Careers & Property: Tenancy or lease?
You would be forgiven for assuming a tenancy agreement differs little from a lease when it comes to taking a pub.
The reality, however, is that a tenancy differs enormously from a lease and those considering either would be well advised to weigh up carefully the fundamental distinctions between them before entering into an agreement. While both a tenancy and a lease involve renting a property as opposed to owning it, they each provide very different forms of tenure, rights and obligations.
Traditional tenancies have a long history and previously accounted for a large proportion of the old brewery estates. The brewery landlord owns the trading asset and therefore has complete control of all the wet trade. The tenant owns the fixtures and fittings, pays rent for the property and retains the profit of running the business without having any right of ownership of it.
A lessee, on the other hand, owns the goodwill of the business, thereby becoming an owner-operator, and that fact underlies the key differences. Tenancy agreements tend to be for relatively short periods of 12, 18 or 24 months only. On expiry of the agreement the tenant can apply for a renewal or simply vacate the premises. The incoming tenant will purchase the trade inventory and the outgoing tenant will carry out any repairs necessary to ensure the premises are left in as good a condition as when they moved in. The extent of any maintenance or repairing obligations will be set out in the tenancy agreement.
A lease, however, is an altogether different affair. The term is usually 10, 15, 20 or more years. Most leases place a full insuring and repairing obligation upon the lessee and therefore, from a property maintenance and repair perspective, is far more onerous than a short-term tenancy.
Leases are assignable, meaning you can sell on the business after a period of time, making a profit from the goodwill you have hopefully built up at the pub. But be aware that if the person to whom you assign the lease fails, the landlord could be calling on you to pick up the tab for any unpaid rent and in effect pass the lease back to you.
While a lease does represent a far greater commitment and place on you the kind of obligations and liabilities that a tenancy does not, this has to be balanced against the potential gains business ownership brings over and above merely the right to retain any trading profit. Leases are therefore more appropriate for operators who wish to build value in a business, which they can sell on for a premium when the time is right.
Paul Davey is managing director of licensed property agent Davey & Co
www.daveyco.com
