That four letter word

Setting a fair rent is a thorny issue for both licensees and pubcos, but there are ways around the problem, says Clive Williams

If licensees were asked to name the most contentious issue in the relationship with their land-lord, I am sure that the answer would be rent — by a mile!

Of course, it must be assumed that the relationship is all sweetness and light at the time of taking over the pub, because one takes it for granted that if the rent was not acceptable — fair and equitable for both landlord and lessee — the deal wouldn't be agreed by both parties.

As far as the landlord is concerned, he has no incentive to over-rent a pub, because to do so would create a rod for his own back. To over-rent means that in time the licensee becomes de-motivated and will not make money commensurate with his efforts. And if the licensee is not making money, he is a continual irritation to his landlord.

This means that the pubco business development manager (BDM) will have the hassle of recruiting another tenant or lessee, when what he should actually be doing is helping the licensee develop that business, although there can be problems in achieving this, if by then the lessee is in defensive mode.

So where does the oft-used statement "Pubcos charge sky-high rents" come from? In the main, in my view, this assertion comes from uninformed sources who do not understand the rules of engagement.

It seems that the problems arise at the time of rent review or when there is an unexpected downturn in trade. So how should these situations be handled by the licensee?

The very first rule in these situations is to get advice. No, I don't mean paying expensive fees to trade consultants, but more like getting practical help from a fellow tenant who has been in the same situation, or a former BDM. Yes, that's what I said — a former BDM! Contrary to popular opinion, retired BDMs stay in touch with many of their former licensees, and I am sure they would be pleased to advise, if only on an informal basis. Regrettably, we only hear about bad BDMs. Believe me, they are not all bad.

At normal rent review time, if trade has decreased and the tenant is looking for a rent reduction, the key issue for the pubco is identifying if the tenant is at fault for the downturn. In these situations I guess that requests for rent reductions will fall on deaf ears, and the view will be adopted that he should take responsibility.

It is encouraging to hear Ted Tuppen of Enterprise Inns say recently that it is "especially important" to continue working closely with licensees and offer rent concessions to those struggling in the current tough trading climate. But I wonder how many Enterprise tenants have benefited from this commendable offer?

So what should a tenant do in the case of a trade downturn? Well, the very first step is to look at the business plan, trade assumptions and projected profit and loss submitted at the start of the tenancy upon which the rent was assessed.

I firmly believe that if there has been a material decline in business through no fault of the tenant, then this should result, at the very least, in a temporary reduction/abatement.

For the pubco not to agree to a reduction — even on a temporary basis — is tantamount to disaster for both parties. The likely result, if the rent is not reduced, is that the pubco will have a pub for re-let — the resulting major hassle is something I can guarantee the pubco will wish to avoid, if at all possible.

The tenant should also enlist the help of his accountant to give evidence of the trading situation — preferably showing the trading figures on a monthly basis versus the previous year and the projected profit and loss on which the rent was based. Given the increase in utility and fixed costs, overheads should also be listed in the same way.

Now that most new leases/tenancy agreements do not have an upwards-only review clause, and provided licensees produce the evidence in a calm, clear and concise fashion, then it will be very difficult for the landlord to refuse a mid-term rent reduction in poor trading conditions or, indeed, at time of normal review.

Of course, there are a variety of leases and tenancy agreements in use in the industry, and all of them have tailored rent-review clauses. So my comments are of a general nature, and tenants must refer to their agreement (or code of practice) before a formal rent review.

To conclude and give a balanced view of the argument, if a pub is trading at significantly higher levels than shown on the projected profit and loss used to calculate the rent, should the pubco have the right to review the rent upwards mid-term? Answers on a postcard...

Clive Williams was brought up in the trade and is a former tenanted director at Whitbread. After leaving Whitbread, he co-founded three pubcos, the last of which — Celtic Inns — was sold to Marston's in 2006. He is a judge of the Association of Licensed Multiple Retailers Operations Manager of the Year competition