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One of our main frequently asked questions, for new
people coming into the licensed retail trade is,
"What is the difference between a freehold
property, managed, a tenancy and a leasehold?"
- Hopefully the following information will help to
answer your question.
Introduction
"Pubs on/off sales"
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A Premises Licence is required to sell intoxicating
liquor by retail on and off named premises. This is
granted to a premises such as a public house, off
licence, hotel, restaurant or other premises selling
alcohol. An individual will also be required to be appointed
the designated premises supervisor (DPS) of the
premises. There are various kinds of premises such as
"on" or "off" licenses, which may
have conditions or undertakings attached to them which
limit their use.
Besides selling beers, wines, spirits and minerals
most public houses also serve food and cater for
functions on the premises. A good number also cater
for "outside" functions, setting up a bar
and possibly supplying food as well. Some offer
accommodation. Many houses have one or more amusement
machines, (AWP) with or without prizes, such as fruit
machines, juke boxes, pool tables, and video games.
Incidental sales include cigarettes and allied lines,
packet snacks such as crisps and nuts, miscellaneous
vending machine sales, advertising, payphones,
garaging or other kinds of lettings. Entertainment may
be provided for clients.
The weather has a marked effect on trade. Sales
increase as the weather improves, and fall away when
it worsens.
The beers & lagers sold are supplied by the
brewery companies. Nine large groups of brewers
operate on a national basis with a further six smaller
companies operating on a regional basis. Beers are
sold in large volumes, so a brewery producing a
general range of beers needs to secure sufficient
profitable volume outlets (pubs and clubs) to ensure
the necessary bulk sales. The licensing and
registration system places constraints on the number
of volume outlets available, so each brewery tries to
guarantee its share of the market and fend off its
rivals by either acquiring worthwhile licensed
premises outright, or by becoming the sole source of
supply to licensed or registered premises.
Registration is a form of licensing available only
to members' clubs, that is clubs which are owned by
and run for the benefit of their members such as
Sports clubs and Working men's' clubs.
Between them, the brewery companies own about two
thirds of all UK public houses. Roughly three tenths
of the brewery owned - "tied" - houses are
"managed" houses run by licensees who are
brewery employees. The other seven tenths are
"tenanted" houses run by licensees holding
leases from the breweries.
The third of all houses not owned by the brewers
are "free" houses which are free to obtain
their supplies from any source. In practice, many
"free" houses enter into "tie"
contracts with the breweries in exchange for loans on
advantageous terms. Most houses in Scotland are
"free".
Pub prices vary from house to house. Very
generally, in England, Wales and Northern Ireland the
prices charged in managed and tenanted houses in the
same locality are similar and lower than the prices
charged in nearby "free" houses. In
Scotland, the prices are similar in all three kinds of
house, subject to regional differences.
The contractual arrangements between breweries and
the houses they supply vary from house to house. The
arrangements most commonly met are, in broad terms, as
follows.
The brewery runs the house through its manager, who
is an employee in receipt of a salary and bonuses. The
salary is usually related to the amount of business
transacted by the house and is either based on the
house turnover or a brewery "house evaluation
scheme". Bonuses are commonly dependent on an
increase in the house's annual profits. A manager's
spouse, if employed by the brewery, will have a
separate contract of employment.
All breweries have regular checks and stock takes
in managed houses, and expect the manger to keep
discrepancies in the stock or till records down to the
lowest possible level. A few breweries may charge the
manager if the discrepancies rise about specified
levels. The manger may be required to deposit a sum of
money with the brewery as a security against such
losses. The brewery may pay interest on this sum.
Many managers used to receive commission on the
amounts taken by the amusement and vending machines,
and advertisement boxes, sited in the house. Most
breweries have now ceased to pay commission, and have
increased the manager's salary instead. Where a
manager continues to receive commission (commonly
about 5% of net takings after winnings and VAT, or 10%
after deduction of winnings, VAT and the rental paid
to the machine supplier) it is usually paid by the
brewery, although the machine supplier may pay it in
accordance with the brewery's instructions.
