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Business description: Property agreements with licensees
The relationship between Punch and its licensees is generally governed by the type and terms of agreement in place between us. In our relationships with our licensees we aim to be open and transparent.
We enter into one of two main categories of agreement with our licensees, under which the licensee operates the pub as either a lessee or a tenant and agrees to pay the rent specified in the agreement. As part of the lease or tenancy agreement, the licensee also agrees that we, or our designated supplier, will be the licensees' sole source of supply for certain products. These "tie" arrangements relate primarily to the purchase of beer, sales of which generally constitute the majority of the licensee turnover.
Leases are generally fully repairing, which means that the licensee is responsible for repairs to the premises during the term of the lease. They are generally fully assignable after two years subject to our consent, which will not be unreasonably withheld, and generally focuses on the suitability of the assignee. Tenancy agreements, which are shorter arrangements, involve the company undertaking to carry out repairs to the pub and are generally not assignable. Licensees are required to provide a rental deposit on entering into their agreement with us.
We have recently completely revised our Charter* which provides full details of these arrangements. Our business appraisal model enables the company to fully assess and protect company profit whilst offering choice between lease and tenancy options and allows us to calculate a fair maintainable rent.
*Click here for more information on our agreeements in our Charter.
The general provisions of each main category of agreement are summarised as follows:
Secure Agreement
The Secure Agreement is our lease of choice for both new leases and the renewal of existing inherited leases. The agreement offers entrepreneurial investors a low cost entry into the trade. A lease can cost as little as £15-£20k compared with the freehold average value of a pub of £550k (May 07).
The Secure Agreement provides us with the security of a fixed rate of rental income at a rate which is typically higher than other types of lease, for a period of 10 years or longer. We share profits with the licensee on leisure machines, equally in most cases. Tie arrangements are incentivised so that the licensee receives product-specific discounts on all purchases of beer.
The Secure Agrement also allows licensees to assign their leases with our prior consent after two years, potentially enabling them to realise a profit on the sale of a going concern. However, we do reserve the right to approve or veto the choice of assignee on the grounds of their suitability for the outlet concerned.
Secure Agreements range in duration from 10 to 25 years, and the rent is indexed annually to RPI with a five yearly rent review. A new licensee must purchase fixtures and fittings, stock and glassware, and lodge a deposit.
The level of discount on beer applies to all sales and varies by product. It is set to incentivise the licensee to buy products which give us higher margins and thus greater returns. The licensee is tied to us for the purchase of all wet products, although we may exempt some retailers from the tie with regard to wines, spirits, non-alcoholic drinks and flavoured alcoholic beverages by negotiation. Secure Agreements contain, as standard, provisions obliging licensees to accept monitoring measures and systems which can detect instances of buying outside the tie. As we view any instance of such 'buying out' activity as a very serious matter which can put a lease agreement at risk.
Since the Secure Agreement is fully repairing, retailers are responsible for the pubs’ maintenance including interior and exterior decoration, and for all outgoings.
Short Agreement
The tenancy agreement is targeted at licensees who are not seeking the greater commitment required by a lease. The tenancy agreement is shorter in duration than a standard lease and the licensee does not usually receive discount on any product but is tied for the supply of all beer products.
Rent is indexed annually to RPI and normally operates with a three yearly rent review.
Rent is generally lower than that payable under our leases.
The agreement is not assignable.
A licensee must purchase fixtures and fittings, stock and glassware and lodge a deposit. Under the tenancy agreement, we are responsible for structural repairs and exterior decoration. Licensees generally have the right to terminate tenancies by giving us six months’ notice.
The Tenancy-At-Will
We generally only use tenancies-at-will in instances where a new licenseefor a lease or tenancy has not yet been identified. The primary purpose of a tenancy-at-will is to keep a pub trading until a lease or tenancy is granted or the premises can be sold.
The tenancy-at-will operates with fewer obligations on, and fewer benefits for, the licensee and has no set duration, often lasting only a few months. The rent is neither indexed nor subject to formal rent review. Under a tenancy-at-will, rent is generally lower than that payable under our leases.
Also under a tenancy-at-will, the retailer receives no discount on any product, is tied for the supply of all wet products and we generally receive a share of profit from leisure machines. We are responsible for all significant repairs to the pubs and the retailers are unable to assign the agreement. |
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