The increasing tendency for landlords to ‘contract out’ of the Landlord & Tenant Act is making it harder for smaller restaurant players to find sites in key London areas.
The Act essentially gives lessees the right to renew expired leases; dispensing with it gives landlords more control over their estates and the option to bring in new tenants on more favourable terms. For obvious reasons, short-term leases unprotected by the Landlord & Tenant Act are trickier to sell on at a decent premium, which is particularly problematic for smaller businesses looking to make a profit out of their investments.
The practice of contracting out in London isn’t new, but its increased uptake by landlords taking advantage of the current sellers’ market in property is impacting on some operators’ ability to expand. Simon Anderson, co-owner of the Pitt Cue Co, says the trend is making it very difficult for the popular Soho barbecue joint to find its second location. “Any small player will be finding it difficult,” he says. “There is a massive shortage of achievable sites in London.”
The astonishing performance of the capital’s key restaurant hotspots – including Soho, Mayfair and Covent Garden – has also strengthened the position of London landlords in recent years. “It’s a simple case of supply and demand,” says David Abramson, managing director of property agency Cedar Dean Gilmarc, who has also noticed a rise in landlords contracting out, although he says the practice is specific to London. “Outside London, contracting out of the Act is virtually unheard of.”
Brands are frequently involved in bidding wars over key sites, with some paying excessive sums. US burger chain Five Guys is believed to have paid close to £2m for its debut UK site,formerly Novus Leisure’s Long Acre bar, which sits between Covent Garden and Leicester Square. Independent restaurant Mews of Mayfair, meanwhile, is believed to have secured 3Sixty Restaurants’ Rocket site in Mayfair for a fee that the venue would have taken 10 years of trading to reach, while the Leon branch in Old Compton Street is understood to have changed hands for around £1.2m.
“There are always big brands out there that are prepared to spend large amounts, which prices smaller players out of the market,” says Anderson. “Until this restaurant boom starts to stall and things turn back in favour of the tenant the problem will remain. Landlords have got a right to be greedy, but when you start out in the restaurant business finding a viable affordable site is one of your biggest challenges.”
Landlords are also increasingly asking for a share of turnover instead of rent, especially in retail developments. Anderson believes this is a worrying development because it puts restaurants on the back foot. Jonathan Downey, founder and director of The Rushmore Group, however, believes this practice could in fact help smaller operators that are looking to expand.
“Rates linked to turnover are normal in a retail development – it’s an element of risk share,” says Downey, who operates members’ bars and clubs in London, including Milk & Honey and The Player in Soho. “It’s the kind of deal that often makes sense at the beginning, but once a place gets more established it’s harder to swallow. But we’re all adults and we know what we’re getting into.”
This article first appeared in the November issue of Restaurant magazine. Click here to subscribe.