The manager usually holds the house licence jointly
with the brewery's area manager, so that relief can be
provided to cover periods of illness and holidays.
The brewery sets all the prices charged, apart from
those relating to the manager's own activities.
The arrangement regarding catering profits can vary
between houses managed by the same brewery, the
treatment usually depending on the size of the house's
catering turnover. Where the catering is no more than
at the "Pub Grub" level - snack catering of
the sandwiches/rolls/something and chips variety - the
manager will probably retain the profits under a
franchise agreement with the brewery. Where it is at a
higher level (akin to a restaurant) it is likely to be
"company catering" where the brewery retains
the profits. The brewery will review any franchise
arrangements at intervals, but may wait until there is
a change of manager before altering them.
The arrangements concerning the profits from
lettings (functions, paying guests, etc) also vary. As
with catering, the treatment often depends on the size
of the income - as a very rough yardstick, where the
house has fewer than four bedrooms or has a small
income from functions the manager may be allowed to
retain the profits under a franchise arrangement,
otherwise the profits will accrue to the brewery.
Subject to any arrangements such as the above, the
brewery pays all the outgoings and receives all the
takings for the house.
A few managers may be tempted to indulge in a
practice known as "buying out" or
"buying away" whereby they purchase items on
their own behalf, sell them to the house customers,
and pocket the proceeds. Such sales may include lines
which the brewery is supplying to the house:- beers,
wines, spirits, etc. The breweries frown severely on
this practice. Modern till and accounting systems have
made this practice more difficult.
Subject to the conditions laid down in the tenancy
agreement, the terms of which vary from brewer to
brewer, a tenant runs the house independently of the
brewer, sets all the prices charged, and retains all
the profits. Commonly, the agreement entitles the
brewery to a share in the take from amusement
machines. The goodwill of the house is reserved to the
brewery, except in a very few cases.
In many cases the agreement rolls on from year to
year subject to one year's notice on either side,
except where the tenant is in breach of the agreement
when three months' notice may be given by the brewery.
Some brewers have shorter terms of notice. A few
smaller breweries grant licenses to trade, which
confer lesser rights of notice, to new tenants while
they are on probation.
The brewery usually supplies the tenant with a
guide to profit margins, or a list of recommended
prices, to help in arriving at a suitable price list
for the house. The list supplied by the larger
breweries is often their current managed house basic
prices list.
At one time all agreements required the tenant to
buy all supplies of beer, wine and spirits (and
possibly minerals as well) from the brewery - the
"tie". Recent EEC regulations, which will
apply to all leased houses from 1989, have the effect
- if certain conditions are satisfied - of allowing
tenants to buy wines, spirits and minerals from other
sources. In many cases the brewery has reduced the
prices charged to the tenant for those lines or (more
commonly) has released the tenant from the wine and
spirits "tie" in exchange for an increase in
the rent. In practice, the regulations are not likely
to affect the beer "tie" and in probably all
cases the brewery will remain the sole suppliers of
beers.
The tenant is usually made responsible for the
maintenance and insurance of the interior of the
house. He or she is also likely to be responsible for
small repairs to the exterior of the house and in some
cases will be responsible for all exterior maintenance
and insurance. The tendency in recent years is for the
tenant to take over more and more of the
responsibility for maintenance. The brewery normally
remains responsible for the maintenance of the
dispense equipment, including those few and decreasing
cases where the tenant owns that equipment.
The tenant often owns the bar and the fittings
behind the bar (the optics, etc.) and possibly the
"truncheon" type beer handles.
A new tenant will pay an "incoming" to
his or her predecessor for the trading stock and those
fittings etc. not owned by the brewery, and will also
place a sum of money on deposit with the brewery as a
security ("brewery deposit"). Some breweries
also require sums to be deposited with them annually,
as security for the tenant's responsibility towards
maintaining the house ("dilapidations
deposit"). The "dilapidations deposit"
can be substantial and may be paid by monthly installments.
The brewery pays interest (net) on the sums deposited
with it, usually at six month intervals at seven day
bank deposit account rates.
