A guide to nil premium leases

For anyone buying a pub in today’s market, there are plenty of opportunities available. As well as the many freehold and leasehold opportunities, one might also consider taking on a pub at a nil premium.

It is important to distinguish between a leasehold premium and a ‘nil premium’ lease; generally a leasehold premium will reflect an up-and-running going-concern business with a sum to be paid to reflect the value of the trade inventory, goodwill of the business and the lease.

Closed or struggling outlets​

A pub advertised with a ‘nil premium’ or a small ‘ingoing’ usually refers to an outlet that is either closed or struggling. In these circumstances, an ‘ingoing’ will usually cover the cost of the trade inventory, deposits and rent in advance. Generally, premiums are common on leasehold assignments whereas nil premium opportunities tend to be on new lettings with a fresh lease on offer.

There are obvious advantages to committing to a nil premium leasehold in that the initial capital outlay will be less than if a premium is charged. However, there is a reason for this. The landlord will be keen to incentivise prospective tenants in order to rejuvenate the business.

These opportunities can be exciting, especially if a new style of operation is planned as the incoming tenant will be freed from having to pay for the previous operator’s goodwill. However, caution should be taken as a nil premium lease does not simply mean that you are being given a free pub.

Investment​

The reality can be quite the contrary, with the property often requiring significant investment to simply put right a previous tenant’s dilapidations. Careful planning will be required when considering a nil premium lease and an accurate projection of potential capital commitment is always advisable.

Nil premium leases tend to be more prevalent with the larger pub companies, often where a tenant has failed or has not been able to sustain the business due to an over-inflated rent. Therefore, it is essential that the rent agreed is at a realistic market level, so as not to put the business in jeopardy from the start.

With a wealth of leasehold properties available at present, both with and without premiums, it is always wise to consider all factors and not necessarily be drawn to the enticement of what is to be paid upfront. Repairing obligations, break clauses, rental levels, condition of the property and the previous history of the pub should all be put into the melting pot before making a decision. Needless to say it is always worth gaining independent expert advice from a chartered surveyor before committing to any transaction.

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