Don’t idealise the end of the pub tie

03-Dec-2014 - Last updated on 03-Dec-2014 at 09:04 GMT

Related tags Pubs Renting

'It will not change poorly run pubs that don’t hold any appeal for modern-day consumers into the goldmines some people believe they will become'

Many pitfalls await tenants and pubcos if the proposed changes to the pubs code are implemented, warns Paul Tallentyre, pubs and bars director at Davis Coffer Lyons

While the proposed changes to the pubs code are important, we should remember that this process has been ongoing for many years so I await the outcome of this latest round. If the proposed legislation does come into force, it will have a profound effect on the pubs market.

Tied pubs have always been a good way for tenants with relatively little equity to enter the market. Without the security of the tie, pubcos will expect incoming tenants to be responsible for more initial investment, so the tenant will carry more risk. This will prevent many aspiring publicans from entering the market.

In addition, large pubcos will have far less incentive to invest in free-of-tie pubs — and, where some have spent tens of millions of pounds a year investing in their estate, this is likely to decline.

Managed pubs

Managed pubs will also increase. Enterprise has already established a managed business and I imagine others will follow suit in preparation for any change in legislation. This will enable them to be in a position to decide whether or not to convert any pubs that it thinks will go free-of-tie at the point of lease renewal into managed houses, which they control themselves.

Smaller and community pubs will also be affected as the benefits from capex contributions and off set rent are withdrawn, which may result in some finding themselves under-capitalised and unable to make the necessary level of investment.

Another key consideration is rental levels. These have not been fixed and, while some in the market believe that their setting will be based on rents of similar properties in their immediate vicinity, I imagine a more complicated calculation will be made. This may lead to a larger increase in rent than some are expecting and, while it is true that these costs can be off-set against reduced beer costs, I imagine many will find a shortfall between the two.

Untapped revenue

Finally, losing revenue generated from beer sales will mean pubcos will understandably look for other ways to generate revenue from their estates. This could include letting upper parts of their properties, offering outside-the-act leases and shorter leases with no capex contributions or rent-free periods.

Many operators see breaking the tie as a quick and easy way to improve their business performance. However, it is not that simple and will not change poorly run pubs that don’t hold any appeal for modern-day consumers into the goldmines some people believe they will become.

If the proposed changes come into effect, then operators need to consider their long-term plans very carefully before deciding to break the tie. After all, the grass isn’t always greener.