Rents
The setting of rents is generally based on turnover and profitability. In calculating a pub’s rent, the brewery or pub company will initially assess the pub’s turnover based on ‘fair maintainable trade’ (FMT), ie their prediction of the turnover that a competent hypothetical tenant or lessee could achieve whilst operating the pub. From this they prepare an estimated profit and loss forecast using industry standards as a guide to the pub’s operating costs. The rent is then based on this. It should be noted that the brewery or pub company profit and loss forecast is simply an estimate – although hopefully an accurate and professionally assessed one.
However, if in the course of preparing your own financial forecasts, you can demonstrate that the rent appears unfair, then you may be able to renegotiate this. It is worth asking how the rent has been assessed and whether it reflects how the pub is currently trading. The forecasted fair maintainable trade may be higher than the present turnover of the pub. In such cases, you may be able to negotiate a ‘stepped rent’, ie one that starts low and increases in stages over a period of time, to give you time to build up the business.
How Rents Are Calculated
Typical tenancy rents are based on:
- 8–12% of forecasted turnover;
- 40–50% of forecast net profit – excluding rent.
Forecasted turnover is a pub’s total sales revenue, including food sales, gaming machines and any other income earned, such as letting accommodation. All figures are calculated excluding VAT.
An example of a simplified rent calculation is given here (note all figures exclude VAT):
Either calculation results in an annual rent of £ 20,000 that leaves a net profit after rent has been applied of £ 20,000.