Licence to bill

You are approached by a couple – existing clients – who have had an offer accepted to purchase a public house from a publican. They are paying the outgoing tenant a £70,000 premium for the unexpired term of a lease of the premises, which has seven years left to run. The premises are empty and the seller has not been trading. The buyers would like you to act for them. This may sound like a simple assignment of a commercial lease – but is it?

Acting on the purchase of licensed premises can be a lot more complex than it first seems. In this article, I outline how to decide whether to take on the work, how to quote for it if you do, and the key elements of such transactions.

Should you take on the work?

This type of instruction can be more complex than it looks. If you decide to quote for it, you must make sure that you have thought the deal through: do you know everything you’re quoting for; do you understand your clients (including how much support they will need, and how quickly they want to complete); and can you make the work pay for you?

What is the scope of the matter?

Consider what you are quoting for; it’s probably not just commercial conveyancing. The contract itself is an asset purchase agreement, which apportions the premium between the lease, the goodwill, and the assets, and makes provision for a stock take on completion. But what starts as an asset purchase often becomes a share purchase, because the clients act on tax advice after the heads of terms have been agreed. In this case, can you confidently carry out a company commercial or corporate lawyer’s job? It is likely there are employees; even if there are only one or two, you will need to understand employment law, especially the complexities of TUPE. There may be goodwill, a website (intellectual property law) and trade accounts and novation agreements (commercial law) that need reviewing, and advance bookings made by the seller. There could be planning law issues, and issues relating to the premises licence (under the Licensing Act 2003). A failure to advise your clients on these issues could result in their incurring criminal as well as civil liabilities.

Before taking the instruction, you need to have either the knowledge yourself, or suitably experienced fee-earners in your practice to whom you can delegate elements of the matter in specific areas of law.

Even if there is no business for sale and the transaction is an assignment of an empty premises, leases often contain tie-in arrangements, including novation agreements and fixed contracts for the supply of beer and cider from one brewery. I have heard of deals falling through because the seller has lost confidence in the buyer simply because the buyer’s conveyancer has wasted too much time getting to grips with this type of work, and goes silent for weeks while figuring out how to make the work profitable.

However well you investigate the scope of the work, you could still discover down the line that the transaction is more complicated than you originally envisaged – for example, the lease turns out to be an underlease, there are title defects, planning issues, outstanding rent review issues or missing rent deposits, or key signatories are out of the country or difficult to contact.

You may find that, once you’ve split your fee in terms of time and for your hourly charge-out rate, you might have earned more as your client’s barman!

Who is your client?

It is also very important to know who your client is before quoting your fees. If they are purchasing in their personal names, this is fairly straightforward. However, if they intend to purchase the business and the lease in the name of a newly incorporated company, the company will be your client. You should investigate and identify all beneficial owners of the company holding a significant share and control in the client.

If the couple are the company directors and shareholders, and the landlord requires guarantors, can you represent both the buying company and the directors as guarantors? When acting for both, you must consider whether there is any conflict of interest, and whether acting for both would be in the guarantors’ best interests (see Royal Bank of Scotland plc v Etridge (No 2) [2002] 2 AC 773).

You will need to identify where the money to fund the purchase originates from. If the purchase is in cash, conduct thorough due diligence and adopt a rigid anti-money laundering policy. If the couple have secured finance from a bank, are you on the lender’s panel or will they accept your firm as their conveyancer?

Consider the business acumen of your clients. Have they run a public house before, or will they be totally reliant on you to tell them the pitfalls? The well-reported recent case of Luffeorm Ltd v Kitsons LLP [2015] EWHC B10 (QB) illustrates that causation is difficult to prove, but do you really want your name dragged through the mud in defending a case against a disgruntled client?

Get to know your clients and their motivations early on. Why do they want to buy a pub? Why do they want to buy this particular pub? Why are they buying in the name of a company? Why do they want this to happen so quickly? Why do they want to purchase without the benefit of a survey? You will be surprised by many of the responses. ‘I’m in a hurry because I want to catch the Christmas trade’ is a valid response, whereas ‘I’m in a hurry because I want to move my non-resident family into the accommodation above the pub’ would raise more questions.

Another issue to address is time frames. Clients always expect an acquisition to be quick – generally four weeks. The reality is that the landlord’s licence to assign can be difficult to obtain, and references slow to arrive. It is possible to achieve a quick acquisition, but less so when acting for new enterprises. Hopefully, the seller has engaged an expert commercial agent who has experience in creating heads of terms for this type of deal, and has also explained to the buyer that the landlord has no incentive to act quickly on approving the sale.

I have heard of deals falling through because the seller has lost confidence in the buyer simply because the buyer’s conveyancer has wasted too much time getting to grips with this type of work, and goes silent for weeks while figuring out how to make the work profitable

What will the transaction involve?

So, you decide to quote for the instruction. You put together a fair quote which you feel will be profitable for your business, and the client accepts it. What next? In the rest of this article, I outline some of the key elements of this kind of transaction.

Sale of assets only in licensed premises

In most cases where a licensed premises is being sold, it is the assets (the lease, the employees and stock etc) which are being sold. The buyer pays for the assets and liabilities, together with the business. The employees usually automatically transfer to the buyer, but the licensed premises are generally carried on by a new entity, owned by either a new person or a new company. In this kind of business sale, existing business contracts including the business lease and supply contracts with breweries etc will need to be transferred into the buyer’s name. Let’s assume for the purposes of this article that there are no employees to consider in the purchase.

