Independence day

Phil Dixon turns the traditional pub tenancy agreement on its head and suggests an open-ended, flexible approach as an alternative way forward

I looked across at the happy smiling couple and enquired: "just take me through that again. You are so far over the target set for you by the brewery that each month your bonus is greater than the rent?"

"Yes, that is correct," they replied almost in unison. This couple, who had previously run a fascias and window-frame cleaning

business were resolute in the fact that taking this unpicturesque, small, nothing-to-shout- about ordinary public house was without doubt one of the best decisions of their lives.

Four days later I am having a coffee with two friends of a friend. They are vibrant, knowledgeable people wanting to take the leap and run their own business (food-led retail outlet). They quiz me on the big companies'

agreements. I find myself explaining that the 100% tie is often the norm. I chat about the repair liability, flow-meters and how rents are determined.

"Is it true," they ask, "that if you are suc-cessful and say double the turnover, the

landlord doubles the rent at the next review?" I find myself waffling (nothing new) and tell them it doesn't usually double, but increases several times more than inflation are, from

my experience, common. "Most of the companies offer a three-year agreement or a

20-year one. We don't fancy either of them," they insist. I then waffle on some more

about the Landlord & Tenant Act and the way companies work. They remain adamant

and confirm they will try to find a business without having to apply to the main

companies.

Meeting customer's expectations

Although there are a few exceptions, the majority of pub cos/breweries are like car salesmen in the old Soviet Union circa 1982 - you can have a Lada or a Lada. You do get one choice: do you want two doors or four? Whatever happened to meeting, never mind exceeding your customer's expectations? Why would anyone want to invest up to

£100,000 in a business and only want guaranteed security for three years? If the prospect of being exploited, every so often, by allowing the estates department to strike terror into the hearts and minds of your customers (ie, the rent review) puts people off, why not come up with a different proposition?

Firstly let's consider traditional

tenancies. Why not introduce a probationary

period combined with compulsory pre-entry

training? Afterwards, offer the agreement with correction fluid and ask: "How many years would you like to initially commit to? Two, four, seven? The rent can be indexed by RPI. Always include a six-month notice clause so tenants can leave of their own volition".

I have no issue with firms wanting to offer 20-year leases but they always moan that they're not attracting the right people. "We're getting too may applicants who just want a lifestyle" is typical. In that case, why not offer a

"lifestyle" agreement whose key aspect would be twofold - a fixed rent and a fixed

assignment fee.

Simple arbitration system

I would recommend a 10-year agreement, with rents set and indexed annually over the 10 years. Each party could give six months notice to review the rent due to changes in

circumstances beyond the control of the

lessee. On the one hand, a major economic

factor - eg, the Leyland factory closing - and on the other (from the company's point of view) - 200 houses built on the field next door. If the issue is disputed, a simple arbitration system could be offered.

An alternative method of fixing the rent is to take a fixed percentage of turnover. An issue in the past was that of the accuracy of

financial records - eg, what's the difference between Lord of the Rings and a

licensee's accounts? Lord of the Rings bore some resemblance to reality. The introduction of compulsory financial management, complemented by Brulines (flow-meters), removes from the pubco/brewery the element of doubt. Rent could be based on reported and verified turnover. There would be a minimum level and then a fixed percentage relating to bandings.

Minimum Rent:

£25,000 based on say an FMT (turnover) of £250,000

Turnover:

£250,000 - £300,000 10% of the amount

£300,000 - £350,000 9% of the amount

£350,000 - £400,000 7.5% of the amount

This would continue with the percentage decreasing, therefore rewarding not penalising the lessee who increases trade. It is an agreement once used by Watney Mann and was one, where provided the turnover figure was accurate, well received by both sides.

A crucial issue is the question of whether this agreement should be assignable? I think it should be, but with a completely new

method of determining the value of the

business. The fee would be fixed, based on the net profit declared in the licensee's approved accounts, typically profit over one year. Therefore the exact profit of the business determines the fee. Agents would market the pub and provide the company with a choice of applicants. The pubco/brewery would then decide who takes over the pub. I accept it negates market forces but conversely it allows the person with the best potential to take the business, not necessarily as now, the one who may be silly enough to offer far more than the business warrants. They are nearly always in difficulty in a matter of months. Successful "lifestyle" lessees would be incentivised to cash in their businesses and move on to another challenge in a reasonable period.

Training/skills enhancement

I have become a convert to the view that

compulsory financial management training is a good thing as it rescues businesses that would otherwise end in failure. Pre and post-entry training should also be compulsory. Too many companies only make payment for the training compulsory and not actual participation! About 90% of all pubs in the UK could improve their retail standards so the issue needs to be taken seriously.

As with all the above suggestions, elements have been borrowed, but a new "lifestyle" agreement with rents and assignment levels fixed from day one is worthy of consideration. After all, as our soon-to-be departed great leader always says, there can be a third way.

phildixoncmbii@aol.com