Tenancy, leasehold, freehold – what is the difference?

The differences between tenancy, leasehold and freehold pubs

There are three ways to own a pub and this can cause some confusion. There is no right or wrong way and the best way for you will come down to what you can afford and what opportunities there are in the area that you want to operate.

Let’s break down the options:

Operating as a pub tenant

With a pub tenancy you rent the pub, usually from a brewery or pubco, for an agreed period. A tenancy is just another name for a short lease and typically, pub tenancies are for 2-5 years rolling. This gives the brewery or pubco the opportunity to review your rent every time that the tenancy renews.

If you wanted to leave you would have to give notice as stated in the tenancy agreement (and there may be penalties for breaking the agreement early) or wait for the end of the contract period. At the end of the tenancy the pub reverts back to the landlord.

In a typical tenancy, you would buy the fixtures and fittings (and maybe trade stock) at an agreed price and at the end of the tenancy the fixtures and fittings (and trade stock) would be sold back to the landlord, or new tenant, at an agreed valuation. You would not be able to sell any “goodwill”.

In a tenancy you are likely to be tied-in to buying your beer etc from the brewery (unless it is a free-of-tie lease) but the responsibility for the maintenance of the building stays with the landlord.

Good breweries and pubcos will offer support to their tenants making this a popular route to running a pub for people starting out in the trade and wanting to get experience in the pub sector.

Buying a pub lease

A leasehold agreement is a longer term commitment (typically 10 to 25 years) during which time you commit to paying the landlord rent, which may be reviewed periodically (typically every 3 or 5 years). Most leases are assignable after 2 years, which means that you can sell your business to a new owner (subject to the landlord’s approval).

With a lease you are able to sell the “goodwill” in the business. If you build the business up you can sell it for a premium so leases tend to suit experienced publicans who are looking for a long term business commitment and a reward for their hard work at the end.

If the landlord is a brewery or pubco they may tie you into buying beer etc from the brewery. Also, leases tend to be fully repairing and insuring which means that you are responsible for ALL repairs and maintenance (even to the fabric of the building such as the roof) and you must pay for full insurance of the building.

Owning a pub outright, freehold

Much as with owning your own house, owning the freehold to a pub gives you freedom and flexibility to do what you want, with no landlord to answer to. You can stock whatever beers, wines and spirits you like and should be able to negotiate a good discount with suppliers. You can decorate and remodel as you wish. You will benefit from any increase in the property price and all of the profits stay with you as there is no rent to pay.

Of course all of this freedom comes at a price. Freeholds are much more expensive than leasehold to buy, particularly in popular locations where there will be a lot of competition to buy desirable pubs. You are totally responsible for all maintenance, insurance, etc. and you will have much less support from the brewery.

However, you can raise a mortgage against the value of the freehold.

Which is best?

As I said at the start, there is no best way to own a pub. As with all big financial decisions, do lots of research, have a look at what is on the market and don’t be afraid to give us a call for some friendly advice.