Is it time to give lease a chance?

By Michelle Perrett

- Last updated on GMT

Is it time to give lease a chance?

Related tags: Lease

Whether you are thinking of selling or buying a lease, there’s a little more to it than simply agreeing a price and signing on the dotted line, as Michelle Perrett reveals.

If you are thinking of selling a leased pub, it is likely that an assignment sale to a new operator is what will be involved.

In short, this means that a sale will take place of the remaining years on the lease, including fixtures and fittings, to a new licensee. Here are the top 10 tips for assigning a lease:

1. Read your lease

While this might seem obvious, any lease assignment will depend on the legal agreement with the landlord.

Kevin Marsh, head of licensed leisure at Savills, says it is important that the licensee understands the conditions for assignment.

“These can include only allowing assignment to tenants with similar or greater financial covenant strength and having to cover the legal and other professional costs of the landlord,” he warns.

Meanwhile, the length remaining on the lease could also impact any assignment.

Simon Chaplin, head of pubs & restaurants at Christie & Co, says a shorter length left on the lease could affect the ability of the landlord to renew, which would affect its value. 

He warns: “If your lease has fewer than seven years to run, its value starts to diminish.”

He also advises licensees to check for the possibility of a ‘pre-emption clause’, which means that the landlord has first option to buy at market value. He also suggests that any licensee should check the extent of any drinks tie agreement within the lease.

“With all the press on this subject, buyers are more aware than ever before. Check that any ‘release from tie’ is transferable and get the paperwork,” he advises.

2. Landlord consent

Landlords will require information with regards to the new lessee. They will need to give their consent to the assignment, although under the terms of most leases they cannot unreasonably withhold this.

“While they cannot unreasonably refuse to give their consent, they will want to know about the strength and background of your buyer,” says Stephen Taylor managing director at Guy Simmonds.

“The landlord or agent will check the financial standing (covenant) and background of the prospective new tenant, and insist on satisfactory references, business plan, etc.”

Savills’ Marsh says it is also important to know the policy of the landlord before looking for a new lessee.

“Unlike pubcos, private landlords won’t necessarily have set policies on lease assignment so it is advisable for you to discuss this with them at the start of the process,” he says.

The landlord is likely to want to know how the prospective tenant will use the premises and whether they want to make any planned alterations. And the lessee is likely to have to pay the landlord’s costs pertaining to any assignment.

Christie’s Chaplin says: “Your landlord may have a standard process that you have to adhere to and they will charge costs. Get an early indication of what these might be.”

3. Appoint an agent

There are major advantages to appointing an agent because they will be responsible for valuing the property, as well as assisting with any sale.

Guy Simmonds’ Taylor says that an agency will provide an ‘initial and correct valuation’ and then facilitate the transaction through to completion.

“This will usually involve liaising on your behalf, with the buyer, solicitors and the landlord, and taking references,“ he says.

The agent will work out the value of the lease taking into account a range of issues including a calculation/multiple relating to turnover and reconstituted net profits.

Paul Bettesworth, director at Bettesworths, warns licensees to pick a reputable agent and not to sign up to onerous agreements.

“Beware of anyone promising you the earth while requesting a lumpy up-front marketing fee,” he says.

“There are disreputable agents in the business-transfer market who make a lot of money by tying sellers up to complicated, restrictive and onerous agency agreements, while taking enough money as a sign-up fee to make the subsequent success of the marketing almost irrelevant.” 

4. Choose a solicitor

Licensees need a solicitor experienced in conveyancing to advise through the sales process.

They will also be responsible for ensuring the seller has complied with all legal obligations and can supply relevant documentation to any prospective lessee.

This will include a range of items such as employees’ details and contracts, copies of all relevant licences, fire certificates, risk assessments, relevant safety certificates, insurance, energy performance certificate, fire risk assessment and even asbestos management plans.

5. Have an accountant and up-to-date accounts

An accountant will ensure that the financials of the business are up to date. These will be required by the buyer and are essential to ensure the correct valuation of the property. Lessees should also provide a copy of their latest VAT returns.

