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At the time of writing, over half of the 54,000 pubs in the UK are leased or tenanted. While there will undoubtedly be further closures of uneconomic pubs as supply and demand is balanced, the result is a significant improvement in quality and sustainability of the outlets within the sector.

The major players in the sector have to address the excessive debt burden created through their rapid expansion, but the leased market strategy has so far focused on disposals of underperforming assets at the bottom end of their estates.

It has been widely anticipated that the large Pub Co estates will experience a much broader restructuring and this has been confirmed by the recent announcement by Punch Taverns Plc of their intention to separate their managed and leased operations, with the planned disposal of a significant number of outlets. The disposal options are limited; many are likely to be sold for alternative use or directly to the tenant, but the better quality outlets will see either a complete change in ownership or overarching operational management.

The consumer offer has never been more innovative in response to market pressures with many leased pubs moving to dry led operations, incorporating a range of ancillary uses from local shops to post offices. In contrast the limited availability of good operators who can successfully run such diverse and substantial leisure businesses mean that there has never been more choice or flexibility. This has also brought far more complexity and with all aspects of such deals open to negotiation, a full understanding of the agreement and trading terms is essential to maximise both the trading profit and future value of your business.

In the past those new to the trade or borrowing significant amounts were often steered toward assignments of existing businesses where there is a demonstrable trading history. It can often be very difficult to differentiate between the inherent and personal goodwill and so such businesses rarely offer the same returns as a new letting, particularly in the current market.

There is much talk of forcing the larger pub companies to include guest ale rights in their agreements and to offer a free of tie option, in response a bewildering array of discount schemes is offered by most of the major companies. The reality is that wet trade is becoming a less significant proportion of most leisure businesses even allowing for the growth in cask conditioned ales as a result of the government’s progressive beer duty policy.

Unless there is a significant opportunity for development of the wet business most discount schemes dependent on meeting a volume target will tend to favour the landlord and diminish in value over time. Apparently free of tie options are invariably based on a pub company’s notional price list and to understand such schemes requires a detailed understanding of current beer prices on the spot market. It is essential that all of the financial aspects of the business and particularly the net costs of occupation including rent, beer prices, discounts, and gaming machine share are judged in the context of the anticipated business plan and profit and loss. Most landlords offer guidance and assistance in this area but they are of course acting specifically in their own interest.

The tie itself is not the issue, it is the net financial value of the deal and structuring it to work most efficiently for the style of business you plan to grow.

Less regard tends to be paid to the lease terms and yet they can have a significant bearing on future value, the most important aspect being the provisions for rent review and assignment.

Pub companies now offer many variations on the traditional upwards only rent review including fixed rents, consumer price index uplifts and even up and down rent reviews in the case of hardship. The availability of such provisions does tend to be associated with shorter non-assignable agreements and would not potentially outweigh the benefits of being able to sell the business in future.

Get the negotiation right at the start and be confident of growing the business and an upwards only review should not be of significant concern. If your business is situated in an area with other competing uses such as offices or shops it is well worth taking a leaf out of the books of the large retail chains such as J D Wetherspoon. By negotiating a rent review clause that assumes the property is a shell, not specifically fitted out for use as a pub and may be used for a broad range of retail uses, then the rent review may be based on comparison with other retail units in the locality rather than on the trade.

The landlord benefits from an asset with a stronger underlying value because of the alternative uses and the successful licensed trade operator has the certainty of a rent that is potentially less variable and will not rise significantly purely because he succeeds in trading the outlet more effectively.

The leased and tenanted market is undergoing structural change but the stock of UK pubs includes fantastic, well-run businesses and investment opportunities but it is a complex area. The licensed property adviser has to combine relevant market knowledge with an understanding of the trade and consumer trends in order to correctly appraise the opportunities in the market.

Peter Carroll is a surveyor in DTZ’s landlord & tenant team