The Difference Between A Leasehold, Tenancy And Freehold Pub Business
Date added: Mon, 14/11/2016 - 10:00
There are three different ways to run a pub so it is important to choose the method that is best for you. We recommend that you familiarise yourself with the differences between these options in order to make the right decision.
In this post I share what it means to take on a pub tenancy, buy the leasehold of a pub, or to own the freehold of a pub. Read on if you’re interested in becoming a pub landlord and starting your own business…
Taking On A Pub Tenancy
This is perhaps the easiest way to get started in the pub business. It is also an affordable route to becoming a pub landlord. Overall it involves the lowest level of costs and investment, but it does depend entirely on you and your ability to make a profitable business. A tenancy agreement is often regarded as an ideal way to enable newcomers to the business to dip their toes in the water; although many long-term pub landlords also prefer this business model. It gives you the time to explore what it is like to run a pub, earn a good living and enjoy an attractive lifestyle, but with less commitment in terms of funds.
The exact details of a pub tenancy agreement vary from brewery to brewery. Ownership is at the heart of any tenancy agreement.
As a tenant you are renting, not buying, premises from a brewery or pub company. This is normally on a short-term basis, generally lasting five years. You are effectively buying all the fixtures and fittings, glassware and existing supplies from the owners. A rent has to be paid on a regular basis, and this can be reviewed at regular intervals. At the end of the contract term, tenants must give statutory notice and sell the fixtures, fittings and supplies back to the landlord or new tenant.
An additional cost that has to be borne in mind is the fact that you would be liable for paying a share of the cost of repairs to the premises.
During your tenancy you will be self-employed and it becomes your responsibility to employ bar and kitchen staff. You pay their wages.
There will inevitably be a tied agreement as to the purchasing of beer and lager supplies. It may be that the agreement will also cover all other supplies such as soft drinks, wine, crisps and other snacks. This depends on the brewery or pubco, and you should always seek independent advice before taking on a pub tenancy.
What you cannot do at any point is sell on the goodwill of the business. This means that you cannot sell your stake in the business to any other person, other than the existing pub company. Breaking a tenancy early may result in financial penalties.
Buying The Leasehold Of A Pub
This is another popular way of running a pub. It offers considerable versatility and flexibility as to what you can do with the pub, while knowing that help and support are at hand whenever needed.
Under a leasehold agreement, you purchase a lease to run the property from a brewery or pub company. These are long-term agreements, usually between 10 and 21 years. To this end a leasehold tends to suit more experienced pub landlords who are looking to run a business for a significant period of time. Your interests are fully protected under the Landlord & Tenant Act 1954, and you have the right to renew the lease at the end of the term.
If you decide to sell on the goodwill at any point during your lease, you will need the agreement of your landlord. The sale terms will invariably reflect the success of your pub. If it has become more profitable, then you are likely to achieve a higher price for it. Bear in mind that the reverse is also true – if you take on a successful business, lose trade and are not successful at running the pub, making little or no profit then you face the prospect of selling the business at a loss or even having it returned to the landlord for very little or no payment at all. You can lose money as well as gain it. Leases automatically change hands at much lower prices than when selling a freehold business.
As the leaseholder, you are self-employed and running your own business. Employing and paying for staff is your responsibility. You are also responsible for all aspects of repairs to the property, even if a major repair becomes necessary such as re-roofing the building.
Most leases will require you to buy a specified range of products for sale in the bar, particularly beers and lagers.
Owning The A Pub Freehold
By far the biggest commitment for any pub landlord is to take on a freehold. It is also the hardest, because you become solely responsible for everything relating to the pub. You gain the flexibility to put on whatever beers you choose, and run the pub exactly as you want to run it – but you will have far less support from breweries when it comes to services like marketing and business help. It is also a very big financial commitment. Buying a freehold is like buying a house, only involving even larger sums and long-term commitments.
With a free house you own the pub, the land, the buildings, the fixtures and fittings, the goodwill. You are free to buy goods from any supplier you choose and can negotiate terms. Discounts are often provided to encourage you to stock a particular brand. You also gain full responsibility for all repairs to the property, and hiring and firing staff. You are self-employed, running your business.
On occasions, free house owners do take out loans from a brewery in order to fund the purchase or improvements to a pub. This effectively negates your ability to run a totally free house, since it becomes a tied agreement for the duration of the loan. The brewer will require you to take their products.
Finally there is one other option for those who are not ready to commit to any of the above, and that’s to run a Managed House. This involves being paid a salary by the brewery or pubco and no financial responsibilities for the premises, staffing, supplies and services. However, it does mean that you become a salaried employee and with that you will lose the ability to run the pub as you want to.
That said, breweries like Greene King aim to employ pub managers with drive and ambition, who want to make a success of the business. Therefore we’re always open to new ideas and so this route can provide invaluable experience for anyone not quite ready to take on a pub tenancy yet.
If you are uncertain as to which option is right for you, get in touch with our team to discuss this in more detail. We would be delighted to explore the various ways of running a pub with you, and discuss your experience, circumstances and goals.