lessors resulting in the tenants only being allowed to sell one brand – the breweries’ product. This was called the ‘tie’, which limited the market share options and operational freedom for the pub lessor or tenant and severely limited the choices available to the consumer. As consumers have matured, learnt to exercise their commercial power and become more demanding, it has been vital for the industry to evolve. In 1989, the British Government passed the Beer Orders to release pubs from these ties, and the pub industry changed forever.

The arrival of pub group companies

The Beer Orders resulted in the passing of ownership of pubs, in the majority, from the breweries to pub group companies and, in the minority, individual owners.

The English pub is one of the few remaining businesses, if not the last remaining, that still incorporates an accommodation element in its offering. Pub companies include that in their properties, and therefore pub lessors or tenants get rent-free accommodation for themselves and their families. The lessor or tenant can also use the accommodation for staff. Anywhere between ten and twenty thousand licensees use this option currently.

The impact of group buying power has had a profound effect on product ranges and customer offerings at each individual outlet.

A pub group company can source beer from breweries of its choice and can offer its lessors bulk buying power pricing from, for example, forty-six different brewers (medium-sized regional ones and large national options). In addition, they could include thirty-five niche brewers and may allow freedom to include some nano-brewery options. A lessor could have access to one hundred and eighty different draught beers, which is a significant range to choose from. There are also free-of-tie lease options whereby the rental amount would be higher.

Pub group companies – are they successful?

Some pub group companies estimate that their individual outlets generate an average revenue of up to thirty-five thousand pounds per annum. This figure includes the unique pub feature of accommodation. The pub group company would then earn about twenty-five thousand pounds per outlet (before tax). These group companies tend only to lease or tenant properties, not directly manage the business, and they do not generally have direct brewery interests driving one brand.

Every month, over four hundred and fifty applications for lease agreements are purportedly received by individual pub group companies.

Under the previous brewery ownership arrangement, limited investment was made into the real estate of the pub industry. The investment figures reported by pub group companies include amounts such as nineteen million pounds over two quarters and eighty-five million pounds over three years.

The consumer wins

Service levels and therefore customer satisfaction are also being boosted as the group companies have the capital available for training. Customer satisfaction and customer experience are huge focus areas for today’s modern consumer, so a group executing three thousand seven hundred training days every two quarters will ensure a much happier customer base.

The pub group companies also hold the retailers accountable — ‘an inspiring pressure’ that entrepreneurs often lack. It is up to the pub group company to find the balance between accountability and lessor satisfaction. Ultimately, the success of the outlet is the success of the group.

Competitions such as ‘Pub Company of the Year Award’ can help gauge the successful players in the large leased pub company market.

Short term leasing of a pub – Tenancy

A popular option with UK licensees is the short-term lease choice. These are also known as tenancies, and they traditionally have a lease contract that covers between twenty-four months and five years.

In this arrangement, a licensee can take on a going concern and get valuable support from a pub company. Some breweries have started the ownership of pubs again, and a licensee might choose that option. Breweries tend to offer a more favourable rental amount.

In both of these arrangements, a licensee is usually tied to a range of beer and other products but, as mentioned, above the range of product options can be huge. It is up to you to decide whether that range suits your target market. The pub group company would tend not to force products into a market segment that were not popular, and they would have usually invested significant amounts of capital into marketing to assess market demand.

Ease of entry into the industry

A tenancy is a great option if a pub-chef entrepreneur finds finances to be a barrier to entry into the pub industry as the need for significant start-up capital is eliminated. This low-cost entry option also brings lower risks, convenience and greater support. As a tenant in the eating and drinking-out section of the hospitality industry, an entrepreneur will still have significant freedom regarding the running of their selected establishment. If cooking is their passion, the tenant can fully control their own kitchen in the early years of their career and carve a successful long-term business path.

The pub’s success is important to the pub group company for obvious reasons, but also because sustaining existing tenants is more affordable than onboarding new ones. The tenant, therefore, can expect significant help towards achieving a thriving business.

There are free-of-tie lease options whereby a licensee will not be restricted regarding product choices. The maintenance of the real estate is still the responsibility of the pub group company as the property owner.

