Pub property: Lease is the word

By Stuart Stone contact

- Last updated on GMT

Give lease a chance: The ins and outs of lease reassignments
Give lease a chance: The ins and outs of lease reassignments
Leaseholds remain an ever-popular point of entry into the pub industry for inexperienced pub owners. However, sites that are only part way through their lease may need to be reassigned, so what’s the best way to do this?

When it’s time to move on from a leased site, or take one on, a common way to do this is through lease reassignment. 

Finding someone to take over a lease is dependent on how attractive the prospect is. The benefits of assigning a lease are largely down to the profits that can be achieved further down the line. “And they can be substantial,” says Paul Davey, managing director at Davey Co. “Even if you’re not trading [when you reassign] they can still be achievable. It’s all down to preparation.”

Good advice, early on

Davey says: “The catch-all is really to take good advice early in the process so you can take the right steps in terms of the preparatory work pertinent to that particular lease, site and landlord. 

“Whoever the landlord is will determine how the process is going to be handled from an assignment perspective. 

“If it’s a private landlord, for example, their requirements are going to be somewhat different to pubcos, which have a set format.”

Guy Simmonds managing director Stephen Taylor advises: “All lessees and prospective lessees taking an assignment should always take legal advice from their own specialist licensing or commercial solicitor, and ensure they are briefed and advised of the full terms and conditions of the lease.

“The lease should be valued by a national agent who can demonstrate comparables of leasehold businesses recently sold in the region.”

Landlord approval 

Davey points out: “Before you even start to negotiate with a buyer, you need to make sure they are going to pass muster with the landlord. 

“There’s no point starting the process of assigning a lease to a buyer if they’ve got no real chance of successfully having the lease assigned to them because of either bad credit referencing, bad trading records history, or anything that’s going to be adversely affecting a landlord’s consent.” 

Simon Jackaman, a divisional director at Fleurets, says: “The agent would take up a bank reference and, if they’re already an existing operator, we would be able to apply for existing trade references alongside an accountant reference, and a solicitor reference.”

In addition, the assignee would need to provide a document – similar to a CV – to showcase their grasp of the industry in addition to a deposit, cash bond, or nomination of a third party to stand as a guarantor. 

However, it’s worth noting that different landlords will have different sets of demands and must-haves, depending on whether they’re a pub company or private landlord.

Taylor suggests one key difference: “If it’s one of the pub companies, the buyer would then need to go through a training course that the pub company may offer. The seller certainly needs to engage with the landlord at the earliest possible opportunity.”

Longer-term benefits

Simmonds’ Taylor outlines that one of the major benefits and attractions of a longer-term lease is the right to be able to assign this lease – subject to the terms. 

“This type of longer-term, assignable lease offers a potentially high financial reward to the lessee upon assignment, commensurate with the profitability of the business. Hopefully, the lessee is, therefore, financially rewarded for building up the business, together with their hard work, endeavours and investment. 

“The value of the lease upon assignment is based on profitability, length and type of lease, quality of fixtures and fittings, etc. The outgoing lessee can then take another lease and repeat the process if they so wish, thereby making not only a hopeful significant trading profit, but also another potential capital gain on assignment.”

Jackaman adds: “There’s the chance to maximise the value of the business, in terms of the goodwill and the fixtures and fittings at the same time. 

“However, the pitfall of that is if it goes to the market, and a buyer wants to borrow money while they can still get funding for leasehold purchases, it isn’t easy and most banks would want at least a 15-year term left on the lease. 

“Anybody that doesn’t have 15 years or more left on the lease will probably have to do one of two things – one is go to the landlord and see if the landlord is willing to grant a new lease. 

“Obviously if the lease is within the Land-lord & Tenant Act then they’ll have automatic rights to the new lease at the end of the term anyway.”

Stumbling blocks

Jackaman also points out that a gulf in expertise between outgoing and incoming lessees can create some “nervousness” for the lease-assigning landlord. 

He mentions that authorised guarantee agreements (AGAs) are in place to combat any complications from this. However, Jackaman warns that these can be a stumbling block in their own right.

“An AGA effectively means the seller is going to have to stand as a guarantor to the incoming buyer until such times as that buyer reassigns the lease themself. So, whoever is the immediate past tenant will need to stand as a guarantor. 

“Quite often, people I meet aren’t aware of that but, when they sign the lease, the chances are that clause will be in there. 

“If the person they sell to defaults, the landlord will have the right to come back to the immediately previous tenant. That trips up an awful lot of people.”

However, Taylor mentions that it is possible for an outgoing lessee to negotiate out of such an agreement or take out specialist insurance to guard against such a scenario. 

“We have recently negotiated on behalf of an outgoing tenant, with a pragmatic private landlord, to achieve a satisfactory outcome for both parties, at a very reasonable cost to the outgoing tenant.”

Repairs and dilapidations

Unless a new tenant is willing to take on work to improve a premises, Jackaman adds that the matter of repairs is often a pitfall for outgoing tenants. 

“You, as the outgoing tenant are going to be responsible for any repairs that may well be done. In most cases, the landlord will either get a schedule of repair or dilapidation done. That would then be factored into the assignment.”

Guy Simmonds’ Taylor says that discharging obligations such as outstanding dilapidations can be an “onerous obligation”, but one that needs to be fully satisfied before consent to assign is granted. 

“We advise our private freeholder or landlord clients to have frequent property condition surveys carried out, to ensure that buildings are maintained on a continuous basis, to the obvious benefit of both landlord and lessee.”  

To find out more about pubs for sale, lease and tenancy visit our property site​.

Related topics: Property law

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