Whether your rent is up for review or you’re researching a new prospect, doing your homework is paramount. But how do you get your first foothold on the mountain of paperwork needed to thrash out the best deal?
According to Philip Smith, senior associate at Fleurets, the cornerstone document for a tenant heading into a rent negotiation is the lease or tenancy agreement. He explains: “It sets out the basis on which they’re permitted to occupy the property and is, basically, the agreement between the landlord and the tenant as to how the property will be used over the term of the lease.”
This is echoed by Peter Taylor, director of the hospitality valuations team at Christie & Co, who adds “everything hinges upon the lease”. He says that the rent review provisions in the existing documents are essential in forming “the basis of the rent review – setting out all the matters that are to be assumed and all the matters that are to be disregarded”.
While Smith explains that “tenants should always have up-to-date accounts to give to their adviser or at least have in their own possession so that you can argue against, or bring into negotiation any accounts you have if it helps your case”, providing account information during rent renewal is, according to Savills director of licensed leisure Dan Mackernan, “tricky”.
Mackernan says: “If we’re talking about trading fully fitted pubs, rent is based on trading potential. Very rarely do you get to see actual accounts and, if you do, the question is whether they are relevant because you’re meant to be assessing rent as what the average operator would do. If you’ve got a very good operator who’s doing a million pounds in turnover they may not want to declare that because the landlord may assess trade at a lower level.
“If you have to show the accounts, it sometimes puts tenants on the back foot because the landlord may think ‘now I know they’re doing a million pounds, I’m going to base my rent around a million pounds’.”
But he adds: “If you have to do it, you must have a good argument to back up why you think the level of trade is exceptional – like if you’ve got a great chef or products that you can’t get anywhere else, which would maybe inflate the turnover levels.”
Fleurets’ Smith says: “When the lease was entered into there could have been licences to alter the property – this could make a big difference.
“Say you’re taking on a pub and you agree with the landlord that you’re going to extend it and increase the trade area, but at a rent review you wouldn’t want the value of those improvements taken into account. You need to have that licence to hand to cover those improvements that you made to the property.
“You may also have entered into a schedule of condition when you take the property – say you take on a very dilapidated pub, you wouldn’t want your rent to be reviewed to the value of a fully refurbished and operational pub – so you would need to be able to produce that schedule of condition to say exactly what condition you took the property on.”
Mackernan adds: “You have to build up the whole picture of trade – with comparables and your accounts – and say ‘why would the average operator get that GP or those cost levels?’.”
Building a detailed picture through benchmarks and comparable evidence is also a huge part of assessing a new deal if you’re looking to explore new sites and cities.
Andy Frisby, divisional director at Fleurets, says it is key to understand the area that you’re going into at the outset. “For example, if you’re going into an area like Covent Garden, it’s an area that not only the domestic market has been keen to move into but one the international market has been keen to move into as well. As a result, the rents are going to be significantly higher.”
Knowing your area is crucial for benchmarking, says Frisby, so homework is important.
“The way that you can go about working out some of the benchmarks is searching on all the property agents’ websites to try to obtain details of similar sites within a location,” he explains. “That will give you an idea of what rents people are paying in that space. You do have to take into account how historic some of that information is but it gives you a starting point to understand.
“There isn’t an open forum and you can’t go onto a website and download all of the local rents, unfortunately. You can approach some of the local operators and ask them, but many of them aren’t going to be overly receptive to that for obvious reasons. It does make it very difficult.”
However, there are ways to get an idea, he says. “It depends very much on the style of operation, but you can look at what’s been happening with shop rents and business rents. They sit within different segments, but if those have been going up significantly of late then you can see that an area is improving. Restaurant rents are also a good guideline.”
Savills’ Mackernan adds: “If you haven’t got a very good comparable set then you do have to build up a hypothetical profit-and-loss account and then be ready to be challenged on each line and why you’ve adopted those numbers.”
Read into the rent
When considering taking on a pub, look at rent as an indication of the business turnover, advises Rachel Crossland, recruitment manager at Daniel Thwaites. She says: “A low rent is not always a positive. The pub company or brewery should be able to demonstrate how the rent has been calculated with assumptions of sales volumes and all overheads relating to the business.”
Christie & Co’s Taylor concludes: “A decision is going to have to be made at some point as to whether to seek professional advice. My advice would be ‘stick to what you’re good at’ – tenants are busy people running a pub and they should seek professional advice as soon as possible rather than enter into negotiations themselves.”
- To find out more about pubs for sale, lease and tenancy visit our property site. http://property.morningadvertiser.co.uk/