In the past, it was a common practice among
breweries to charge a low rent for the premises (the
"dry" rent) and charge more than their
standard wholesale prices for the draught beers
supplied. The amount of the increase (the
"wet" rent) over the standard wholesale
price of the beers depended on the house turnover and
the "dry" rent, and ranged up to four per
cent or so of the wholesale price of the beer. Wine,
spirits and any other lines supplied by the brewery
would be charged at their standard wholesale prices.
In addition, the tenant might be charged for the right
to engage in catering.
Those arrangements have now been superseded by
agreements under which the tenant purchases supplies
from the brewery at its standard wholesale prices and
pays one rent. The method by which the rent is
calculated varies from brewery to brewery. In many
cases the rent is a percentage of either the house
turnover or its net profit, commonly eight to ten per
cent of the turnover after perhaps excluding certain
income such as machine takings or tobacco sales. The
brewery either has the right to see the tenant's
records, or calculates the turnover or profit on the
basis of the volume of its supplies to the house, plus
other information held. In some cases the rent is a
percentage of the potential turnover.
Another common method of fixing the rent is that
the brewery decides on the return on capital it
requires for its investment (the house) and deducts
from that figure the non rental income received from
the house (the profit on supplies of beer etc. to the
tenant, and its shares of machine takings). The
balance is the rent chargeable.
Nowadays rent reviews often take place at three
year intervals. The tenant is entitled to discuss the
proposed rent with the brewery and to go to
arbitration if need be.
Subject to the terms of the agreement with the
brewery, profits from ancillary activities such as
amusement and vending machines, catering, functions,
lettings, advertising, and so on are either shared
with the brewery or retained by the tenant.
The amusement and vending machines sited in the
house may be chosen by the tenant, provided the
machine supplier is on a list of approved suppliers
maintained by the brewery. The law prohibits the
supplier of a gaming machine (broadly, a machine which
pays out a prize) from entering into a profit sharing
arrangement with either the tenant or the brewery; he
may only receive a fixed rental. Subject to this,
there is a wide variety of arrangements governing the
share-out of the machines' net takings after payouts,
VAT and rentals. A common arrangement for
"fruit" and video games machines is that the
brewery sites and runs the machines and gives the
tenant around 25% to 33% of the take, the tenant
paying the VAT due on the total takings.
Other machines can fall under any of the following
arrangements which may not involve the brewery at all.
- Paying a rent and retaining the takings
- Sharing the takings with the supplier (not
"gaming" machines)
- Receiving a rent or a commission (vending
machines)
A tenant may be offered various incentives by the
brewery to increase the house turnover. For instance,
he or she may receive the offer of a bonus if the
turnover, or purchases of particular lines, rise above
specified levels. Incentive schemes can be complex,
involving reinvestment of the bonuses/discounts on the
tenant's behalf.
On the other side of the coin, the rent a tenant
pays to the brewery is often based on the brewery's
expectation of the turnover the house should achieve.
Consequently, the greater the failure to meet the
brewery's target turnover, the more heavily the rent
will bear on the tenant.
The requirement that a "tied" house must
buy its supplies of beer, and possibly other lines
from the owning brewery as that brewery's standard
wholesale prices, coupled with the fact that the
tenant's rent is in many cases effectively geared to
the volume of the supplies purchased from the brewery,
may tempt a tenant to "buy out" or "buy
away". This is the practice of obtaining some
supplies from cheaper sources and is regarded by the
breweries as a serious breach of the terms of the
lease.
Lease holds or lease's normally run longer terms
then tenancy agreements subject of course to the
conditions laid down in the lease agreement, the terms
of which vary from brewer to brewer, a leaseholder
runs the house independently of the brewer, sets all
the prices charged, and retains all the profits. The
leaseholder is normally tied to the brewery for the
sale of beers, lagers & bottled beers alco-pops,
the brewery does not normally take a share from
amusement machines, jukeboxes, pool tables etc. The
goodwill of the house is reserved to the
leaseholder. Leases normally last for 10, 15, or 20
years and can be sold to another interested party
normally after a period of time. This is known as
assignment of the lease the standard time with most breweries
is about two years. Leaseholder are also normally
given brand selection this means they can choose what
products to sell by retail in their premises.
