Long Lease or Tennancy?

What is the difference between long-term leases and standard tenancy agreements?

Should members look to switch from a tenancy agreement to a long-term lease? - 'Yes' and 'No' is the unhelpful answer. It depends on the circumstances.

Pub companies seem keen to get licensees on longer leases, why is that? - Several reasons. It improves the company's bottom line profits. Leases invariably pass on additional repairs to the tenant. Rents normally go up to reflect security of tenure. Some ties e.g. PPL can and are introduced making the Pub Co. more money. The guaranteed long-term rental (usually upwards only) increases the company's value.

So what is in it for the licensee? - There are two main reasons to sign a long lease:

1. Assignment value. If you leave your tenancy all you get is the value of your stock/glassware and fixtures and fittings.

If you sell/assign you lease you can sell the value of the business. There is normally a restricted period, sometimes two or three years. So if you are thinking of retiring or wish to move on in the next five years a long assignable lease is something to consider.

2. You want to make an investment and protect yourself from being rented on the profits arising from that investment. An example would be building a restaurant on the back of the pub or converting a floor into letting accommodation. Most agreements don't allow the landlord to rentalise improvements, but only for the period of the agreement.

An example of this would be that of a small country pub whose licensee then built on a very large conservatory. When it came to rent review all the trade from the conservatory had to disregarded. So the licensee paid a fair sum for a small country pub but a relatively modest amount for the size and scale of the overall business. This protection against rent continues for the period of the lease and transfers to the new owner if sold.

3. Some companies' lease terms can offer extra incentives e.g. greater barrelage discounts. If you take on a pub that has been under-trading, such agreements can be very lucrative to the new licensee.

It is very important for licensees to ensure that they fully understand everything they are signing for and what additional responsibilities they are taking on should they switch to a full repairing long term lease.

How are leases valued and what are they worth? - Usually this depends on the value of the business and the time left on the lease – the longer the better. The crucial figure is the bottom line/net profit of audited accounts. A figure of around once to twice net profits is a reasonable guideline. Although if someone really wants the pub and they think they can do better then there is always the prospect of a higher offer.

It has been the case that some leases can go for £350,000 but average prices are as follows together with the value shown as an average percentage of fair maintainable turnover.

(Source Fleurets year to Dec 2002)

For what reasons should you not sign a long term lease?

Long leases do give security of tenure but this should not be the sole reason for accepting them as they also come out with higher responsibilities, such as repair and refurbishment. Tenancies, however, can offer peace of mind especially if your tenancy is a protected one. The days of pubs being taken back into management appear long gone. Indeed many companies do not have a managed estate. There is, though, the legal possibility of the landlord taking the pub back for management or redevelopment. However in most cases, licensees who pay their bills and honour their agreements can look forward to long-term security on their current tenancy agreements, i.e. three years plus three years plus three years with the additional benefit that, if justified, the rent of the pub can always go down at the renewal stage. There is though, one snag here...

Most landlords don't understand the workings of the Landlord & Tenant Act. They have a number of rights but only if they follow a strict criteria and timetable on renewal.