Licensees need to start negotiating their rents to take into account the likelihood of a smoking ban, says a leading property specialist.
Howard Day, from chartered surveyors Howard Day Associates, argues that the proposed smoking legislation will have an impact on the sustainability of rents, especially where they are fixed according to the profits method of valuation.
He says that licensees will face a drop in turnover, in the short term at least, if the government's proposed smoking ban is implemented. Licensees will be forced to make the choice between the loss of wet income or stopping the food they serve. Either way turnover is likely to drop and tenants undergoing rent reviews now should aim for a value that takes the worst-case scenario into account, he argues.
Landlords are likely to dismiss such calculations but tenants should make it an issue to ensure they are covered for the potential loss of turnover.
Mr Day believes that any rent fixed now without upward-only rent review provisions could go down as the legislation is introduced - which is expected to be in 2008. However, rents will not go down consistently as the market is imperfect and any impact on trade will take time to come into effect.
He argues that the knock-on effect of a smoking ban is that there will not be as many rent uplifts as in recent years and rent reviews are likely to become more contentious as the legislation takes effect.
When assessing comparable rents for rent review purposes, the market may become polarised with smokers' pubs on the one hand and food establishments on the other.
The new Use Classes Order splitting pubs from restaurants could also further polarise the market, he argues.
However, where the user clause in the lease is flexible and there are no planning restrictions, valuers will have to consider if the rental value could be higher if the establishment moved from smokers' pub to food establishment or vice versa.
Mr Day continued: "To be on the safe side, I would advise tenants negotiating rents today to aim for a level that assumes a smoking ban is in force within five years. The consequences of this for individual establishments need to be considered very carefully."