Examination of Witnesses (Questions 100
- 119)
TUESDAY 22 JUNE 2004
A.B. JACOBS &
CO AND
FERDINAND KELLY
SOLICITORS
Q100 Mr Evans: What have people got
as recourse?
Mr Jacobs: They do not really
have a simple recourse. They can just not sign up for the lease;
that is one course. Of course, once they are in, their recourses
are rather limited. On a rent review they can argue from their
own standpoint, but if that is not successful, they can go to
an independent expert. They can go to an arbitrator. Those are
their choices. If it is a lease renewal, they do have the choice
of going to a court, but all those choices are very expensive.
When I say "expensive", I am talking in terms of £5,000-£30,000,
depending on which route you choose to take.
Q101 Mr Evans: In your estimation,
can the smaller pubcos be put in the same basket as the larger
ones?
Mr Jacobs: Yes, the small ones
have learnt from the big ones very quickly. I have not come across
a small pubco that is actually operating fairly.
Q102 Mr Evans: Do you feel that the
pubco and the way that it has developed since the beer provisions
came about has been totally unhealthy for the industry?
Mr Jacobs: Yes, totally unhealthy.
Q103 Mr Clapham: Mr Jacobs, given
that the public house is quite an important part of village life,
certainly in rural areas, do you feel it is important that we
do try to keep those pubs going?
Mr Jacobs: I think it is very
important. I think that it is part of Britain. It is a British
way of life. It should be maintained, retained and developed.
The difficulty, of course, is that there are changes in the attitudes
of the public. In villages that have more than one pub, we are
coming to a situation where really only one can survive. Then
you have the other problem of course that people's perception
of noise and so on is changing, and those people, particularly
in rural areas, do not want people coming in to their village,
picturesque as it may be, to visit the pub. They do not really
want that. They do not want the car doors slamming. You have a
bit of conflict there. On the basis of what is good and what is
right, the retention of the British pub has to be the right direction
in which to go rather than the development of these monstrosities
in the centres of cities which just attract a large amount of
binge drinkers.
Q104 Mr Clapham: Given that fact,
is it possible that we could develop what could be said to be
an appropriate way of imposing a rent, one that would be conducive
to the continuity of the public house?
Mr Jacobs: Yes. I think it is
quite straightforward. You base the rent upon the profitability
of the pub and not on what some valuer or some other employee
of the pubco perceives it to be. One of the biggest problems you
have is that when you are dealing with either a valuer or a member
of a pub company, their experience of actually owning, operating,
managing, marketing, accounting for or running a pub is non-existent
and so you cannot press people on the other side who have no experience
other than a perception of what it should be like. They are as
bad as the people who read the adverts that say, "Oh, come
and run a pub, it is wonderful", and they actually believe
it, and these people are sitting on the other side of the fence!
The reality is that the guy sitting on this side of the fence
is actually operating the pub.
Q105 Mr Clapham: Given what you heard
this morning when you sat through the session with the FSB, do
you feel there is a need perhaps for a code of conduct on the
part of the pubcos to make everything more transparent: the dry
rent, the wet rent, the costs that are incurred in selling the
business, et cetera?
Mr Jacobs: There is a requirement
to make the issue of the assessment of profit and the construction
of rent much more transparent. That is required, irrespective
of whether there is a code of conduct. The biggest difficulty
with a code of conduct is that all these pub companies have developed
various independent codes of conduct and it is almost impossible
to stand by them in the first place. A code of conduct is not
really the answer. You have to sit down and say that the way forward
is that there must be transparency in the assessment of profit
and the construction of rent. You must start with the profitability
as a free tied pub and if a tie is imposed, and I would suggest
it should not be, then the consequence of that tie is taken off
that rent so that the tied rent is much lower than what is actually
being charged at the moment.
Q106 Mr Clapham: For example, would
that impact on some of the payment that had to be made when a
business is sold? Ms Newport this morning said that she was rather
surprised to find that when she came to sell her business, the
pubco was demanding certain payments from her, payments that she
said she was not aware would be demanded when she sold the business.
