New lease of life

Scottish & Newcastle Pub Enterprises has bucked the recent trend by launching a 25-year lease. Michelle Perrett assesses how attractive this is to new licensees.

While pub companies have been frantically introducing shorter leases into their estates to by-pass the costs of stamp duty and land registration, Scottish & Newcastle Pub Enterprises (S&NPE) has introduced a 25-year full repairing and insuring lease into its estate.

The company has granted a dozen of these new leases and is looking to roll out more.

This new agreement is a change of approach for the company, which has in recent years converted most of its agreements to franchises. It manages all but 40 of its 1,100-strong estate on behalf of the Royal Bank of Scotland.

The franchise agreement is different to a standard lease as it is "open book" with a high level of support in terms of accounts, financial services and stocktaking. The franchise package, which is a non-repairing lease, has start-up costs from as little as £10,000. While a franchise is a good way for new people to get into the trade there is more security for licensees and entrepreneurial operators with a longer lease option.

John Draper, property director at S&NPE, said: "We have some high quality, high turnover houses in our estate. We took a view in the middle of last year that we probably weren't getting the calibre of operator we thought we should be for these top-end pubs. The quality quasi-managed operators were just not attracted by the franchise agreement.

"The people we have in mind for this new lease wouldn't take on a franchise."

He believes the deal will give tenants and operators more of a chance to invest in the business. The agreement runs for 25 years and is fully repairing and insuring, although there is flexibility as the company also offers the lease in blocks of five years. It is assignable after two years and offers a discount of £50 per barrel.

"When lessees choose to sell their businesses after two years, they are now getting reasonable premiums which is surprising for what is generally thought to be a relatively short-term agreement," said Mr Draper. "In the last six months we have had about 15 assignments and the premiums have ranged from £50,000 to £150,000 with an average of £96,000. Licensees' profit is in the range of £25,000 to £30,000. Although many of them have to pay off loans, they are still making a tidy sum."

He says he thinks this is due to the quality of the estate, which has many ex-managed houses turning over 300 barrels or more.

"With the long lease we now feel that we have something that can attract the entrepreneurial end of the business to the better end of the estate - plus a core franchise offer for the majority of our properties which is particularly attractive for new entrants - and at the bottom end a three-year franchise rolling agreement," said Mr Draper.

Rates service​

The company provides a comprehensive rating service for its licensees. It has found that out of its 1,100 strong estate 424 of its sites were rated too highly. It managed to get ratings dropped by 10 to 20 per cent, which works out at nearly £6,000 per property. The total saving for licensees over five years has been £2.5m.

S&NPE's new 25-year lease​

• Lease term:​ 25 years. In England the lease term is Landlord & Tenant Act protected.
• Rent review period:​ Annually, with increases in line with increases in the retail price index, or five-yearly based on open market reviews.
• Repairs and decoration:​ The lessee is responsible for all repairs and must redecorate the interior and exterior every three years, and during the last year of the term.
• Tie:​ The lease is taken up on a full-tie basis for draught and packaged beers, lagers and stouts, alcopops, premium packaged spirits and ciders.
• Discounts:​ Lessees receive £50 per barrel off invoice on all tied products, from barrel one.
• Machines:​ AWP, SWP machines and pool tables work on the basis that the company and the lessee each receive 50 per cent of the income after deduction of VAT, machine rental and duty.

Licensing​

S&NPE estimates that the average cost of licensing change for each of its lessees is between £800 and £1,000. The company predicts this would cover the standard application fee and professional fees.

S&NPE undertook research among its licensees about their main concerns surrounding the new Licensing Act. Many of the concerns, especially in the higher risk agreements, centred around being able to fund the additional costs. The result is that the company has offered to pay half of all costs (up to the maximum of £500) to its lessees in England and Wales. John Draper, property director of S&NPE, said: "We think that it is going to cost about £300 for licensees to get their plans produced, and about £250 to £300 for independent specialist advice. We have licensing managers, solicitors and specialists throughout the country who will provide this service to our lessees. Then there is the cost of the application."

The Licensing Act is set to come into force in July 2005. It is expected that licensees will have six months from November in which to send their operating plans into their local authorities.

Three-year rolling franchise: support​

• Each franchisee is assigned an operations and sales manager (OSM) whose job is to provide dedicated business advice.
• Each licensee receives eight days residential training before and during their first 12 months in the business. This will lead to the National Certificate for Licensees.
• OSMs will provide marketing and promotional ideas as well as support in helping licensees to put their own ideas into action. The marketing support is tailormade and is focused on developing the business.
• A range of menu packages are available to help develop food sales. They are supported by dish costings, cooking instructions, printed menus and marketing materials.

Pictured: The Faulkner in Hoole, Cheshire, is on the new S&NPE 25-year lease.​