Both the Association of Licensed Multiple Retailers (ALMR) and the British Beer & Pub Association (BBPA) support this point of view.

Due to the shorter contract period, it is prudent not to invest too much personal capital into the business premises. It might build the business but the rent will go up with this success, and your profits will be replenishing the capital used. In a tenancy arrangement, it is vital to find a balance between moderate success and personal investment.

And remember, at the end of a tenancy contract, it is renewal time – your rent will be increased and, in rare cases, doubled. Regardless of the ‘tie’, a long-term lease rental has a bit more protection from the courts.

Long-term leasing of a pub – Lease Agreement

Unlike a tenancy, a lease agreement is for a substantial length of time. The minimum contract period is usually about twenty years and the maximum contract period is typically about twenty-five years.

The other major difference is that the lessor, or the individual pub business, will carry the liability for all repairs and maintenance to the building as well as the insurance responsibilities for the building, not only the stock.

In the majority, this arrangement will come with a ‘tie’ for beer and other alcoholic beverages. There is still an element of business support offered and it can be slightly customised, but it will be to a lesser degree than that of a tenancy.

It should be noted that, with the agreement of the pub company, the long lease can be sold onto another lessor. However, should the new lessor fail in this endeavour, the pub company might be entitled to legally demand that the original lessor take back control of the business.

As mentioned above, a long lease gives you more rights for a court ruling on a hiked up rent, but a pub company can also take back the property for internal management or site development.

Carving a career path through leasing a pub

An entrepreneur could carve a career path for themselves by starting as an employee and learning about pub ownership from the ‘university of business life’. With studies or experience under their belt, they could commence in a group company owned pub as a manager. This would gain them vital experience and valuable insights into a multi-faceted industry.

Building on that wealth of knowledge, that next planned step could be a tenancy option as the first venture into business ownership. The substantial support from the group company will be highly beneficial to a first-time business owner. There would be access to expensive market research, greater buying power, business innovation ideas and training.

After that, the next step could be the lessor option, which would be an easier option at this stage due to the significant experience and knowledge gathered over the years. Where to from a lessor option? Freehold. This would be your full risk, full freedom option – and perhaps the start of your own pub group company.

The BBPA cautions entrepreneurs interested in the industry to research it well and gain lots of experience as it is an industry that demands diverse skills and competition is high. They also advise that, in addition to the business skills, a solid knowledge of the related legislation is paramount, from licenses to hygiene.

It is important to remember, as with most businesses, it is not all about being good with customers and giving them refreshments and food – although those are obviously vital. It is equally important to be good with administration, bookkeeping and staff management. These are all pillars of success.

Experienced pub owners caution new pub-chef entrepreneurs against starting a freehold with little or no experience. Capital doth not a pub owner make and nor does studying a course. The industry opinion is that a freeholding pub started with a lot of capital and an inexperienced entrepreneur with only a course under their belt fails or closes.

Picking a pub company

Old hands in the industry recommend putting aside sufficient time to select the right combination of premises and pub group company. This applies to both tenancies and long leases. The predominant school of thought is that the pub company choice is more important than the actual pub.

As freehold pub businesses are expensive business endeavours, an entrepreneur usually starts with a tenancy or lease agreement – in addition to the importance of gaining hands-on experience and insights. Financial institutions will expect experience and a successful track record before financing capital for a freehold pub endeavour.

The industry of pub group companies and the tradition of the ‘tie’ has been much maligned over the decades. Increased costs, market instability and profit percentages have been criticised extensively. As with a silent partner in a business, when a business becomes successful, the entrepreneur running the business begins to regret the silent partner or pub group company arrangement. This is a common and erroneous miscalculation of the value of the arrangement. The cost of risk, the cost of ease-of-entry into the industry and the cost of business support is extremely high and should be carefully assessed before being criticised.

A good pub group company will ensure the entrepreneur is business ready with a thorough business plan as well as sufficient proof of experience and business acumen.

With all this information on hand, you can now start your exciting path in the historical, cultural endeavour of running a pub. Cheers to that!

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