2020/NO.45 - A growing number of high calibre operators are beginning to see the writing on the wall after little to no luck in their attempts to help their landlord see sense. Unfortunately, there will be many casualties in later stages of 2020 when Gov support eventually runs out, and the summer trade is all but gone with the weather beginning to turn for most of the country earlier this week. With no meaningful rental support, these sites will welcome a new tenant either at a greatly reduced rent set in today’s market, as it should, or set an unsustainable level which will see the process repeat which is more than likely unfortunately.
An extract from a recent Propel newsletter noted Young's chief executive Patrick Dardis warning that working from home is having a devastating effect on central London business. To quote and to credit the original source;
“Dardis added ten of the group's tenanted pubs in central London have found trading so challenging they have closed. “They couldn't cope with social distancing and just handed back the keys,” he said. Yet despite the huge cost involved in running near-empty pubs, Dardis is determined to keep trading to show London is open for business. If the capital remains a ghost town, he said the impact on Britain could be even worse than the pandemic…”
These pub sites do not often find themselves on the open market, and Youngs are not alone in this situation. A vast number of knowledgeable and experienced operators are walking away from prime sites from a range of Pub Companies and brewers, revealing the short sightedness from the owners as most will not replace these operators with like for like quality.
It is feared Pub Companies would rather push their luck in placing a relatively new or lesser experienced operator on a rent of the landlords choosing. They will do so by dressing the prime site up as a once in a lifetime opportunity, therefore ‘you would be a fool not to consider the site on offer’ and should be ‘willing’ to pay the rent asked, which is likely to be far too high and unrealistic. If only the landlord had some sense and offered sensible rental support package to their existing tenant base, spread over a specific time frame linked with the recovery of the individual premise. This would see the retention of the much-needed high-quality operators at these prime sites, instead of the gamble that we are beginning to see.
In saying that, prime sites under the ownership of the regulated POBS (pub owning businesses’) might have a harder time re-letting these superior premises out at the same or higher rent than before given that ‘sustainable business plans’ are in fact a regulated under the Pubs Code.
Long gone are the days of the regulated Pub Companies simply demanding that a tenant make the Business Plan work around the rent in order to make it fit. Far too often have we seen prospective tenants carefully construct a business plan, study the local competition, produce a profit and loss account which often presented a rent reduction. Only for the BDM to return the Business Plan and confirm that the Business Plan would only go forwards if the current rent was affirmed. The ingoing tenant was often told to fiddle the figures to make the justification of the landlords rent in order to secure the pub or facing missing out.
Pubs Code Regulation 10 links to an MRO situation and requires a Business Plan on “entering into a new agreement”.
(2) A “sustainable business plan” is a business plan which—
(a)has been prepared following consideration of independent professional advice, such as business, legal, property and rental valuation advice;
(b)includes financial forecasts for the tenancy or licence period, including—
(i)estimates of income and expenditure;
(ii)a sensitivity analysis;
(iii)the impact of any indexation of rent or of other costs referred to in the new agreement or in the renewal; and
(c)contains a forecast of the income and net profit over the tenancy or licence period which, in the pub-owning business’s opinion, is reasonable for the tenant and realistic.
The key point being the forecast of the income and net profit, which is intrinsically linked to that of the rent, being sustainable in the eyes of the POB and no longer the eyes of the tenant. This should remove the above situation from occurring, limiting the POBs ability to capitalise on the prospective tenant’s naivety, or through the manipulation of the process in order to pressure said tenant in taking on a prime site at an extortionate rent all the while dressing it up as a ‘good deal’.
This brings us back to the beginning, if certain Pub Cos and brewers had any sense or plan for longevity, they should consider a fair rental support package tapered upwards over the site-specific recovery time frame in order to retain the quality operators that their estates need. If they do not, any prudent and knowledgeable tenant with their commercial hat on will know when the right time is to walk…
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