Mr Jacobs: That is not uncommon.
The biggest difficulty she has, of course, is that she has a pub
with a tie where the rent is excessive. The wet rent plus dry
rent are excessive for the business and so therefore she has an
uneconomic pub. She is trying to sell an uneconomic pub. If the
valuer-cum-agent acting for her tells a few little white lies,
that it has roses round the windows and God knows what else, he
may get away with it. There may well be some sucker out there
who will come along and take it. That is the way it goes, unfortunately.
Q107 Richard Burden: You started
off by saying that your advice to pubco tenants is really to quit,
to sell up?
Mr Jacobs: First of all, you have
got to try and negotiate better terms and a better deal. In the
event you cannot, you have got to get out of that particular pub.
If you particularly like the business because you like the way
of life, you have two choices. You can go and try to find a freer
type pub, which is difficult because the pubcos in actual fact
have a monopoly of the ownership of the pubs.
Q108 Richard Burden: You have touched
on this already, but so I am absolutely clear about it: the implication
clearly is either that people sign up for tenancy agreements that
they have not read properly, or they have not taken proper advice,
or there is additional information that they need to be aware
of that is not being provided by the pubco. Is it that people
are just not checking their leases or is it that they are not
getting the full information that would be necessary to make a
rational decision because the pubco is not providing it?
Mr Jacobs: I think it is a mixture
of the two. People coming into the trade very often do not take
sufficient professional advice. They will ask friends and neighbours
instead of taking the correct professional advice and going to
a proper accountant, and not just any accountant but an accountant
who has some speciality and knowledge of pubs. Similarly with
solicitors: there is no point in saying, "My next door neighbour
is a divorce solicitor but he is a solicitor, so therefore he
can look at the lease and tell me". He is a divorce solicitor,
for God's sake, do not go to him. Go to a firm of solicitors that
has some experience in the trade. This is the biggest problem,
of course, that people try and take shortcuts and then, once they
have signed the lease, they are hooked.
Q109 Mr Berry: What information do
you think pubcos should provide to potential tenants that at present
they do not? What are the key areas?
Mr Jacobs: There are two key ingredients.
One is a true history of what the pub has actually achieved. It
is a fact that most of these pub companies—Punch, Enterprise,
Unique, et cetera—have all, within the terms of their lease,
a requirement that if they wish or if they ask they can have a
copy of the quarterly VAT returns and a copy of the accounts.
Therefore, they all have in their possession the accounts and
the quarterly VAT returns. They should be disclosing to the prospective
tenant facts, not theory—"Oh, we think this pub can
do ten times better; oh, I think you can save on wages here".
Those are not facts. They should be giving facts. That is the
first point. The second point is: when they say, "Here is
the wholesale price of beer and this is what we will be charging
you", they should also be saying, "In the event, of
course, it was a free house out there in the marketplace, you
would be getting £50, £60, £70, £80 or £90
per barrel discount". They should be honest and say what
is a free house. How on earth can an incoming tenant have any
idea of what the wet rent is? Very often there is no mention in
the lease that there is a wet rent. Nobody knows what a wet rent
is until they are actually in the pub.
Q110 Mr Berry: Without a legal requirement
that pubcos disclose that information, clearly it is not going
to happen is it? Landlords do not go around saying, "And
these are the reasons you should not rent my property"? People
do not fly by windows.
Mr Jacobs: The issue here of course,
if they were honest about it, is about disclosing what the true
rent is. Then the person who has actually taken on the premises
could say, "This is the true rent relative to the turnover"
and so on. They would then make a better judgment. Without that
information, they are not in a position to make that kind of judgment.
Q111 Mr Berry: I entirely agree.
My point is that without a legal requirement, a code of conduct,
call it what you will, pubcos are simply not going to provide
that information, are they?
Mr Jacobs: Not unless you direct
it. A code of conduct, just writing down "if you are a good
boy, please do this", is not going to work either.
