If you are the tenant or lessee of a pub, i.e. you pay rent for your pub / are not the freehold owner of your pub, then at some point you will have to negotiate with your landlord the amount of rent you pay for your pub. Given the rent you pay is likely to be one of the largest business overheads your business has to fund it is essential that you pay a rent that the business can pay over a sustained period.
Landlords seek to review rents paid on a regular basis, in most cases this will be every three or five years and as these reviews are typically “upwards only” they will have a significant effect on the profitability of your pub business.
Rents on pubs are predominantly based upon ‘potential trade and profitability‘ and the hypothetical ability of the tenant / lessee to run a pub business from the premises in question.
The rent review process is a veritable minefield for even the most experienced of operators and unless you understand the rent review process thoroughly, know exactly what you are doing, have information about comparable pub businesses to hand and are a confident negotiator then your best bet is to engage the services of an expert to act on your behalf.
Your tenancy or lease agreement will, in all probability, contain several pages devoted to the rent review process and may well include clauses that mean the rent can only go up and be based on an “open market basis“. Recent pressure by tenants / lessees / parliament and the government means that, in practice, many pubcos or brewery landlords are waiving these particular clauses and have in some instances agreed to rents being reduced.
Your tenancy or lease agreement may contain a clause linking your rent to the Retail Price Index (RPI), this means that the landlord can (and generally does) increase the rent every year at a specific time in line with any increase in RPI. On taking up a tenancy or lease it is vital that if a RPI clause is included regarding rent, that the initial rent you negotiate with your landlord is at a level that your business can sustain over the period of the tenancy or lease including any rises due to the RPI clause.
As I said above, the majority of rents on pubs are calculated by the landlord with reference to two important theoretical factors: FMT (Fair Maintainable Trade or Turnover) and the ability of a Reasonably Competent Operator (RCO) or Reasonably Efficient Operator (REO). This means at the time a rent review is due, it will not be the actual past performance of your pub business that is used to determine any rent review. Rather, it will be the landlords estimation of what FMT by a RCO/REO would achieve at the premises in question. This figure is normally expressed as a percentage of the “Divisible Balance” of net profit that is derived from the business; before finance, depreciation, the tenant/lessee’s drawings, one-off expenditure and the rent.
The recent economic downturn, along with other factors such as the smoking ban in the UK since 2007 have resulted in falling turnovers for many pubs and as a result of increasing costs for things such as beer, energy, food etc. the gross profit one can achieve from pubs has also fallen. Therefore unless there has been a material change in your local economy (and in some areas local economies have been bucking the overall economic trend) in all probability there can be no good reason put forward by a landlord to increase the rent on your pub. Quite the contrary, what is required for a sustainable business is a rent reduction; although in most cases a freeze or a restricted increase is all that many tenants / lessees achieve.
So What Do I Do At Rent Review Time?
The first thing you need to do is read your tenancy or lease agreement and the British Institute of Innkeeping (B.I.I.) accredited Code of Practice your landlord has in place to govern the way the rent review should be conducted and any rent increase is calculated. One of the first dates you should put in your diary when taking on a tenancy or lease is that of the first rent review and plan accordingly.
There is nothing to be gained from delaying the process of a rent review, on the contrary there may be much to be gained by acting promptly. You may be able to agree a future rent figure that is based on current trading figures but sign up to at a later date. If, in the interim, your business improves you will benefit from what is, in effect, a discounted rent at higher trading levels. On the other hand should you experience a sudden downturn in trade you may still be able to negotiate a last minute reduction.
Meeting With Your Landlord
First and foremost, no matter how stressful or difficult you find the process, which, for many tenants / lessees is highly emotive, remain courteous and professional. (See my separate article on How To Manage Your Relationship With Your Landlord).
When you meet with your area manager or landlord’s representative try to agree a rent reduction or if ‘upward only’ a nil increase. In either case you’ll need to be able to justify your position with your estimate of the FMT and your rent bid, just as you would if you were negotiating the rent when taking up a tenancy or lease.
Discuss the FMT on which the rent will be based before anything else. Remember, this is a hypothetical level of turnover of what the good-to-average retailer will achieve.
Don’t let your landlord’s representative talk about last year’s figures. As the operator of a tied pub you will probably have “Brulines” beer dispense monitoring equipment installed in your cellar by your landlord. Use the data this equipment collects to present an accurate picture of your business at the time of your discussions. Remember your landlord will rely on this information to prosecute any infringement of the tie, known as “buying out”, and will claim Brulines’ figures are 100% accurate. (In other words your landlord can’t have his cake and eat it.)
If asked to provide accounting and other information only do so after careful consideration and only then if marked WITHOUT PREJUDICE, after all you’re not a recognised “expert”, even though, in all probability you know more about your business than any of your landlord’s representatives.