The brewery usually supplies the leaseholder with a
guide to profit margins, or a list of recommended
prices, to help in arriving at a suitable price list
for the house. The list supplied by the larger
breweries is often their current managed house basic
prices list.
Some agreements required the leaseholder to buy all
supplies of beer, wine and spirits (and possibly
minerals as well) from the brewery - the
"tie". Recent EEC regulations, which will
apply to all leased houses from 1989, have the effect
- if certain conditions are satisfied - of allowing
tenants to buy wines, spirits and minerals from other
sources. In many cases the brewery has reduced the
prices charged to the leaseholder for those lines or
(more commonly) has released the tenant from the wine
and spirits "tie" in exchange for an
increase in the rent. In practice, the regulations are
not likely to affect the beer "tie" and in
probably all cases the brewery will remain the sole
suppliers of beers.
The leaseholder is usually made responsible for the
maintenance and insurance of the interior of the
house. He or she is also likely to be responsible for
small repairs to the exterior of the house and in some
cases will be responsible for all exterior maintenance
and insurance. The tendency in recent years is for the
leaseholder to take over more and more of the
responsibility for maintenance. The brewery normally
remains responsible for the maintenance of the
dispense equipment, including those few and decreasing
cases where the leaseholder owns that equipment.
The leaseholder often owns the bar and the fittings
behind the bar (the optics, etc.) and possibly the
"truncheon" type beer handles.
A new leaseholder will pay an
"incoming" to his or her predecessor for the
trading stock and those fittings etc.They will also
normally pay the out going leaseholder for the
goodwill of the business and the premises, and will
also place a sum of money on deposit with the brewery
as a security ("brewery deposit"). Some
breweries also require sums to be deposited with them
annually, as security for the tenant's responsibility
towards maintaining the house ("dilapidations
deposit"). The "dilapidations deposit"
can be substantial and may be paid by monthly installments.
The brewery pays interest (net) on the sums deposited
with it, usually at six month intervals at seven day
bank deposit account rates.
The leaseholder, is not permitted to "buy
out" or "buy away". on the products he
is tied to. This is the practice of buying some beers
or lagers from a cheaper supplier and is regarded by
the breweries as a serious breach of the terms of the
lease and can result in the leaseholder being locked
out or evicted from the premises.
"Free" houses are able to purchase their
supplies from any source. In order to attract and
retain the custom of such a house, a brewery may offer
a discount from its standard prices. Discounts can
vary according to the volume of purchases, or may
simply be a flat amount per barrel or case ordered.
It is also a common practice for a brewery to offer
one or more "trade loans" of either money or
equipment, or to offer to assist with refurbishment,
to persuade the licensee to enter into or renew a
"tie" agreement. A "tie" requires
the licensee to buy either a specified amount, or all
his/her supplies of beer and perhaps other lines from
the brewery over an agreed period. Such an agreement
may involve supplanting a rival brewery as the
licensee's sole supplier. "Trade loans" can
take many forms, the most common are
a) No or little interest is charged on the loan;
the borrower's purchases from the brewery are
invoiced at full trade prices, the discounts to
which the borrower is entitled being set against the
loan.
b) No or little interest is charged on the loan,
which is written off over the period of the loan
agreement. Sometimes the loan is partly cleared by
setting against it any discounts, or other
entitlements earned through incentive schemes.
c) The brewery purchases from the licensee
fixtures and fittings considered to equal the value
of the sum loaned, and returns them to the house at
the end of the loan agreement (which is often for
seven years).
The takings from amusement machines, net of token
redemptions/payouts and VAT, are taken by the licensee
and a rent paid to the machine supplier. Alternatively
the licensee may share the takings with the supplier
(not gaming machines). Vending machines may also be
rented, or accepted on a commission basis. Profits
from other activities such as catering, lettings,
advertising and so on are retained by the licensee.
Thanks for reading: Chris Brennen
(LTTA)
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0121
459 6080
