Taking on a pub property can be both exciting and daunting. Here are 5 key considerations that pub tenants should consider when taking on this new venture:
What liability am I taking on to repair the pub?
Typically, as a pub tenant you will be responsible for keeping the property in good condition and repair. A repairing obligation can potentially be onerous on tenants and impose a wide range of liability, particularly for older pubs. It is therefore essential to obtain a schedule of condition from the landlord at the start of your tenancy and negotiate terms so that the landlord is entitled to get the property back in the same condition as the schedule. Obtaining a schedule of condition will not only help to limit liability but will also be a useful guide as to the required condition of the property.
A landlord is likely to set out a dilapidations claim before the end of the lease. The dilapidations claim will list any works that it wants the tenant to complete before the end of the tenancy. It is a good idea to start these dilapidations conversations as early as possible, as the tenant could be liable to pay the landlord for the works and even lost rent if they are not completed in time. Tenants should carefully consider the terms of the lease to determine what repairing liability they are really taking on.
Is there a tie to a brewer?
Under some pub tenancy agreements tenants are restricted to purchasing stock, such as beer, cider and minerals, from the landlord. These tenancies are referred to as ‘tied pubs’. Being tied to a brewer can bring some advantages, as the rent is usually lower than market rates and the tenants business will have the landlord’s support. However, as a tied tenant you may be subjected to inflated costs of products and will have less flexibility to adapt and respond to customers preferences.
Can you break free from a tie? The Pubs Code Regulations (Pub Code) were introduced in July 2016 and were put in place to ensure that dealings between landlords and their tenants are fair and lawful. Under the Pub Code tenants have four circumstances where they can ask for a new market rent only lease (MRO lease) and break free from the tie. The four MRO events are: (1) tenant receives a rent assessment proposal (2) renewal of the pub agreement/tenancy (3) the tenant has been notified of a significant increase in the price of tied products, and (4) a ‘trigger event’ has occurred (trigger events are events that have a significant impact on trade). It is however worth noting that the Pub Code only applies to those pub companies with 500 or more tied pubs.
What happens if the business doesn’t go according to plan or it does go well and I want a longer lease term?
A pub tenancy will generally be granted for a fixed period of time, referred to as the ‘term’. If the business is not going according to plan and tenants are struggling to keep the business going, a lease can be ended early by the tenant in certain circumstances.
If a tenant and landlord agree to an option to break before entering the tenancy a tenant can be released from the lease on the specified break date, provided they follow the requirements set out in the lease. A tenant could also be released if the landlord agrees to a surrender. If these options are not available to a tenant, they would need to try to find a replacement by way of an assignment or underlease, but this too could be restricted in the lease terms. Without one of these exits the tenant may be bound to pay the rent and comply with the lease obligations until the end of the term, whether trading or not.
Tenants that fall into rent arrears and are unable to pay rent as it falls due could be at risk of the landlord forfeiting the lease and regaining possession of the pub. Again, this would be subject to the terms of the tenancy and tenants will need to carefully check what terms and rights they have in these circumstances.
If however, the business is going well but the lease term is close to expiry then you will be entitled to a statutory renewal of your lease, if it falls within the security of tenure Landlord and Tenant Act 1954 (1954 Act). If the lease was excluded from the security of tenure provisions then it means you will not have these statutory rights and will need to try and negotiate a new lease with the landlord at term end.
Your solicitor will be able to check whether you are taking on a lease that is inside or outside the 1954 Act as this will be a key consideration for your future planning.
What licences will I need?
All businesses and organisations that sell or supply alcohol on a permanent basis will need to have a premises licence. Pubs, by nature, would fall into this category and tenants must make sure that a premises licence is in place before starting business. Licenced premises are also required to have a Designated Premises Supervisor (DPS) appointed who holds a personal licence. The DPS will have the day to day responsibility of running the pub and will act as the primary contact for the local authorities and police.
Although the DPS must hold a personal licence it is not a requirement for all employees of the pub to hold a personal licence themselves but they must be authorised to sell alcohol by a personal licence holder. To be able to hold a personal licence you must be aged 18 or over and, in majority of cases, hold a relevant licencing qualification. The aim of the qualification is to make sure that licence holders are aware of the wider social responsibilities involved in the sale of alcohol, as well as the licensing laws.
Pub tenants should also consider other licences that might be needed to run the pub. These can include licences for regulated entertainment such as the performance of live music or playing of recorded music, and gaming machine permits.
What about fixtures and fittings?
Fixtures and fittings can be defined as the ‘loose’ trade inventory items of the pub, these would include things like seating, tables and kitchen equipment. Items that are described as tenant’s fixtures can be removed from the pub before the end of the lease, this is subject to the items being removed without causing substantial damage. On the other hand, landlord’s fixtures cannot be removed at the end of the tenancy and must remain in the pub.
It is important that tenants are clear from the start of their tenancy which items are considered the tenant’s fixtures and which are considered the landlord’s as it can cause issues later on. For example, any ovens that are replaced by the tenant that were there from the start of the tenancy will still be considered a landlord’s fixture. Tenants must also consider whether they will buy the fixtures and fittings from the landlord at the start of the tenancy and at what price and if any items are leased from a third party.
If you need advice get in touch with our Commercial Real Estate team here.