Examination of Witnesses (Questions 40
- 59)
TUESDAY 22 JUNE 2004
FEDERATION OF
SMALL BUSINESSES
Q40 Chairman: So it was upward but
it was not necessarily RPI'd?
Ms Newport: Yes.
Q41 Chairman: Was there an element
of catch up in the increase in rent that you were—
Ms Newport: Not that I am aware
of, because when I took the property on it was completely and
utterly run down and nothing had been spent on it for years, and
when we moved in there we spent £20,000 on the property,
I believe the previous tenants paid £18,000 a year rent,
ours was 20, so that had already gone up by two. I have got at
home the previous landlord's, part of the previous landlord's
accounts that I can actually send and confirm this. So within
a couple of weeks the rent had gone up by £2,000.
Q42 Chairman: I do not know if you
can tell me, because you are tenants, but my understanding is
that if you want to buy a pub the price of the pub will be based
pretty well on the previous year's turnover. Is that correct?
Mr Dunton: It is usually based
as an element of good-will over and above the freehold value of
the past three years trading accounts.
Q43 Chairman: If the average of three
years or the best of three years is taken, how much more is there
for the good-will side in it?
Mr Dunton: The goodwill, depending
on what sort of accountant you have, can either be greater or
lower as a legitimate tax advantage to the vendor, but the good-will
element is the business element that adds on to the freehold value,
and that can be anything, depending on profitability or turnover.
There are different ways of gauging it.
Q44 Chairman: What I am trying to
get at is, do the pubcos work in a vacuum? Is it a whimsical basis
on which they vary the rent?
Mr Dunton: The rents are based,
as Richard said, on a theoretical evaluation of what the operator
should produce for that particular pub. In other words, if a pub
rent is set and nobody has been in that pub for a while or it
was previously a managed house and it was now available to lease,
they would have to establish a rent from somewhere. So they would
look at it and say, as Richard says, "This is worth",
whatever it is, "It should produce X profit." They then
demand 50 to 52% of that profit before rent, and that is approximately
where they get their rental figure from. I suspect that they also
add quite a percentage on top of that as leeway in case, again,
you are able to bargain them down a bit.
Mr Bishop: Enterprise, I think,
claim that their rents represent about 4.6% of the average value
of their pubs, or 7.3% of the average value if you take into account
the higher prices of beer. My understanding is that the average
return on a commercial rent is somewhere between 6 and 8% in commercial
property more generally, but we have looked into the yields that
pubcos are generating on their freehold assets and, once again,
we have turned to the figures that the analysts at the investment
banks have come up with, which suggest that pubcos are making
a far higher return, with Investech Securities estimating that
they make an 11.7% return as a result of their rent and an investment
bank called DKW estimating that that return is in the region of
13%. So I think these figures indicate that the yields that pubcos
are making on the freehold assets are far higher than the standard
in the commercial property world.
Ms Newport: I submitted some information
to the Trade and Industry Committee in May. Based on my Sage budget
account for last year, my rent showed against turnover 17.62%
of my turnover. I think I actually submitted that in black and
white.
Q45 Chairman: Is there any incentive
for you as tenants to sell more beer: because it seems that if
you sell more beer you have to pay higher rents?
Ms Newport: Yes, effectively.
Mr Dunton: May I add that previous
brewery owners, of course, gave you that incentive and they did
not take into account your expertise and ability to increase turn-over
as a penalty for higher rents, and this is exactly what pub companies
do. They say they want their share of the net profit, and, if
your turnover goes up and if you are any good, you make a bigger
profit, but the Pubcos take a bigger slice, but the brewery leases
it.
