Lease renewals may be a new phenomenon, but with rent review

Lease renewals are a new phenomenon in the pub industry and have only been around for a year or so. I receive numerous calls from licensees who appear to be unaware of their statutory rights and I believe there is still much confusion as to what tenants should be doing to protect their legal interests. Prior to 1992, pub tenants had no security of tenure and I believe this was due to the fact the brewers did not want their tenants to have automatic right of renewal. All this changed with the Landlord & Tenant (Licensed Premises) Act 1990, which repealed Section 43(1)(d) of the Landlord & Tenant Act 1954. The 1990 Act provided that, on or after 11 July 1992, all public houses had security of tenure unless the letting was for less than six months, or a tenancy at will, or the letting was excluded from the Act by a court order. In effect, all licensed premises are protected, although many, such as restaurants and wine bars, already had the protection of the 1954 Act, where they are valued on a retail basis and not the profits approach that applies to pubs. Prior to July 1992, there was an argument that a pub could still have security of tenure if a certain proportion of its sales was related to non-alcoholic products. It was considered that non-alcohol sales in excess of about 30% would be sufficient to qualify for 1954 Act protection, but brewers were very reluctant to test this percentage in case it set a precedent. I was at Inntrepreneur at the time the 1990 Act was being drafted and it was clear pubs would eventually have security of tenure. Hence the grant of a 20-year FRI (fully repairing and insuring) and assignable lease, tied only for beer. The security of tenure applies to tenants of pub companies as well as to those of large, regional and small brewers. I often wonder how some of the smaller brewers throughout the country deal with their tenants who are on annual or three-yearly agreements. Do they go through the process of serving a Section 25 Notice, which is a statutory requirement to end a business tenancy? I suspect in some cases, it is the "arm round the shoulder" approach by the business development manager who says to the tenant: "We do not wish to incur unnecessary legal costs and therefore if you'd like to stay, then please sign here!" The first 10-year leases granted by Bass and Vanguard (now Punch) are now coming to an end and triggering the serving of a Section 25 Notice. In the notice, the landlord has to indicate an intention of either not opposing an application by the tenant to the courts for a new tenancy, or give the reasons for opposing the application. These notices are generally served by recorded delivery and I cannot stress enough how important it is for a tenant to respond promptly and not to simply "park the notice" behind the bar ­ remember, time is of the essence. Within two months, the tenant must notify the landlord, in writing, that he or she is not willing to give up possession of the property. This protects the tenant's position. However, if terms have not been settled for a new agreement, then the tenant must apply to the court for a new tenancy not earlier than two months or later than four months after the serving of the notice. Remember, tenants who do not respond to the landlord within two months of receipt of the notice will lose their rights to apply to the court for a new tenancy. A lot has been mentioned in the press recently about these procedures, but I find that tenants are still not protecting themselves. This places them in a very poor negotiating position when agreeing terms for a new tenancy and landlords can take advantage by saying: "This is the agreement, take it or leave it because you have no security of tenure." However, a protected tenant is entitled to a renewal of the agreement generally along the same terms and conditions, apart from the rent, although the new lease may be updated to usemodern wording. Assuming a tenant has gone through all the right procedures and a landlord is willing to grant a new lease, then negotiations can commence. It is at this stage that tenants must remember that, generally, all terms can remain the same, apart from the rent. A new lease would normally be granted at an open market rent. If, due to the economic climate, rental values have fallen, a new rent could be below the passing rent. This differs to a rent review, which is usually on an upward-only basis, and, at the worst, the rent would remain at the same level. Last year, there was much publicity about the "Brooker" case. This was a lease renewal between Unique Pub Company and tenant, Les Brooker. The dispute was determined by the court and the judge ruled the new rent would be less than the passing rent in the lease. Last year, I was involved in a similar case. I was advising a tenant who was facing a lease renewal. Shortly after he took the lease 10 years ago, he suffered a dramatic fall in trade due to the closure of substantial premises nearby, as well as other contributory factors. He struggled to meet his rent payments and the landlord at the time gave him a personal concession and, at the fifth-year review, there was a nil increase. At the end of the lease, he had the opportunity to agree a rent below that fixed 10 years earlier and, although the matter was referred to the courts, he managed to agree a new rent that was marginally less than the rent in 1991. Nowadays, many pub companies are introducing new agreements, which differ from the original leases granted 10 years ago. All their new leases are now fully tied for beer and cider, some even for alcopops, wine and spirits. There is usually a machine-income sharing arrangement. Rent is also index linked in line with inflation plus a five-yearly open-market rent review. While at Inntrepreneur, I was involved in one of the first 20-year leases granted in 1988 and dealt with the rent reviews in 1993 and 1998, acting on behalf of the tenants. There are now only six years remaining and consequently the leasehold interest is not so valuable as it was. The last rent review is due next year and this will be an opportunity for the tenant to negotiate a surrender and renewal for a longer term because the leasehold value will start to fall rapidly during the last five years of the original lease. In this specific case, the landlord will, in return for granting a longer lease, require the tenant to give up his guest ale, become fully tied for beer, enter a machine-income sharing arrangement, and accept rent being index linked. The tenant will have to evaluate the benefit of a longer lease in return for giving up the discount he received on his guest ale against the landlord's offer on tied-beer discounts, although none of which are guaranteed indefinitely. Alternatively, he could wait until the end of the lease in 2008 and request a renewal on the same terms ­ apart from the rent.