What is Freehold, Leasehold, Tenancy?
You own the outright ownership of the property and business. A freehold is almost always ‘free of tie’ which means that the owner can buy beer and all other supplies from wherever he/she chooses.
A freeholder can receive substantial discounts from his or her suppliers, making them competitive in the marketplace. Higher profits enables them to effectively service mortgage interest repayments.
A purchaser can normally borrow up to around two thirds to three quarters of the purchase price on mortgage as the freehold property offers a good security for a loan.
Tenancy is one of the most established and traditional ways of running a pub. Normally short-term agreement (initially one-three years), often with the tenant having the right to continue as tenant from year to year (sometimes referred to as a ‘rolling’ or ‘evergreen’ agreement) under the Landlord and Tenant Act 1954.
A tenancy is valued on its fixtures and fittings, (trade inventory). Tenancies are not assignable. Tenants cannot sell on any business interest at a profit (goodwill). When a tenant is ready to leave, then he will have his fixtures and fittings re-valued and surrenders the tenancy to the landlord. The tenant will be paid the new valuation, including stock and glassware.
You have the right to occupy a property for a fixed term of years (sold as a going concern).
There are effectively two kinds of lease:
• Sale or assignment of a lease which has already been created – the lessee is committed to pay the rent throughout the term unless he can sell the interest by assignment to another purchaser
• The grant of a new lease by a landlord – new leases are offered by brewers/pub companies and private owners nowadays normally ‘without premium’. This means you will only be required to purchase the trade furniture, fixtures, fittings and effects, plus stock and glassware. Sometimes a security deposit needs to be lodged. Be aware that new leases frequently contain a clause barring the sale or assignment of the lease within the first two years unless you agree to a penalty being paid, after that period the lessee can sell the business as above.
If you are successful in your lease you can sell on the ‘goodwill’ on the open market. However, if you fail the business, the business may have to be sold at a substantial loss or, at worst, surrendered back to the landlord for little or no payment.
Your lease will be subject to many conditions:
• Tie, free of tie, part-tie or full-tie and other supply or trading agreements
• Repairing obligation – internal repairing or full repairing
• Rent review pattern and how the rent review is calculated
• Service charge provisions
• Assignment clauses
• Insurance premium charges
• Decoration – internal, external or full obligation to comply with all the terms and conditions of the lease in order to stay in possession. You will pay an agreed rent and if the lease is assignable, it means they can be sold in the open market almost like freehold, subject to the new purchaser being approved by the landlord.
Where a lease is not ‘free of tie’ the lessee (tenant) is obliged to purchase a specified range of products (usually all or most of its beers and lagers and in some cases alcopops) from the lessor/landlord or its nominated supplier. This normally requires the lessee (tenant) to buy beer at ‘list price’.
Tie or Free of Tied?
Some leases are also free of tie, whereby the lessee has the same freedom to negotiate terms with suppliers and obtain good discounts. As this should result in a greatly improved ‘bottom line’ profit, the market value of the lease could also be higher.
Most lease and tenancies are partial tie. This means you have to buy certain products from the brewery that own the pub but not all. The majority will tie you with ales, lagers,ciders and spirits but allow you to purchase freely wines and soft drinks,they may also allow a pump for free choice of ale. all of these are negotiable.
Some leases and tenancies (normally short term) can be fully tied this means you will need to buy all products from the brewery you are linked to penalties from outsourcing can be high and codes are put on products for checking purposes many pubs fail due to non payment of penalties/increased costs it really is not worth the risk.
If a freehouse needed refurbishment/improvements then some owners might search out a brewery loan. This could result in him becoming tied during the loan’s duration. Brewery loans should be at lower rates than a bank loan and the pub owner might obtain larger discounts.