LEASE

What is a lease?

Leased pubs are operated under a lease agreement and are similar to tenancies. The lease is offered by the owner of the property to individuals wishing to become a pub lessee and they run the pub as their own business. Rent is paid to the owners on an ongoing basis. Agreements typically run for 10, 15 or 20 years plus.

Similarities with a tenancy

• The agreement is offered by the owners of the pub.
• You run the pub as your own business.
• Rent is paid on an ongoing basis.
• Rents are calculated in a similar way, but higher percentages may apply to the calculation, eg 10–15% of turnover or 45–55% of net profit before rent.
• Some or all products may be tied.
• You are required to pay for fixtures and fittings, stock and a deposit.
• There is ongoing support from brewery or pub company.

Differences between a lease and a tenancy

• There is a longer period of agreement for a lease.
• You are able to sell on (assign) the lease and charge goodwill.
• You are likely to be responsible for all repairs and decoration.
• You may need a solicitor to act for you when signing the lease.
• You may require a property surveyor to prepare a structural survey of the premises.
• You may have to wait 2 or 3 years before you can assign.
• You will be responsible for finding a buyer and negotiating a price for selling on the lease if you decide to leave.

• Ingoing costs tend to be higher to cover legal and professional fees and stamp duty charges.
• Running costs are higher to cover additional repair, insurance and decoration expenses.

What’s good about a lease?

A lease can be sold on when you decide to vacate your pub. This is called ‘assigning’ the lease. If you have run a successful pub you may be able to charge ‘goodwill’ for the business. The value of your lease (also known as the lease premium) should be professionally assessed by a property valuer experienced in pub leases. They will look at how profitable your business is and how many years remain on your lease. They do this to calculate what a buyer would expect to earn if they bought the pub from you. Pubs with good profits are valued more highly than ones with lower profits. Buyers will also demand to see up-to-date, verified financial accounts that support the price of your lease.

Two ways to acquire a lease

There are two ways to buy a lease:

• 1Acquiring a new lease from the owners of the pub.
• 2Buying an existing lease by assignment.

Acquiring a new lease

Acquiring a new lease involves dealing with a brewery or pub company directly. All discussions and interviews take place with them. Normally the lease will be offered without a premium being charged. Actual financial accounts will not generally be available (as in the case of a tenancy). Your profit and cash-flow forecasts will need to be estimated from sales information provided by them. Main ingoing costs will be:

• fixtures and fittings;
• stock;
• a deposit.

Buying a lease by assignment

Buying a lease by assignment involves dealing with the seller of the lease directly. All negotiations take place with them and the brewery or pub company will only be involved in order to vet your application.

Ingoing costs will be higher than if you bought a new lease because the seller will be charging a premium on the lease, taking into account goodwill. However, the price should be supported by financial accounts for the business. It is advisable to seek advice from your own accountant or property valuer when deciding whether the asking price is a fair one.

Once you have bought the lease on assignment, you are required to abide by its terms and pay rent to the brewery or pub company. Ongoing contact will be with them and there are no further dealings with the seller of the lease.

Repairs

Your obligations to repair the premises under a lease are much greater than a tenancy. You are normally responsible for attending to all repairs under a lease, including any structural problems that may occur. It is therefore essential that you are aware of any repair problems before you take on the pub. A full structural survey is recommended and should be used in any negotiations. You will need to budget for the cost of maintaining your pub and these should form part of your business plan and any financial assessment you make of the pub.