Time to drive a hard bargain
The major tenanted pubcos are being poked by two sharp sticks. One stick is political and centres around intense pressure over the transparency and fairness of relations with tenants.
The other sharp stick is economic. The marketplace is a very powerful thing. The Business & Enterprise Committee (BEC) report in May had this to say about how the marketplace exerts its own pressure: "Pubcos that not only benefit themselves, but support their lessees, are likely to stay in business. If pubcos push too hard and are too greedy they will fail."
To re-phrase BEC, if pubcos fail to adapt to market conditions, they risk more and more licensees failing and will struggle to attract new talent. In many ways the intense market pressure is having a transformational effect as the tenanted pubcos rush to adjust to the new economic reality. For a start, one informed estimate suggests there are 4,000-plus pubs that the major tenanted pubcos would want to sell if the market hadn't collapsed.
It's hugely significant that Admiral Taverns is finding, for example, that average freehold pub disposal prices have dipped in excess of £100,000 in the past year. The only course of action in the changed landscape of 2009 is to acknowledge that the seven fat years, as Enterprise's Colin Pedrick calls them, are over and it's time for imagination, pragmatism and flexibility. This is driven by the purest of motives — self-preservation. If tenants don't survive the current conditions, there's a risk of a devastating breach of pubco dams.
In many ways the balance of power has been flipped by economic conditions and it's a tenant's market. Any new arrival in the tenanted market should use this to his or her advantage by pushing hard to achieve fantastic terms. There are things on offer that tenants could only dream about a few years ago — rent-free periods, stepped rents, free-of-tie agreements (Greene King has around a dozen of these in place now), free start-up stock, one-way rights to give notice and break clauses.
New licensees are unlikely to have to pay any sort of a premium, will be able to drive a heck of a bargain on fixtures and fittings, and negotiate to reduce the liability to a long lease while keeping options open to extend. Some sitting tenants are seeing rents re-based and getting better deals on discounts and all manner of peripheral support as the tenanted pubcos shore up their walls with the proverbial sandbags.
There's not a single tenanted pub company out of the woods on this at the moment. Not a single one that won't be having some pretty radical internal discussions about what more can be done to ensure its tenants have a sustainable future. And the days of handing down contractual terms from on high are gone — it is, as everybody says, the tie flexing.
