The implementation of the market-rent-only (MRO) option saw predictions that thousands of licensees would choose not to remain tied to their landlord. At the same time many others predicted the decline of the tenanted sector. Neither, however, has materialised.
But there are reasons for this. Hundreds of cases are stuck within the system at the office of the pubs code adjudicator, which is responsible for dealing with arbitrations. Accusations have also been rife that there have been delaying tactics by some pubcos to circumvent tenants’ access to MRO.
But it is important to recognise that while the major six pub companies are covered by the legislation, there are many other smaller companies offering tenanted and leased deals.
And, in the wake of the legislation, pubcos have started to review their lease and tenanted deals offering more competitive agreements to retain good publicans and foster better relationships.
Neil Morgan, managing director of pubs and restaurants at Christie & Co, argues it is not in the interest of the pubcos to have businesses fail or to have pubs on tenancy at will or management agreements.
“A lot of people predicted the demise [of the sector] with the implementation of MRO but MRO has not really had a massive effect and a lot of pubcos and tenants have sat down and revised agreements or made new arrangements which have negated any need for MRO,” he argues.
“Everything has been prompted by the legislation, but leading up to MRO, pubcos were getting their house in order anyway.”
He argues that many pubcos are not just sticking with the ‘one agreement fits all’ principle but are tailor-making agreements to suit the potential lessee or tenant.
For an experienced operator, a pubco is more likely to look at the strength of the covenant and grant a longer assignable lease or even free-of-tie deal.
Morgan predicts, that despite all the scaremongering about the death of the tenanted and leased sector there will actually be more interest.
“Cost pressures are having an impact on the managed sector in terms of national living wage, pensions and rates. The viability of a managed house model used to be £8,000 to £10,000 a week and it is now between £15,000 and £20,000 a week,” he argues.
Vote of confidence
The result is that a number of companies are switching over to franchise and lease agreements to negate the cost of running a managed house, which will see increased interest in the sector, he states.
Fleurets director and head of agency Simon Hall argues that there has been a “massive vote” of confidence in the sector with both the Admiral and Punch deals.
“For those companies to be invested in at the price that was paid, these were not fire sales and were definitely a vote of confidence in the whole model despite MRO,” he argues.
One new trend that is showing the buoyancy of the sector is the increased interest in buying individual pubs to add to estates. He cites NewRiver, which is on the acquisition trail for individual sites as an example of this.
“Pub companies stepping into individual acquisitions is a big change, which we have not seen since 2007,” he argues.
He agrees that the affect of MRO has resulted in a rise in deals for tenants, despite limited numbers opting for free-of-tie arrangements.
“They have negotiated new tied deals and have come off the leases and gone into tenancies under better terms,” he says.
While these pubs are more likely to be profitable, the licensees will not benefit from the capital on reassignment, he admits.
“Tied tenancies are probably on better terms than they have been for a long time and should be making more profit, but are not assignable, which is like the old brewery model,” he says.
“Pubcos have been keen on reducing the affect of MRO and reducing the number that will be able to apply for it.”
He argues that, despite this, there are more free-of-tie tenancies being offered in the market on new lettings.
But the unintended consequences of the legislation is that it has been detrimental for proven successful tied leaseholders.
“People who built their businesses on the basis of being able to sell them are now in a position where sale prices have reduced on tied-lease assignment especially when there is less than five years left on the lease, even though they are protected by the Landlord & Tenant Act,” he admits.
The threat to the tenant is that there is no guarantee as the lease can be taken back to the pubco as a managed house.
“The risk of secured leases being able to go MRO when legislation becomes more easily understood is a threat to income and will continue to be,” he adds.
MRO fails to deliver
Stephen Taylor, managing director at Guy Simmonds, agrees there is a threat to licensee livelihoods with more short-term agreements on the market.
“The feedback we receive from shrewd prospective operators is negative,” he says.