Guy Simmonds’ Taylor says: “Without these, an accurate valuation is not possible and any purchaser will also need full accounts for himself and advisers to study.”

This will allow prospective buyers to instruct their advisers to check that the asking price is correct and reasonable.

Bettesworth agrees that full accounts are crucial and are one of the most important aspects for any sale.

“Accounts should generally only be made available to bona fide applicants after a formal viewing of the property,” he says.

Meanwhile, Christie’s Chaplin says the accounts must show the business in its best light because it is just a trading business that is being sold and no ‘bricks and mortar’ are involved.

6. Dilapidations and repairs

Many licensees on longer agreements have a full repairing and insuring (FRI) lease. This means that the licensee is responsible for all the upkeep of the property.

Simon Hall, director and head of pubs at Fleurets, says: “This can include anything that is in disrepair from rotten windows to guttering, but can go as far as electricity
and boilers.”

He says most purchasers will have their own survey completed and know the extent of what they are buying into. But many landlords and pubcos now insist on repairs being completed before they will give permission for an assignment, he warns.

Bettesworth advises licensees to keep their premises in a good state of repair.

“If you have an obligation under your lease for the maintenance and repair of your property, this responsibility (and outstanding matters of disrepair) will pass to the buyer upon sale,” he advises.

“Therefore, your buyer and possibly your landlord (whether through survey or independently) may very well expect any ‘wants of repair’ to be addressed or budgeted for by you.”

7. Sell the business to prospective purchasers

It is no different to selling your house. People want to imagine themselves in the property, serving behind the bar and living in the accommodation.

Guy Simmonds’ Taylor advises sellers to make the living accommodation as appealing and attractive as possible.

“Many prospective purchasers are often raising capital to buy your business by selling a desirable home, and will wish to move into similarly appealing and immaculate accommodation,” says Taylor.

If the premises is looking a bit tired then some basic decorating to ensure it looks well kept should be considered. And when there are viewings, ensure that the premises are clean, the garden has been mowed and the premises looks inviting.

Taylor also warns of the effect pets can have on a potential purchaser.

“Potential purchasers are often immediately turned off by ‘Bruno’ lying in an unmade bed and ‘Tiddles’ licking last night’s dinner plates clean! Try to confine pets to specific areas and make sure there are no pet odours,” he says.

8. The offer

Don’t take the first offer for the pub because it helps with a quick sale.

Having a financially viable, strong buyer will provide both the licensee and the landlord with more stability.

Fleurets’ Hall warns of the importance of finding an assignee that has sound financials and good experience. While it is important for them to be able to pay the seller they also need to be able to upkeep the property and run the business. If this assignee fails he says it “could come back to bite you”. 

9. Don’t forget you may still have liabilities

Even though a sale will transfer the responsibility for the lease to the buyer there may still be some liabilities for the seller.

“Sometimes you will have to provide a guarantee for the assignee, which can be one of the biggest pitfalls for licensees, particularly if you have to provide a personal guarantee,” says Savills’ Marsh.

“You really have to think carefully about this because you could be liable for unpaid rent and dilapidations many years after you have left the business.”

Guy Simmonds’ Taylor says: “This usually depends upon the date of the lease, and the infamous Privity of Contract law. You should also ensure you are not in breach of any of your lease conditions and rent is always paid on time otherwise consent to assign may be withheld.”

10. Staff and employment

Licensees need to take advice from their solicitor regarding the rights of staff.

Essentially, the purchaser will be responsible for taking the staff on under Transfer of Undertakings (Protection of Employment) regulations, known as TUPE for short. The buyer takes on all aspects of staffing and duty to existing employees when a business is purchased.

Taylor adds: “You may wish to opt for full transparency for staff from the outset that you are intending to sell the business and consequently you can reassure them that their employment will continue.

“In our view, honesty and transparency towards employees, is always the best option.”

Related topics: Property law

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