I always dreamed of running a pub, greeting the regulars with a smile, a quip and their favourite tipple. After more than 30 years of handling debt recovery work for the licensed trade, I can see that the reality is very different. It is not an easy life. For many, long hours bring little financial reward. This can bring the pub owner and the tenant into conflict if the relationship is not managed carefully and commercially.
The national living wage, apprenticeship levy and pension contributions have increased staff costs. Business rates continue to be penal. Pubs generate 0.5% of total business revenue, but pay 2.8% of the business rates bill.
Pubs continue to close at the rate of 76 per month. The fastest rate of closure is in urban areas outside city centres. The number of smaller pubs has fallen since 2001 but the number of larger pubs has risen in the same period.
The market has changed. Research shows that Generation Z – 18 to 24 year olds – are drinking less alcohol, almost 40% of this group claims to be teetotal. Those who do drink alcohol are drinking less of it.
Against a background of declining beer sales, revelations from the Global Drug Survey perhaps show that we are concentrating all our drinking into one or two nights a week.
The Beer Orders of 1988 brought about a revolution in the way that pubs are owned. However, rather than bringing greater competition into the market, the effect was to turn pubs into rental income generators for major property companies with tenants effectively penalised for being successful operators and thrown out for being unsuccessful operators.
Rather than treating their tenants as an income generator, many pub owners are now working more closely in partnership with their tenants for mutual benefit. Independent brewers such as Hall and Woodhouse have pioneered this model. Chris Chapman, head of business partnerships, says: “We refer to our tenants as ‘business partners’ because they are just that, our partners. Our success is built around having the best invested public houses in the south of England and a range of affordable but flexible agreements that ensure the needs of our business partners are met, with security of tenure, no open market rent reviews and industry leading tied pricing.”
A long term relationship involves investment by both pub owner and tenant.
In the past, pub owners have spent too little on the fabric of their buildings, which have deteriorated to the point where they become unattractive to customers, uneconomic to run and, in some cases, unsafe.
Equally, tenants have often failed to understand the capital requirements of running a business and have been inadequately funded when unforeseen expenditure arises or when sales drop (for example in periods of bad weather). The simple remedy for them has often been to buy outside the brewery tie and save costs, which generally then results in penalties being imposed and the debt spiralling. Our work at Shakespeare Martineau has, for many years, been based on the recovery of unpaid rent upon the termination of a tenancy, with unpaid trade debt and dilapidations and charges for buying outside the tie often featuring as a large part of a claim.
Lack of investment in the building and declining trade then makes it difficult to attract ambitious tenants and the pub goes further downhill before eventually closing, either to be sold off and converted into a supermarket or residential property, or simply left closed until the planners agree to de-license it.
A successful tenant recognises the changing market and offers modern food and drink to a discerning market, supplied in attractive surroundings, promoted by social media.
Mark Higgs operates a number of highly successful businesses in formerly struggling or closed pubs in North Oxfordshire and Warwickshire. His model for success involves good service from a welltrained and managed team, a good food offering coupled with an range of drinks delivered in a clean and attractive environment and well-publicised through social media.
However, where a tenant finds that debt is looming, it is important to be open with its landlord and explain the reasons for the cash shortage and set out a business case for support and forbearance from the landlord. It is in the interests of the landlord to support the tenant through a difficult period. Going back many years, pub owners would allow tenants to run up massive debts as long as pubs remained trading and would then evict and bankrupt outgoing tenants as soon as a new operator could be found to take over.
Nowadays, the partnership model is seen as the right way to conduct a successful business.
It is widely acknowledged that there are still too many pubs for the market and there must be further closures in the coming years before the market stabilises at the right level. With the support of landlords, the right financial backing and a clear understanding of what makes a successful pub, ambitious lessees are probably in a better position than they have been for many years to take advantage of the opportunities to succeed.
This also involves keeping on top of regulatory issues, which have an increasing impact on the running of any business. The consequences of non-compliance can be disastrous. I will deal with this in part two.
Whilst the headlines paint a picture of doom and gloom, pub closures, declining trade, increasing overheads and people staying at home to drink cheap booze from supermarkets, there are some areas of hope. In particular, Brexit seems to have produced something of a bonus for the market. Not only are Brits staying at home and spending more money in pubs, due to some unusually good weather last summer and this Easter, but Europeans and others travelling from abroad are benefitting from the decline in the value of sterling following the Brexit vote and are spending more on one of our great institutions, the British pub.
By Alan Hamblett, partner at debt recovery and asset finance solicitors, Corclaim