Taylor argues that the “many beleaguered pub company lessees” believe that the advent of MRO, and the subsequent delays and confusion, has so far failed to deliver pragmatic rents.
“These good operators, require the security of a long-term protected lease at realistic rent. This also, of course, enables them to build the business up, hence then being able to reap the benefits of their hard work, by being able to assign the lease and goodwill, hopefully at considerable, commensurate capital gain.”
Savills director of licensed leisure Kevin Marsh believes that MRO helped to spark debate forcing both tenants and pubcos to focus on their relationship.
“MRO has stimulated debate and helped people understand that being tied does not mean they are going to be worse off than being free-of-tie and there are benefits of being part of a tied estate. As a consequence of that, I believe strongly there will be a future for that market,” he says.
But he also accuses MRO of being a “distraction” for many tenants who thought they were going to be able to free themselves from their pubcos and make more money.
“Some of them have got better deals on their supply, but a number of them have realised they are entitled to upwards and downwards rent reviews,” he says. “If the rent has got out of kilter with the market, then they have the ability to reduce their rent anyway,” he says.
There are also a number of pitfalls with MRO, such as the level of detail associated with it and the fact that rent has to be paid quarterly in advance, that have made it less attractive,
“In the main, pubcos have been far more generous to some of their tenants than any third-party landlord would have been,” he says.
Pub company Ei Group (EiG) believes that the sector is still strong for the leased and tenanted market.
It has transformed its business in the wake of the pubs code, offering new leases and restructuring its business.
The core leased and tenanted estate has around 4,000 pubs compared to its 250 managed pubs and roughly 330 commercial properties. As of 30 September, EiG had 790 potential MRO deals, resulting in 290 offers. Only 10 have translated into free-of-tie agreements with 102 resulting in new tied agreements, nine leases taken back or pubs sold and the rest referred to the PCA.
Earlier this year, as first revealed by MCA, a sister title to The Morning Advertiser, the tenanted and leased arm (now called Ei Publican Partnerships (EiPP)) was remodelled.
It has already produced its first post-pubs code leases – specifically designed for the hard-fought waiver of MRO in response to “significant investment” in affected pubs.
Nick Light, managing director of EiPP, told MCA he believed it was still early days, but he was encouraged by the resilience of the tied model.
“I felt in the final analysis – when publicans really decide on the best deal for them – the benefits of the tied model would be clear,” he says. “There is always a risk to starting any business and the pub sector faces pressures from all sides. The added risk of increasing a key overhead in the level of rent you pay was always going to be an important factor in people coming to that decision.”
He also says that, despite the challenges the code has presented EiG, it has brought benefits and has changed the “perceived balance” in the negotiating power of the two parties as well as due diligence.
Importance of support
Andy Hodgson, operations director at Admiral Taverns says that the “tenanted model is back in vogue” and that the company is a champion of the traditional tenanted model.
Hodgson says: “As a business that already prided itself on industry best practice and had been working in the spirit of the new code for some time, our experience to date has confirmed our belief that the legislation will not have a significant impact on our own business. ”
The importance of building long-term, supportive relationships with its licensees has been something that has driven its operations and “licensee-centric culture that underpins that”, he argues.
“Our experience post the introduction of regulation, is that our licensees are continuing to place great importance on that support. It has always been a point of difference for us and I think it will continue to open up more opportunities going forward,” he says.
The company is focusing on attracting new talent into the sector with its new Business Support agreement. It is giving first-time licensees an added level of support and training to help them run their own pubs.
“The support and training that pub companies are offering is also increasingly strong and this raises the sector’s profile and will make it much more attractive to people who wouldn’t have considered taking on a tenancy before,” he says.
“They might have ambition to run their own business, they may even work in the broader hospitality sector, but they wouldn’t necessarily have considered making the jump to running their own tenancy.”
There have been many political debates about the implications of MRO and subsequent decline in the sector. But the tenanted and leased market is still standing, with new agreements driving the sector.
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