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Away from Trump/Brexit/Antisemitism Sean Fear on the perils of running a pub

August 2nd, 2018

It’s Time to Scrap the Beer Tie

Over the years, several clients have instructed me to help fulfil their lifetime’s dream, by purchasing a pub. My usual advice is “Don’t, but if you must, for Heaven’s sake, buy a freehold.” Running a pub successfully is one of the hardest jobs one can do. One has to manage temperamental staff, satisfy demanding customers who have plenty of alternative ways of spending their money, fulfil endless regulatory requirements, and deal with suppliers who are frequently unreliable. All in the face of supermarkets selling cheap booze, and the smoking ban. Turning a profit as a pub landlord requires a working week of at least 60 hours, and taking these hours into account, you probably won’t earn more than the minimum wage in any event.

But it can be far worse than that. You can fall into the hands of a Pub Co. A Pub Co. is a species of predator whose business model can best be called the parasitic wasp method of capitalism. There are thousands of species of parasitic wasp, that lay their eggs in a host. The eggs hatch and eat the host alive, over the course of several days. Eventually, the host dies, and the young wasp emerges from the empty husk of its victim. A Pub Co. operates similarly. It buys numerous pub freeholds, before then luring the unwary into signing long leases that will bleed them dry. The unfortunate lessee will be forced to purchase beer and other drinks from the Pub Co., or its nominated supplier, at up to twice the market rate. If he purchases from someone else, in breach of the tie, he will face a hefty fine from the Pub Co. If he challenges the behaviour of the Pub Co., he will face threats of litigation from a very expensive firm of solicitors.

Win or lose, the terms of his lease will require him to pay the Pub Co.’s legal costs on an indemnity basis. Alternatively, he may find that the Pub Co. refuses to deliver on time, alienating his customers.

In contrast to most business leases, a lease from a Pub Co. takes into account the profitability of the pub, when reviewing the rent; in principle,  that could work to the advantage of a tenant if profitability declined. However, a typical rent review clause will be upwards only, so the tenant bears the risks of a decline in profits, but has to share the gain with the Pub Co. if profits increase. Moreover, If he tries to sell the lease, his lease may first require him to offer it to the Pub Co. at a discount to the open market value. If his lease does allow him to sell it to a third party, he can expect the Pub Co. to cause him maximum difficulty, before offering to take it off his hands at a discount. At the very least, he can expect to pay all sorts of administrative charges, and a hefty solicitor’s fee for dealing with the assignment.

None of this is theoretical. Every One of the examples I have given in the preceding paragraph has been experienced by my clients. One, who was the tenant of a historic pub in a city centre, lost £600,000 over the course of ten years, in large part, due to the behaviour of her Pub Co. landlord. This client is a millionaire, and so can absorb the loss. Most tenants are not so lucky.

Pub Cos. emerged, paradoxically, because of the Thatcher government’s efforts to deregulate pubs in the late Eighties. Historically, pubs were divided into freeholds (or free houses) which could purchase alcohol from any source; managed houses, owned and run by breweries, which largely stocked their products, and tied houses, owned by breweries, let to independent landlords, but tied to the brewery in terms of the products it could sell. The government sought to limit the number of tied houses which any brewery could own, so that many pubs were then put up for sale. Pub Cos. bought up many of these pubs, which they then let out on highly unfavourable terms. The booming property market between 1996 and 2007 meant that from their point of view., there was no downside to seeing their tenants fail. They could always apply for planning permission to convert the vacant pub to residential use.

Back in 2009. The Commons Business and Enterprise Committee published a damning  report on Pub Cos.,  which concluded “We believe that the supply ties operated by Pub Cos. may well be anti-competitive and may have a detrimental effect on the public house market.” The issue is again being considered by a Select Committee, but really, it’s time to treat the beer tie as the restrictive practice which it is, and abolish it for tied houses.

Why should this matter politically? I suggest three reasons:-

Firstly, rapacious business practices are undermining public faith in capitalism. This is just another sordid example, to be added to the examples of unethical business practice that have emerged since the Great Financial Crash.

Secondly, pubs matter to a lot of people. In many rural areas, they are important social centres. When they close, the village suffers.

Thirdly, it would be a quick win for an unpopular government. Drinkers and pub tenants would welcome it. Pub Cos. would howl, but how many of the public will care what they think?

Sean Fear