Pub rents: calculation or negotiation

Enterprise chief Ted Tuppen explains his pubco's approach to setting rents and supporting in-coming licensees.

The current debate surrounding rents, tied or free of tie, fair or unfair, is clouding a fundamental issue about the unique nature of pubs. Unlike a highly controlled, high cost of entry franchise, where every McDonald's looks like every other McDonald's and pricing, operating standards and costs are identical, pubs are all different. Not only are all pubs different, but so are all licensees. The great thing about our industry, the reason it attracts so many entrepreneurial, committed licensees is that every licensee believes that he or she can do a better job than the one before, or the one down the road.

By being different, by being better, a licensee believes that he will be more successful, have a better pub, have more fun and make more money than his competitors.

Think of the variables. What's the competition up to? What drinks products will I sell and how much will I charge for them? Which products are tied or free of tie and how much do I pay for them? Where will I position my food offering and will it be standard prices, standard menu or will I put on daily specials and charge different prices on different days, even at different times of the day? Will I have AWP machines or a pool table? Will I have a band or a disco on Fridays? Will I encourage football teams by subsidising their kit? The list is endless.

We, Enterprise Inns, own the pub and will have paid hundreds of thousands of pounds for it. We provide an infrastructure to support the licensee, assistance from regional managers, the property team, special marketing and non-tied supply deals, all of which licensees can utilise as much or as little as they wish.

The licensee invests in the working capital of the pub, takes on the trading risks and, in most cases, works incredibly hard in the business to make it successful.

With all these variables, no predetermined formula can ever come up with the right level of rent. The agreed rent for a pub must come about as a result of negotiation. Both sides should be fair, transparent and professional in the negotiations, and both sides should recognise and respect the views of the other. After all, the pub owners are in competition to attract the best licensees, smart licensees want to get their hands on the best pubs and the tied model ensures that both parties benefit if the pub is successful.

The quest for fairness and transparency​

The Bec report asked for greater transparency from the pub owners and we have already made a commitment to show in greater detail how we have arrived at our estimate of a fair rent. But, let's be very clear, this is not a formula nor does it necessarily reflect how a licensee may choose to run that particular pub in the future. It is simply our estimate of a fair rent, it is our starting point in the complex process of negotiation.

It is then up to the prospective licensee to build his own business plan, possibly using quite different trading assumptions to reflect how he will run the pub, how that pub will be better than all the rest. Our commitment to transparency means that we will provide what trading history we have, if possible details of all tied products supplied and tied gaming machine turnover for the past five years.

Any licensee who is paying the outgoing licensee to take a pub business on assignment of the lease will have every right to ask for financial statements from the outgoing licensee. In just the same way, anyone buying a freehouse would insist on seeing the latest accounts before making an offer. But we cannot provide accounts or VAT returns from previous licensees - these will be confidential to the licensee. However, we would expect to, with permission, pass on contact details so that any prospective licensee can speak to the previous incumbent if they want to.

We do provide a list of all pubs in the area, but we do not provide details of other rents, either to the incoming licensee or to a central register.

We may, for example, have offered an incentivised rent to someone we knew to be a fabulous operator who would invest in and transform the fortunes of a failing pub.

Neither we nor the licensee would want to share that information. And anyway, what if the pub next door belongs to someone else? What if the pub down the road is a freehouse or belongs to one of the managed chains? What if the real competition for consumer expenditure is actually a restaurant, a social club or a newlyopened gym? What matters is how the licensee intends to make the pub successful in what is always a very competitive market.

But we will provide our trading data and our assessment of pub profitability (which we call Fair MaintainableProfit). Above all, we will insist that every licensee, no matter how experienced they are, or claim to be, whether through direct let from Enterprise or through an assignment, must prepare a detailed business plan, which must be validated by a properly qualified and experienced trade accountant. No pub will be let without this agreed business plan signed by all parties and appended to the agreement. Just think how much easier the life of a valuer or arbitrator would be if every pub on which he is asked to opine has disclosure of the landlord's appraisal of Fair Maintainable Profit and the licensee's business plan attached to the current agreement.

And while I remember, we will from now on insist that every licensee commits to use the services of a trade accountant and stocktaker to prepare management information

on a regular basis. This has always been a requirement when licensees receive help under our Business Recovery Initiative, and too often we have discovered that the licensee has got into financial difficulty through paying too high a premium for his lease, followed up with a lack of basic financial controls and the absence of regular trading and stocktaking information.

What is Fair Maintainable Profit (FMP)?​

FMP is our current estimate of the profit that a competent licensee could generate, in reasonable circumstances (social and economic), taking account of the underlying terms and conditions on which the pub is already let, or on which a new let is proposed.

Our disclosure takes full account of the costs of all products, whether tied or not, the price at which we believe those products may be sold and the resulting gross margin. Our estimate of total turnover takes account of all potential sales lines, whether beer, cider, FABs, wines, spirits, minerals, food, gaming machines, accommodation and any

other ancillary income, according to the particular style of operation that we believe is most appropriate for the pub and which a competent licensee might therefore employ.

The estimated profit for the pub must then take full account of the overhead costs that our competent licensee is likely to incur.

Many of these will be relatively fixed, such as rates, utilities and professional fees, but others will vary according to the style of operation. For the avoidance of doubt, our estimated overheads do not include a manager's salary, costs of financing any lease premium that the licensee may have paid to an outgoing licensee, nor the personal drawings of the licensee.

Equally, no account is taken of the benefits of free accommodation and cost savings related to living above the pub.

To reiterate, our assessment of FMP is not necessarily a reflection of the current style of operation of the pub, nor the actual performance of the incumbent licensee. It is simply our estimate, clearly set out, of how we believe the pub might trade and how much a potential licensee could reasonably expect to make. It is then up to the new licensee to develop his own business plan, using our FMP disclosures as part of that process, to see whether he wants to take on the pub at the rent proposed.

Moving forward​

The Bec report spoke not only about transparency, but also the balance of power between the landlord and tenant. Our offer of financial