Leasehold pub finance

What a leasehold pub is

A leasehold pub is one you occupy and trade under a lease granted by a landlord, who may be a pub company, a property investor or a brewery, rather than owning the freehold outright. You hold the right to run the pub for the term of the lease, paying rent and meeting the repairing and other obligations the lease sets out. When you buy a leasehold pub you usually take an assignment of the existing lease from the outgoing licensee, stepping into their shoes, or the landlord grants you a new lease. You may pay a premium for the lease and the goodwill on top of any rent.

This guide is about financing a leasehold pub as a trading business. The exact terms of any lease, including the tie, the rent review pattern and the repairing obligations, should be checked by a solicitor and a licensed-trade surveyor before you commit, because they shape both the value and the loan.

Leasehold is a far lower-capital route into the trade than buying a freehold, which is why many operators start this way. You are not funding 30 to 40% of a freehold value; you are funding a premium and working capital. But the trade-off is that you own a wasting asset that runs down as the lease shortens, you answer to a landlord, and you may be tied. A lender weighs all of this, which is why leasehold finance is more constrained than freehold finance even where the pub trades well.

How a lease assignment works

Most leasehold pub purchases happen by assignment, where the outgoing tenant transfers their lease to you for the remainder of its term, usually for a premium reflecting the value of the lease and the goodwill of the trade. The landlord normally has to consent to the assignment, and the lease will set out the conditions, which often include the landlord being satisfied with your experience, your finances and any references. On older leases the outgoing tenant may remain liable under an authorised guarantee agreement, a point your solicitor will explain.

• You agree a premium with the outgoing tenant for the lease and goodwill
• The landlord's consent to assign is sought, subject to the lease terms
• The landlord assesses your experience, finances and references
• Your solicitor checks the lease length, tie, rent reviews and repairs
• The lease assigns to you on completion and you take over the trade

Because the landlord controls consent, a lender wants to see that the assignment will actually complete and that the lease has enough left to run to support the loan. We line the finance up alongside the consent process so the funding and the landlord's approval move together rather than one holding up the other.

What lenders look at on a leasehold pub

The single most important factor is the unexpired lease length. A lender needs the lease to run comfortably beyond the loan term, with a margin to spare, because the security is the lease itself, which loses value as it shortens. A long lease with twenty or more years to run supports finance far more readily than a short one with a handful of years left. Alongside length, the lender weighs the strength and assignability of the lease, the rent and how often it reviews, whether the pub is tied or free of tie, and the repairing obligations, since a full repairing and insuring lease puts the cost of maintaining the building on you.

Because all of these constrain the security, a leasehold pub typically borrows at a lower loan to value than a freehold and from a narrower pool of lenders. The finance is sized on the value of the leasehold interest and the trade, and a short, tied or onerous lease limits both the loan and the lenders willing to consider it. A long, assignable, free-of-tie lease on a well-trading pub is the strongest leasehold case.

Free-of-tie and tied leases

A leasehold pub can be tied, requiring you to buy drinks from the landlord or a nominated supplier, or free of tie, leaving you to buy on the open market. As with a freehold, the tie reduces the wet margin and therefore the fair maintainable operating profit, which is what a lender sizes the loan against, so a free-of-tie lease generally supports more borrowing on the same trade. The trade-off is that a tied lease usually carries a lower rent, so the net effect depends on the pub's barrelage and how the cheaper rent compares with the lost margin.

For qualifying tied tenants of the larger pub companies in England and Wales, the Pubs Code provides a right to request a market-rent-only option in defined circumstances, which removes the tie in exchange for a market rent. Where that option is available and being exercised it changes the economics and the lending case, so it is worth understanding before taking on a tied lease. We model the lease on its actual terms, tied or free of tie, so the funding reflects the real margin the pub keeps.

When leasehold makes sense

Leasehold suits an operator who wants to run a good pub without tying up the capital a freehold demands, who values a shorter route into a sought-after site, or who wants to build a track record before buying a freehouse. A long, free-of-tie lease on a well-located, well-trading pub can be a genuinely valuable asset that supports sensible finance and can be sold on for a premium. The risks to weigh are the wasting nature of the lease, the rent reviews, the repairing burden and the landlord relationship.

We arrange finance for leasehold pubs where the lease supports it, and we are candid where it does not, for example where the unexpired term is too short or the lease too onerous to fund well. Where a buyer is choosing between a leasehold and a freehold opportunity we model both, so the decision rests on the economics and the capital available rather than on the headline price alone.