Your landlord should have prepared a detailed “shadow profit & loss account” for your business to justify the rent they are seeking. Request, in writing, a copy of the profit and loss figures the company has used in its calculation and check the calculations in detail. For instance, will beer/wine/food profitability be accurately estimated? Are the assumptions they make about utility or wage costs realistic? Pubcos can and often do make mistakes, be prepared to challenge their figures if they are incorrect. (See my separate article on Profit & Loss Accounts and Stock Take Reports).
In the same way that your landlord will use a projected FMT, so should you when you provide overheads as a projection against FMT, your ability to control and further reduce costs once a new rent is agreed should be to your benefit, not to the landlord. Do not offer up outdated accounts, they are likely to be rejected out of hand.
As your landlord will make their assumptions based upon a RCO/REO you should ask if any of the trading levels in their accounts are down to your goodwill. If there has been an allowance made, as many companies insist they do, ask them to quantify it as it may strengthen your case as to “over-performance“.
Should your landlord claim your turnover be greater, ask why and if this is the case why has the pubco has not raised this before at your regular meetings.
Your landlord may try to include your AWP or other games machine profits into their calculation of profit, don’t allow them to do so. In all likelihood, if you are tied for machines, they have already had a 50% share of the profit, so don’t allow them to put your income in the calculation.
Make sure any improvements that you may have carried out are disregarded from the calculation; e.g., an extension or conservatory. Many landlords will try to increase the rent because the property you are renting has been improved, even if you footed the bill for those improvements.
Take professional advice from your accountant and stocktaker, especially if they have other pub businesses as clients and talk to your fellow licensees and share information, but make sure it is accurate. Ordinarily you would want to keep all your financial information confidential from your competitors, however, being too precious about this information in this instance is not in anyone’s interests. You may be able to provide proof of comparable rents etc. to your landlord to justify your position and help another tenant out at the same time.
Pubcos and pub-owning brewers are under increasing scrutiny and are averse to bad publicity with a growing public awareness that tied publicans especially are earning very little from their businesses. Tell your landlord that in terms of profit, one judge (Booker v Unique 2001) stated there should be at least £20,000 profit left for the publican and that you don’t expect to earn less than that (with inflation that would be nearer £25,000 in today’s terms).
Above all, as with any dealings with your landlord, get it in writing and take notes of your meetings at the time they occur and any subsequent conversations or telephone calls you have with your landlord’s representative; save any emails/text messages to and from your landlord.
But What Is A Fair Rent?
One might as well ask “How long is a piece of string?” For the landlord it’s as much as they can get away with, conversely for the tenant or lessee it’s as little as they can get away with. I believe your first consideration should be “Is it sustainable?” If the rent you finally settle on cannot be afforded then it is neither fair nor logical; it may be that a very hard decision has to be made to risk it or walk away (the same can be said when negotiating a rent when initially taking up a tenancy or lease.)
Your second considerstion should be “Do I want to work more than a complete month for someone else’s benefit?” This means do I want my rent (or mortgage payment for that matter) to be more than 8.5% of my turnover. This was, historically at least, a reasonable benchmark. Much depends on turnover, profitability and ones own personal requirements, and, whilst some operators may be happy to work for £25,000 a year, for instance, some may not. Only you can decide if a rent is fair and whether you are prepared to pay it.
The recent government consultation into the pubcos contained a specimen rent assessment form, you can see what a fair rent (using the government’s proposed formula) would be for a tied pub by clicking here. The legislation governing this will take effect at the end of May 2016. For more advice see the article on Market Rent Option.
What If We Can’t Agree On A New Rent?
If agreement cannot be reached quickly then call in an expert to negotiate with / put your case to the landlord.
If s/he cannot agree then your lease will provide for the matter to be determined by a third party either by arbitration or an independent expert. It may be that your landlord has signed up to the PIRRS scheme (Pubs Independent Rent Review Scheme) and if so then this offers a lower cost alternative to the other two options. Do not, under any circumstances, allow a rental review to go to independent determination or arbitration without taking professional advice. It may seem the costs of professional advice is high at the time, but in all probability the cost will be considerably less than any rent increase that could have been avoided by using a professional advisor.
However much you feel aggrieved at the treatment that you receive from your Pubco or Brewer, the temptation to withhold rent as a gesture of discontent, should at all costs be avoided.
In simple terms, the payment of rent is sacrosanct.
There is a specific and binding obligation contained in every tenancy agreement or lease that has ever been issued, that you have to pay the rent and pay it on time. The non-payment of rent can (and often does) swiftly lead to forfeiture proceedings, which, in themselves are almost impossible to defend, specifically because you either have or have not, paid rent and any judge hearing your case will have precious little leeway within the law to help you.
Top Tip – Don’t implement a price rise the day before the company comes to take down details of your business. It’s better to suffer a short-term loss of margin than three or five years paying too much rent. If you can, put off any price increases until after a new rent has been agreed in writing.