Thinking of buying the Freehold to your pub from your landlord?
On June 16th 2011 the Publican’s Morning Advertiser reported that Punch are to sell off a total of 2,300 pubs and that sitting tenants would get first refusal on purchasing their respective freeholds.
Many of you may be in one of these 2,300 pubs and be wondering whether you should make an offer on your pub? Many others who are the tenants of other pubco’s or breweries may be thinking the same.
The big questions are:
- How much is my pub worth?
- How much does my landlord think it’s worth?
- How much will it cost me to finance?
- Will I be better off buying my freehold?
- If I don’t buy my freehold what happens?
Hopefully this article will inform your thinking and help you to decide what to do. It will show you two scenarios and explain the factors that you will need to consider. Whatever you decide you should take independent professional advice from your lawyer, your solicitor, your stocktaker and your accountant before you make any decision or offer.
How Much Is My Pub Worth?
As with anything an asset is only worth as much as someone is prepared to pay for it; you may think your pub is worth X, your landlord may think it’s worth Y and a lender may think it’s worth Z. (And that’s before you even get a valuation by an agent or surveyor).
All I can advise on is what I think a pub is worth based upon barrelage, current rent, gaming machine income, insurance premiums, other supplier contracts – in other words the income that a landlord derives from your pub. What I can’t advise on are such things as “bricks and mortar”.
Your landlord company will typically be earning somewhere in the region of £220 per 36 gallon barrel of draught beer (or bottle equivalent) that you buy from them. You may receive discount in consideration of the amount of rent you pay or as part of your tenancy or lease agreement. In the last pub I ran this amounted, on average, to £55 per barrel. Hence the landlord was earning £165 per barrel from every 36 gallons of beer I bought from them. (This is sometimes referred to as the “Wet Rent”).
Your landlord also earns from the property rent, as any commercial landlord does. If you enjoy any rent rebate or rent concession your landlord is unlikely to take this into consideration in their deliberations and will only look at what rent your tenancy or lease agreement says you should pay. If your lease or tenancy agreement contains provision for annual RPI (Retail Price Index) rent reviews your landlord may also consider what the rent might be by the end of your tenancy or lease and use this as their calculation for the rental value of your property.
Unless you are free of tie on gaming machines, pool tables etc, your landlord not only gets half the net income (in most cases) from all your machines but also a royalty from the machine supplier for every machine sited in your premises and in some cases a further over-riding discount dependent on such things as share of the estate or numbers of machines in the estate that the machine supplier operates. In the last pub I ran there were 3 AWP’s (fruit machines), a pool table and a quiz machine (SWP). So not only was the landlord getting some £9,000 machine income share but also a significant income from royalties and discounts. If you’re wondering where the machine supplier takes those payments from, it’s from you… in the rents they charge for the machines in the first place!
Another significant revenue stream for your landlord is the amount they charge you for your buildings insurance. You may have wondered why you can get a quote for insuring your building (not to be confused with the insurance you take out to cover your stock, fixtures and fittings, cash etc) for a lot less than the amount your landlord charges. One of the reasons is that most insurance brokers (the people who arrange insurance for your landlord) will receive a commission from the underwriters (the company who issues the insurance policy). Your landlord will, in all probability, be taking a share of that commission. The commission is added to the premium the underwriter issues and then you get the bill. This can be as much as 25% of the premium you pay.
Another way of making money out of insurance is for your landlord to “self insure” certain elements of the risks they would normally insure for. This means they take financial responsibility for repairs etc when an insured peril occurs. By doing this they can make huge savings on their premiums and still charge you full whack on your insurance bill. They do this because they know that in any given year they will probably have to spend out less on certain repairs than if they were to insure against them.