INSIGHT

A guide to rent reviews

By David Morgan

- Last updated on GMT

Related tags: Public house, Renting

'There is an alarming consistency for automatic uplifts in rent when reviews are due'
'There is an alarming consistency for automatic uplifts in rent when reviews are due'
Tenants are becoming more successful in securing their own rent cuts, according to Morgan & Clarke chartered surveyors director David Morgan. Here he gives his tips on smart negotiating during a review

Rent reviews are normally on a five-year cycle, although some of the older Whitbread leases still in existence are on a three-year format. Realistically, looking forward is the key to settling rents that will genuinely stay viable. Lessees should always remember this basic point.

Pubco retail field staff tell us the recession is over, sales are rising and all the bad stuff from 2008 onwards is now firmly behind us. When reminded that the British Beer & Pub Association (BBPA) year-on-year statistics show a decline in volume draught sales in the on-trade and that the off-trade is expanding, the enthusiasm wanes. Add to that, the inexorable rise in overhead costs (excluding rent), which is estimated at between 6% and 9% a year, plus the insidious annual rent rise linked to Retail Prices Index, which has nothing to do with on-site viability.

Consider the reality of supermarket pricing and drinking at home linked with bar prices and the achievement of unrealistic projected levels for wet sales. Bring these facts into all negotiations and discussions.

Draught beer sales

Pub and brewery companies depend heavily on the wholesale contribution they achieve from draught beer sales. It would seem sensible to encourage their tenants and lessees to sell more of the product rather than less, which involves two variable factors — each being key points either at rent review or lease renewal — namely the level of rent and the extent of product discounting. Each are variable and, if handled sensibly and properly in negotiations, will ensure the viability of the business.

There is an alarming consistency for automatic uplifts in rent when reviews are due. In the past five years (which governs current rent reviews), the recession has both deepened and stabilised. Overhead expenses have increased and volume sales have generally decreased (outside central London, of course).

Statistics

Statistical analysis is useful, with the BBPA and Association of Licensed Multiple Retailers benchmarking statistics being regularly quoted, certainly concerning wage levels. Overlooked by both pubcos and brewers is the quarterly Royal Institute of Chartered Surveyors (RICS) Pub Benchmarking Survey. This does not make convenient reading for them.

The contributors to this quarterly RICS survey are: Enterprise Inns, Punch, Marston’s and Star Pubs & Bars. The ratio between rent and projected FMT (fair maintainable trade — which is generally higher than actual), has been constantly less than 8.3%. This, of course, is an average with food-led pub rents probably being slightly higher and wet-led establishments being lower. The RICS statistics are telling and should be emphasised in rent negotiations.

Lessees and tenants can use all of the above to ensure the following years until the next open-market rent review stay viable.

Related topics: Property law

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