Q46 Richard Burden: Can I say, as
a representative of Birmingham constituency I was interested by
Mr Harvey's characterisation of the popular perception of "Brummie
owned pubs"! One of the things that you have proposed is
that pubcos should be required to bring a partial end to the "beer
tie", offering a choice between a free from "tie"
lease, which, I guess, would reduce the wet rent, and going onto
an open market rent purely assessed in some of the ways that you
have been talking about. If I could play devil's advocate for
a minute. If the pubcos themselves were sitting here, and no doubt
they will be at some stage, they would say, "Look, you are
also proposing that the lower wet rent should not be added to
the dry rent", and they would say that tenants would be partially
or are currently compensated for high beer prices by lower rents
when actually those two proposals are contradictory. How would
you respond to that?
Mr Bishop: What we have tried
to do in our submission is to use the figure that pubcos themselves
quote, principally to their shareholders, and take their figures
of an average pub and basically come up with a conclusion as to
how much that average pub would be out of pocket as a result of
the "tie". I think we have demonstrated quite conclusively
in the submission that, even allowing for some of the more spurious
claims of the pub companies, that, for example, there is a huge
benefit to tenants of living above their pub, the tenant, as a
result of the "tie", is £15,000 out of pocket each
year; and pubcos have two main channels, as you have identified,
in which they can make money from their tenants, either through
the wet rent or the profit they make on the beer or through the
dry rent on the premises, and our concern is that if you do not
tackle each of them at the same time, then all you are going to
see is that any benefits that tenants receive as a result of,
say, lower beer prices will simply be added to the rent. So the
only way that you can tackle the problem that faces tenants, and
that means that the partnership is no longer equal and very much
favours the pubco, is if you tackle the problem with the beer
prices and the problem of rents at the same time.
Mr Harvey: If you think about
the Punch Growth Lease, Punch will wax lyrical about the fact
that they do offer discounts (£45), but that has meant that
the rent goes up by anything from the 20-25% I was quoted to go
onto the Punch Growth Lease, so any benefit from the discount
on the beer is eroded by the rent increase. Of course, there is
another element to that: the business risk is then firmly planted
at the feet of the lessee. This, when I signed my lease, was all
about the equal partnership with my brewer at the time. It is
now extremely unequal, particularly under the Punch Growth Lease,
where the business risk is firmly at the lessees' feet because
you have got a substantially inflated rent which always has to
be paid. If you do not sell any beer, you do not get any discount,
but you always have to pay the rent.
Q47 Richard Burden: Could I move
on to something slightly different. In a sense it is returning
to the very first question that the Chairman asked that I am still
not entirely sure about the answer. Depending on how you look
at it, who is the supplier, who is the customer is a bit of a
moveable feast in a way. Let us say, hypothetically, that maybe,
through the suggestions you are making or some modification of
them, changes were brought in that would solve some of the problems
that you are talking about in terms of your relationship with
pubcos and what you perceive, perhaps rightly, to be the unreasonable
exploitation of their position by the pubcos. Some of you actually
run a number of pubs. What would be the safeguard against that
problem being just shuffled down the chain and, in a sense, perhaps
people who are tenants of a number of pubs shuffling the same
kind of problem down to maybe sub-tenants or sub-lessees, or their
staff or, indeed, their customer at the end of the day, which
is the beer drinker? Would there be a safeguard against that in
the kind of solutions that you are proposing?
Mr Harvey: The lease does not
allow you to sublet. So, as a multiple operator, which incidentally
I will not be once two of the pubs are sold—they are on
the market—you cannot sublet your lease, so you would not
have that problem with subletting. In terms of the staff, from
my own experience they get the minimum wage, but that is all they
get, and they are worth every penny of it. I would like to pay
them six, seven, eight pounds an hour if my business model could
support that, but it does not, so I do not see any . . . If the
"tie" was relaxed tomorrow which enabled me to buy outside
the "tie" or receive a realistic discount in the current
market place from my supplier, there are two things that would
happen, in my view: (1) it would the enable my business model
to stand up economically on its own, and (2) it would allow me
to be more competitive on the beer price for the benefit of customers.
Q48 Richard Burden: I understand
that, and I am sure you would react in that way. At the root of
a lot of this is, in a sense, the pubcos using their position
within the market, exploiting their position in the market to
do very well for themselves and not caring too much about those
down the line. If you need to intervene or somebody needs to intervene
to correct that level of market abuse, could you see a reason
of that being done at a different level in the chain?
