How to...conduct a rent review
Rent reviews are a time of angst and confusion for many licensees but with good preparation and a clear head fair deals can be had, says Ewan Turney.
1. Preparation - Start preparing a full twelve months before the rent review date. Preparation is the key to securing the most successful outcome. Tenancy rent reviews usually occur every three years and every five years on lease agreements. However, some leases also have an annual Retail Price Index increase. Give yourself enough time to formulate a strategy and do some digging.
2. Gathering evidence - You need to build up a database of similar properties in your area and find out what their trading and rent levels are. The easiest way to get sales information on pubs is to check the property pages at the back of the MA or check on property agents websites. If there are premises in your area up for sale, you can get the information for free. The more information you have, the better chance of a successful outcome. If there are no properties for let or sale nearby, a phone call or visit to nearby premises may prove fruitful.
3. Accounts - Treat a rent review as starting in the business again. Produce a business plan, SWOT analysis and profit and loss forecast. Take note of anything that could affect the business such as redundancies, housing improvements, major road changes or closures. The accounts will give you a clear idea of what level of rent is sustainable. Generally speaking, sustainable and fair rents are between 12-15% of net turnover or 50% of rent free profit. Anything reaching 20% is unsustainable unless the business is clearly trading below its realistic potential.
4. The meeting - Arrange for the meeting to take place at a quiet time in a separate room. This will stop staff or family running in to ask questions. Having your accountant present will give the meeting a professional feel and they will be able to explain trends and GPs. There is a dilemma - do you show the BDM the accounts? The danger is if the pub is trading handsomely, is the pubco may want a bigger slice of the cake. On the other hand, if you don't the pubco will estimate what the figures are on the best case scenario to ensure they do not under rent the premises.
5. Reject the first offer - The whole process is normally instigated by the pubco issuing a quoting rental. This is the initial rental proposal and offer. This should never be accepted. The pubco is more than likely to aim for the best possible achievable rent. It is likely they will have ignored many factors in relation to the physical and locational characteristics of the pub and gathered market rental evidence based on the upper end of the market rather than the lower.
6. Improvements - These are a contentious issue because what is an improvement? The first point is to check in the lease whether the effect of genuine improvements are disregarded from the rent review. What is considered a genuine improvement is often listed in the lease. If money is spent on fitting out a new kitchen, that is likely to be an inventory change and not an improvement. By fitting out a new kitchen, you are just putting the pub in good repair and that is unlikely to be classed as an improvement. Therefore, any extra trading as a result could be rentalised.
7. Better than average - The rent level is set on what a good average tenant would achieve from the pub. If you are trading well and can prove that is down to your personality, goodwill, business skill and acumen then you should not accept a large increase in rent. To do this you will need to have trading figures for as many previous years as possible. This will show that an increase only occurred when you took over the running of the pub. The more information you have the better, as the pubco's argument will be that you have simply realised the potential of the venue which was under trading beforehand.
8. Duration - Negotiations vary in length considerably. They can last anything from two weeks to a year especially if there is a wide gap in expectations. Where a dispute occurs, it is typical negotiations are left for a few months and then attempted again. It is not uncommon for a year to pass by especially if there is also a change of BDM. The pubco may also adopt delaying tactics as a negotiating tool. If the tenant is seeking to assign the lease, the pubco may well attempt to take advantage by agreeing to give consent to the assignment if a higher rent is agreed at the same time. The lease will contain dispute resolution provisions which will normally allow the pubco and tenant to apply for the appointment of an arbitrator or independent expert. This will increase the cost but ensure neither side can frustrate negotiations.
9. Expert advice - Where the pubco is seeking a particularly large increase, it is a good idea to seek advice from a rent review surveyor. The expert will be able to provide a second opinion and also gather information to further your cause. The key to all successful negotiations is the availability of information. Experts have a large database of information available to them and years of experience in handling cases. Many surveyors will agree a success related element to their fee ensuring they work as hard as they can to obtain the lowest possible rent.
10. Arbitration - If negotiations have completely broken down, arbitration can settle the process. Arbitration cases are rare and can be expensive. Both sides can agree on an arbitrator or the Royal Institute of Chartered Surveyors can nominate one. Both sides make submissions and have the chance to comment on each others before the arbitrator makes a ruling. The process could last from six months to a year and costs could be awarded against the losing side.