Schedule of condition

A schedule of condition is of paramount importance. The clients should be advised early on that the repair liabilities in the lease are likely to be onerous. They may baulk at the expense of instructing a surveyor – to confirm the present state of repair and condition of the property, and the potential costs of repair at the beginning of their ownership, during the remainder of the lease term, and costs of exit by way of a terminal schedule – but taking this step could save your clients tens of thousands of pounds later down the line.

The commercial lease of a public house

Is the lease contracted out of the automatic renewal provisions of part II of the Landlord and Tenant Act 1954? If so, the grant of a renewal at the end of the seven years will be entirely at the landlord’s discretion. Explain to your clients that the risk is that they do a sterling job of rejuvenating the trade at the premises, only to find that the landlord decides to grant a new lease to a new tenant willing to pay a premium and a higher rent.

Are there any landlord-only break clauses? These are very rarely seen, but nonetheless still included in some leases of public houses. If there is a break clause, in, say, year four of the unexpired term, then the lease will not be a ‘good’ business investment.

What land is included in the lease? Does the property include car parking or redundant land that is agricultural (for instance, buying a country pub)? Advise your clients that the full extent of the repair obligations extends to all land in the lease.

A repair clause is often included, with wording along these lines: ‘to put and keep in full and substantial repair and condition’. The repair obligations often include the structure of the building. This could be very costly – some of these properties date back to the 11th century.

What provision is in the lease for rent review? When was the last rent review carried out? Assurances by the selling tenant or the landlord are flimsy, and a memorandum of rent review should be completed prior to the purchase completing.

Tied-in clauses are found in leases where the landlord is a brewery and ‘ties in’ the tenant to both buy a minimum quantity of alcohol from the landlord, and to only purchase alcohol that your clients intend to sell from the licensed premises from that brewery, at set prices. There have been consistent complaints that the system regulating the legal relationship between pub companies and their tenants is not fit for purpose, and that this is a primary factor in the decline of public houses over the last 20 years. Part 4 of the Small Business, Enterprise and Employment Act 2015, coming into force on 26 May 2016, will introduce statutory regulations about practices and procedures to be followed by pub-owning businesses in their dealings with their tied pub. Specifically, section 43 provides that pub-owning businesses must offer their tied pub tenants the option of occupying the tied pub on market rent terms.

Landlord’s licence to assign the lease

The landlord will usually be entitled to make their consent to the sale of the lease conditional upon the payment of any outstanding rents and/or repairs to the licensed premises. Where the lease is tied to a brewery, the landlord will use the assignment as an opportunity to revisit the premises and impose further conditions in relation to the repair of the property within a stated period of time from when the purchase completes.

The landlord also usually has rights contained in the commercial lease to refuse the sale to the buyer if the buyer does not present a convincing case that they will be able to run the premises profitably and pay the rent on time. References will be required, including bank references to confirm that the buyer can afford to meet the rent payments on time, and previous trading references to show their requisite experience in running a successful business. If the buyer is a newly formed company, the landlord may require the company’s directors to guarantee the payment of the rents, and/or require a larger rent deposit or other security to guarantee the performance of the obligations in the lease.

Local authority searches

The buyer will want to know that the licensed premises has planning permission and building regulation approval, and whether there are any outstanding breaches of obligations to the local authority. The Town and Country Planning (Use Classes) Order 1987 (as amended) puts uses of land and buildings into various categories known as ‘use classes’. The current relevant use category is A4 ‘drinking establishments’, which includes public houses, wine bars and other drinking establishments, but not nightclubs. You should require the seller to disclose all letters and notices received from all public authorities, including environmental departments and licensing departments. Check that there are no noise abatement orders or restrictions in place by written correspondence as a result of incidents having taken place at the premises that have led to complaints from the neighbours, for example.

Premises licence and personal licence for the sale of alcohol

Does the seller have the appropriate licences in place without breaches of any conditions?

The licensed premises will need both a premises licence and at least one personal licence for the sale of alcohol. Your client must be – or, where a company, must appoint – a designated premises supervisor who must have a personal licence. Without these, the business will not be allowed to operate.

The Licensing Act 2003 provided for the amalgamation of the existing alcohol, public entertainment, theatre, cinema and late night refreshment house regimes. The Licensing Act 2003 (Mandatory Licensing Conditions) Order 2010 requires the buyers to ensure they have an age-verification policy in place. The following additional conditions apply in respect of premises licensed for the sale or supply of alcohol on the premises: a ban on dispensing alcohol directly into customers’ mouths; the mandatory provision of free tap water; a ban on irresponsible promotions; and the mandatory provision of smaller measures. A further condition was added in May 2014, banning the sale of alcohol below the cost of duty plus VAT.

Premises licence

My firm once had a situation where the selling tenant client did not hold the premises licence, as it was still in the name of a previously insolvent tenant. When the buyer applied for the licence to be transferred, this triggered an inspection by the police, who suspended trade at the premises. The seller managed to continue trading using temporary events licences, and although this had the positive effect of accelerating the sale process, it added legal costs to both parties for advice and assistance. All necessary licences should be checked to ensure they can be transferred, and your clients can comply with any restrictions. The conditions will be enforceable in law, and it will be a criminal offence to fail to comply with them.

Personal licence

Every sale or supply of alcohol must be authorised by a personal licence holder. A personal licence is granted by the licensing authority to an individual, authorising that person to sell or supply alcohol by retail, or to supply alcohol in accordance with a premises licence. Does your client hold a personal licence? If not, they will need to either employ a person holding a licence, or take a course with a British Innkeeping Institute Awarding Body to obtain the Level 2 award for personal licence holders. You should advise your clients not to complete the purchase unless they have a personal licence-holder to run the business.