Mr Bishop: I think historically
you are absolutely right, that pubcos are an unintended consequence
of what happened with the Beer Orders, and we have been disappointed
that the Office of Fair Trading promised in 2000 that there would
be continued vigilance of the pub sector, and yet, when we asked
them to demonstrate that vigilance in our submission to the OFT
in 2001, it was not demonstrated. I think the history of the sector
does suggest that there does need to be continued vigilance from
some official body.
Q49 Mr Evans: The unintended consequences
of the Beer Orders was to create these giants called Enterprise,
Punch, and a few others. They are now ripping off their tenants
with huge extra costs because of the tie and the upward only rents?
Ms Newport: Yes.
Q50 Mr Evans: Therefore, that is
to be passed on to the consumer in higher prices for a pint. So
if something was done about that, how much could the regular at
a pub pay less for a pint of beer? What is the rip-off cost per
pint?
Mr Bishop: We have looked into
some figures by analyst Gracie Neilson which show or that we think
demonstrate, that the tenanted sector is finding it harder and
harder to compete against managed houses in town centres, and
the figures show that since the start of 2003 beer prices to consumers
in the managed sector have increased by less than 2%, but at the
same time beer prices in the sector controlled by pubcos have
increased in the region of 8%. For our members who are tenants
of pubcos, that means that they find it impossible to compete
with a pub down the road which can sell beer at 90p to £1
more per pint. I think the difficulty in giving an estimate about
what the changes would result in, in terms of savings on beer,
is that clearly the tenant is struggling at the moment and there
could be a genuine argument that more of the profits being made
by the pubco actually need to be shared with the tenant as the
priority and then with the consumer. Just on the basis of the
beer prices that are charged to pubco tenants, I think we are
looking in the region of 35p to 45p per pint.
Q51 Chairman: You are all happy with
that figure?
Mr Dunton: Yes.
Q52 Mr Evans: Could I also ask then
because Enterprise and Punch have come in for a bit of a beating
up this morning: can you think of anything nice to say about them?
Mr Bishop: It is worth pointing
out that I understand that Enterprise do not include upward only
rent review clauses in their new leases, and that is to be applauded
and should be recognised as an industry standard. They also offer
new tenants a 30-day cooling off period in line with best practice
for consumers, and once again that is something that we would
like to see extended to the industry as a whole.
Q53 Mr Evans: Are some of the smaller
pubcos different in the way that they treat their tenants? Are
they all going to be tarred with the same brush?
Mr Dunton: I have a friend who
has a lease with a smaller company and, believe me, they learn
very swiftly from the larger ones. He has exactly the same problems
as we all have.
Q54 Judy Mallaber: May I ask Linda
Newport: do you expect to be able to sell your pub? Do you have
any ideas on how anybody who buys it could get out of this problem?
Secondly, do you intend to stay in the pub trade and, if so, what
kind of outfit would you be looking to go in with?
Ms Newport: First of all, I do
not really want to go because I love my job and I love the building.
It is a Grade II listed building in which we have invested a lot
of money and I have a very good client base. We have actually
doubled the business probably in the last three years. I do not
know; I do not think I will sell the place. It may take a year
to sell it, if I am lucky, and then some other idiot—and
I say that—is going to come in there and buy it and, two
years down the line, they will be putting it on the market because
they will be bankrupt.
Q55 Judy Mallaber: Do you want to
stay in the trade?
Ms Newport: I would love to stay
in the trade but I would go and buy a free house, if I could.
Q56 Mr Berry: I have been shocked
by the volume and nature of the representations we have received
from tenants. When I read section 8 of your written submission
entitled "The Disenchanted Tenant", when I look at the
figures, I think that is an understatement. You are actually saying
in relation to tenants of Enterprise and Punch that the evidence
suggests that an incredible 55% think that their landlord as a
business partner, in terms of fairness, rates either "very
poor" or "poor". In almost any other walk of life
people would be given the heave-ho for that, whether in the private
sector or in government or wherever. We have talked almost entirely
about the problem of beer prices and rents. I wondered if there
are other problems that you have come across in relation to the
relationship between landlord and tenant.
