Previous magazine articles 
To lease or not to lease?
In town and city centre locations throughout the country, the majority of commercial properties are held as investments either by property companies or private individuals through their SIPPs (Self-Invested Personal Pensions). While this means that a significant number of restaurants are only ever offered for lease, it does not impact on demand, with the restaurant sector remaining buoyant. However, it does introduce a significant number of potential obstacles, which should be clearly understood from the outset.
Roy Hudghton of DM Hall outlines the potential pitfalls of the leasehold market…
If a restaurant is offered for sale on the basis of the worth of the tenant's interest, assuming that it is let at market rental value, the only marketable worth is that of the goodwill, a figure deemed to include all of the fixtures and fittings required.
The value of the tenant's interest or goodwill will be affected by the turnover and profit of the business, the length of time remaining on the lease and, above all, the terms of the lease. Anything less than 8 – 10 years on the remainder of the lease will have a negative effect on both marketability and value. A possible extension to the agreement may be negotiable, but a statement by the landlord to this affect should be requested as a condition of any offer made.
Additionally, an accurate figure of sustainable net profit is vital. It is this return to which a valuer applies a multiplier to arrive at the worth of the goodwill.
The terms of the lease are vital and the rent review clause in particular should be studied, as the market is now moving away from guaranteed built-in rental increases at review.
Prospective assignees should also look out for turnover rental calculations, or increases relative to the future performance of the business, as such conditions only work one way and, in times of recession or adversity, there will be no prospect whatsoever of a reduction in rent.
There are many obstacles to overcome in the sale of a leasehold business, however profitable it may be, but the market for restaurants in particular remains active.
Sellers can often have an inflated opinion of value, having perhaps invested in the fabric of the building without taking advice. Significant expenditure, such as the relatively recent installation of a new kitchen, is often ignored by purchasers, and while the sellers will look to recoup their costs, a study of the balance sheet will highlight the depreciated value of the equipment, which, once installed, immediately falls in real worth.
When taking an assignation of an existing lease it is also important to study the repairing obligations, which are typically full repairing in Scotland. If this is the case, a purchaser should instruct a building surveyor to undertake a photographic Schedule of Condition for attachment to the lease prior to signing. This will protect the incomer from potential financial penalties of the landlord serving a Schedule of Dilapidations.
The fact that the bulk of purchasers of leasehold businesses pay cash ultimately leads to low levels of return to the vendor. The ideal scenario of the long, new and straightforward lease agreement would see the seller obtaining the best return, while the purchaser seeks independent advice on value and condition, and clearly understands the wasting nature of the asset.
Ultimately, the only way to increase the value of a leasehold business interest, such as a restaurant, is to drive up the turnover and profits on a sustained basis during the early part of the lease.
This article has been edited from its original version. For the complete feature please see Catering in Scotland magazine November/December 2006.
To join our database, go to Media Pack on this website and click on Subscribe.
