Some are saying we are at the bottom of the market, some would argue there’s some way to go, but either way, it’s a difficult time for people looking to exit their pub. Broadly this is because in most cases, it’s not going to attract the price most people would hope for.
It’s with this in mind that some people are considering holding on to their freehold interest and exploring the possibility of letting the pub instead.
One of the main reasons for considering a letting, instead of a sale, is it opens up the marketing to a wider number of potential buyers. In the present climate, bank funding is very difficult to obtain and, while there are capable and willing operators for licensed businesses, the limited ability to raise funding means that many potential purchasers are incapable of buying.
A leasehold business generally requires lower levels of cash contribution, meaning that there are more potential buyers/operators with the funds to proceed without the need for a loan.
Letting your property would also remove you from the day-to-day operation of the business to pursue other interests, and you can retain the freehold asset. Letting the property may also be a means to an end in achieving a freehold sale because, quite often, once a tenant is in operation and has had the opportunity to build the business and produce accounts of their own, it is easier for them to secure funding to buy the freehold.
Even if the tenant doesn’t eventually buy the freehold, granting a lease of the property changes the market for the potential purchaser of the freehold. It will no longer appeal to an owner-operator but will then appeal to investors. This again opens the market to a new section of potential purchasers, although it may have an impact on the sale price achievable.
Issues to consider
■ Can you grant a lease? This is primarily in respect of any outstanding mortgage. Granting a lease will change the nature of the bank’s loan from being a business loan to an investment loan. It will change the value of their potential security and you will need to establish that there is sufficient equity in the deal to support the loan and that they are comfortable with you changing the nature of your ownership.
■ Will a letting produce enough equity release for you to pursue your intended course of action? Do you need to raise cash out of any transaction to buy another property or invest in another business? Will a letting enable you to do this?
■ You will not subsequently be able to offer the property for sale with vacant possession as your tenant will have rights to occupy (and probably security of tenure). This also means that you will not be able to occupy the property again, at least until the end of the lease. It may be possible to insert break clauses but this will have an effect on the rent achievable and the value of freehold investment.
■ Granting a longer-term lease will undoubtedly mean the tenant will become protected by the Landlord & Tenant Act 1954. This means that if the tenant is complying with the terms of their lease they will be entitled to another lease on similar terms at the end of their current agreement. This will be without any additional premium payment. The only grounds on which you can refuse consent is if you are genuinely wishing to redevelop the site, or you wish to occupy the property yourself. In both of these situations compensation would be payable to the tenant.
■ One of the main risks involved in letting property to a third party is that the tenant ‘fails’ and vacates the property. In this situation you could find yourself with rent arrears, damage to the property, damage to the business and unpaid bills.
Benefits of letting
■ You would retain the freehold property, which may allow for capital growth in the future.
■ In some cases you can transfer the freehold into a pension fund or similar tax-efficient arrangement to maximise the financial return.
■ It will secure an income stream that could well be better than you are likely to gain from many investments.
■ It can release you from the day-to-day operation of the business to pursue other interests when an outright freehold sale is proving difficult.
■ It might enable you to achieve a sale at a later stage as an investment — or to the sitting tenant.
If you're a freeholder then you can join the Freehouse Business Club, run by the Publican's Morning Advertiser. Click here for more information and details of the next event