As soon as the legislation regarding large pub companies having to offer “Market Rent Only” tenancies passed late last year I predicted there would be a move by these companies to a managed estate where the “landlord” is merely a manager who is an employee of the pub company.   Currently it operates over 5000 pubs across the country, with only 16 of them being on a managed basis.

The structure of Enterprise Inns will radically change over the next 5 years, with over 1000 pubs planned to be sold in that period.  At the same time they expect to convert up to 850 of their current properties to a managed pub.   They currently offer 5 year agreements to tied lessees, so within this five year period all of their properties will see an opportunity to them to make this move, or conversely see the current tied tenant apply for a Market Rent Only review upon renewal.

They expect that up to 1000 pubs in their estate will move to this Market Rent option by 2020, leaving them with a core of approximately 2500 pubs operating on tied basis.  This change is a significant one for a company which has been effectively operating the same business model in its various incarnations since the 1989 Beer Orders, which at its peak operated over 9000 pubs across this country, nearly 1 in 6 at the time, a figure achieved through the buyout of former Whitbread and Unique Pub Company estates in the 1990’s.

Enterprise chief executive Simon Townsend said the company remained committed to the tenanted and leased division but its plan makes clear that its strategic objective is “to diversify away from a predominantly leased and tenanted business over time”.  He also said it will continue to offer tied agreements of up to five years in length but will focus on growing its managed estate.

Having a large number of tied tenancies on the books has become a poisoned chalice to such pub companies and expect Punch and its peers to make similar announcements over the next few months.  The statement by the Enterprise executive along with the announcements makes it clear that it wants to sell all the valuable real estate worth more as a plot of land and building than it is worth as an operating pub business.  Some of these sold properties will be kept as pubs, but expect to see a lot converted to “other retail uses”.

He also wants to take as many of their pubs out of the reach of the Market Rent Only legislation by making them a managed house, however they are limited by the money needed to upgrade an estate which has in parts been neglected from a maintenance and decor point of view.  Also given their debt pile which costs them £77 million a year in interest and the additional £26 million cost of refinancing the debt this year to the business, that is why they are only planning to move just under 20% of its pubs to this model in the next 5 years.

From my point of view, as a drinker and somebody who knows people who operate pubs, both within the Pub Company world and outside of this world as owners and freehold tenants, all of this is rather a mixed blessing. It can only be a good thing when it comes to more pubs getting the choice of where to buy their beer.  However I feel that the best pubs regarding turnover and profit line will be brought in house to the managed division, whilst the prime locations which are underperforming will be sold on a property and land basis.  This leaves the non prime locations who are not among the top venues regarding turnover and profit who will be allowed to go Market Rent Only.

Leases will only be offered on a 5 year basis, so if one of these Market Rent Only pubs suddenly finds itself in the middle of a new development and a upturn in financial fortunes there is nothing to stop Enterprise simply not renewing the lease and taking the pub into the managed division.  It allows them to cherry pick the best properties on a 5 year rolling basis letting Market Rent Only landlords take all the risk in developing the trade.  Again they have engineered a win-win situation for themselves, but are we really surprised by that?