Nil premium leases explained

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Related tags: Renting

The chances are that if you have seen a pub advertised as having a nil premium, you've thought one of three things. One, that it means you can take...

The chances are that if you have seen a pub advertised as having a nil premium, you've thought one of three things. One, that it means you can take on the pub lease for free. Two, that it must be a really bad business if no premium is being charged. Or even three, what does that mean?

A nil premium lease is one where you are not making a payment for the goodwill or existing business a pub has built up. This can typically be because it has been closed for a period of time, there are no accounts available or a previous licensee has run it badly. As such, they are commonly new leases rather than lease assignments and so are offered by the landlord, such as a pub company.

"These are rarely properties trading at their full potential," says Robin Mence, managing director of property agent Sidney Phillips, which has several nil premium pubs on its books. "But people should remember that a nil premium lease isn't a free lease. You still have to pay ingoing costs, as you need to buy the fixtures and fittings."

Nick Earee, Fleurets divisional director for the South, also has a number of nil premium properties on his books, including the Windmill in Brighton. He says the ingoing costs usually consist of a deposit, the inventory, rent in advance, stock, legal fees, working capital and possibly some stamp duty.

"The sum asked is an approximation of what capital is needed to take over the business. The vendor landlord expects the ingoing lessee to have this in cash funds," he says.

In the current climate, more and more nil premium pubs are coming to the market. Why and what is in it for the landlords?

Henry Plant is an asset development manager at Marston's, which has several nil premium properties on the market including the Bull in Ludlow, Shropshire.

The pub is in a strong location and there is high demand for it. In six to 12 months time, Plant says, it may be able to attract a good premium. For now, the Bull, which has four en-suite letting rooms, is being offered with ingoings of £80,000.

"People are needing to find more and more capital to get into a pub due to bank lending," says Plant. "We are looking to reduce the amount they have to invest.

"It's about sustainable relationships. To attract good tenants into good properties, it is more beneficial to both sides that cash from the premium remains in their hands so they can invest in the business."

Sell the goodwill on

So do nil premium leases offer a good opportunity to get into the trade cheaply? Yes and no. There is the opportunity to build business up and sell the goodwill on for a premium once the market recovers, although most leases will have a non-reassignment clause of two years.

"I think each opportunity has to be judged on its merits," says Mence. "You need to look carefully at the location of the property and its condition but, more importantly, the rental level and the terms of the tie, just like you would any other business."

However, Earee says market forces mean more and more desirable pubs are coming to the market this way. "There are some very good opportunities. It's a very low-cost entry to the trade," he says.

Related topics: Property law

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