Ms Newport: Having decided to
put my pub on the market and talked to Enterprise, I have to pay
them £500 just to put it on the market. Because I have renewed
the lease and I have signed into another two-year contract, if
I sell it before that extra two years, I have also got to pay
them another £10,000 for doing absolutely nothing, bearing
in mind I have already spent £120,000 on their building,
and I also have to pay some of their solicitors' costs. I have
to pay my own solicitor, their solicitors' costs, £500 and,
if I get out before 1 January—and I have this in writing—I
have to pay them £10,000.
Q57 Mr Berry: Briefly, does the following
case surprise you? One of the written submissions to this Committee
happens to have been put in by a constituent of mine who is a
former tenant of one of the larger two pubcos. Areas of her pub
became unusable due to flooding; the landlord, whose obligation
it was to put the thing right, delayed and delayed and delayed.
She was supposed to get a rent honeymoon during that period but
did not get it. It was in the contract that she should get it
but she did not. She was forced out of business. Does this surprise
you?
Ms Newport: No.
Mr Bishop: I think the average
time that a tenant stays with a Punch or Enterprise pub is in
the region of three years. Their claims are that pubcos represent
a low-cost entry into the trade. Whilst that may be true, all
the evidence we have received, certainly prior to our submission
to the Committee, is that tenants certainly do not like it when
they get there. I think the same survey that we have quoted in
the submission shows that 60% of Punch and Enterprise lessees
would not or are not likely to take out another lease with their
pub company. I think it is most demonstrated by the relationships
between business development managers and tenants. The business
development manager is the primary point of contact between the
tenant and the pubco but the responses we have received from our
members suggest that their primary role rather than supporting
the business is actually ensuring that the pubco is paid on time
and that none of the payments due are late. Examples are found
particularly where pubs are struggling and the business development
manager is not sufficiently experienced to assist on those occasions.
Q58 Mr Berry: The situation you describe
is little short of scandalous, it seems to me. One proposal you
make for improving the situation is for a code of conduct for
pubcos. I would be grateful if you would say a little more about
what you believe should be included in such a code, who should
draw it up, how it should be enforced, and how tenants would benefit
from that.
Mr Bishop: We do think there is
a role for a code of conduct, although we believe that it does
not compensate for the greater problems that we see existing with
beer prices and with rents. The code of conduct should really
be a commitment to transparency I think from the pubcos when they
are negotiating new leases, when they are negotiating rents, and
in the prices that they pay for beer. I think we have already
discussed this morning two key elements of that code: firstly,
the rent review process and the access to a rent review panel;
and, secondly, information that is available to potential licensees
when they first meet a representative of the pub company. We would
like to see pubcos funding mandatory pre-entry training run potentially
by a learning and skills council or a business link so that tenants
at least know what they are getting themselves into.
Q59 Mr Clapham: I would like to ask
Linda Newport a couple of questions. From what you have said,
Ms Newport, about the added costs and the payments that are likely
to be made when you put your business up for sale, were those
matters made clear at the time you took the original contract
or is that something that has just come to your notice as you
put the business on the market?
Ms Newport: That has actually
come to my notice as I have put the business on the market. I
knew when I signed that it was for two years but basically I have
been there three and a half years now, so my assumption would
be, after the amount of money I have invested, if I could sell
it before that, they would waive any penalties or anything like
that, but no. I was told by the BDM that they work their penalty
out at 20% of what you are going to sell the place for, which
is a hypothetical figure basically. I have my property on the
market for £200,000. If I get £130,000 I might be lucky
but they have based their figure on 20% of £200,000. Because
I have spent that money, they have given me the concession that
they will only take 10%, which is very kind, I must admit! I have
that in writing and could submit it to you.
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