Q112 Judy Mallaber: Mr Jacobs, you
do not think there is any point in a code of conduct whatsoever?
Mr Jacobs: Not really.
Q113 Judy Mallaber: Are there any
other mechanisms that we could look at, such as a standard lease
which could be provided for people when they are seeking to take
over a pub?
Mr Jacobs: I think there are standard
terms you could actually define as being required. After all,
a pub is a restricted user unit. You cannot use it as a furniture
shop or a goldsmiths or anything like that; it is a place for
selling beer or alcoholic beverages and therefore it is restricted.
There is no reason why there should not be clauses drafted to
go in there which say, "This information will be forthcoming
from the landlord". It would be the landlord's duty to issue
this information.
Q114 Judy Mallaber: What items do
you think should be included in the standard lease?
Mr Jacobs: One term is the condition
of the building, particularly in view of the current trend towards
full repairing and insuring leases. People going into pubs very
rarely have a full structural survey, or even a survey at all,
so therefore there should be some requirement for the landlord
on that. After all, the landlord knows what property he has. Either
he or his staff will have examined the structure regularly. Therefore
there should be something in the lease about maintaining a property
maintenance register. He should also disclose the prices, what
the open market prices are. They should be able to disclose what
they are. I have argued that there should not be a tie in the
first place, except for the small brewers, those small ones which
fall within the ambit of the Chancellor's special duty rates.
Therefore, if you did not have a tie, you would not have that
problem and the tie would just disappear. You would just be back
to a straight property company with a restricted user clause.
They want to see that their property is maintained property, so
therefore there should be something in the lease setting out some
form of permanent maintenance history.
Q115 Judy Mallaber: When you say
there should be these items in the lease and there should be requirements
for them to be in the lease whether there is a tie or not, from
your experience, what kind of legal backing would that have? How
would you enforce the "should", that these items should
be included?
Mr Kelly: Currently, Mr Chairman,
there is none at all. There is no existing procedure that you
could latch on to which would impose that. It would require, therefore,
some legislative change. One particular point that did occur to
me is that of course leases are not covered by the Unfair Contract
Terms Act. Just perhaps restricting it to the point about representations
that take place before the lease is signed might swing things
more in a tenant's favour if representations that were made before
they signed had more fearful consequences for those making them.
By way of example, there is no doubt that if you were to make
a change on the assumption that a code of conduct tends not to
work—and you only have to look at the petrol companies for
instance—and if you are going to go for some legislative
change, for that to have legislative backing would require some
careful consideration. It is not something that we have dealt
with.
Q116 Judy Mallaber: Mr Jacobs, when
you were asking about Linda Newport's positions, you advised her
just to get out of the trade. Did you mean that or did you mean
that she should just get out of the trade she is in at the time?
Mr Jacobs: On the basis of what
she was saying, that she reckons that she is going to sell the
pub with luck but will lose money and have no money left, what
is she going to do? How is she going to get back into the trade
if she has got no money?
Q117 Judy Mallaber: As general advice,
you would not say that being in the trade—
Mr Jacobs: That is general advice
to that particular person.
Chairman: I do not think it is really
appropriate for us to discuss someone's position, interesting
though it may be. Could we take it in the abstract rather than
making it personal?
Q118 Judy Mallaber: I was trying
to seek whether your advice is that it is not worth being in the
pub trade, even if you are in a non-tied situation?
Mr Jacobs: It is worthwhile being
in the pub trade. There is a future in the pub trade provided
the sums are right, but not if the sums are wrong. Unfortunately,
most of the tied lease dry rents are excessive. The tenants do
not have a liveable income. If they do not have a reasonable liveable
income, then all they can do is just struggle from day to day.
If there is no real development of the pub, development of the
ambience and all the various other things, it will just gradually
implode.
Q119 Mr Hoyle: We have more or less
battered it to death about rents, but you do say in your evidence
that you feel that the beer tie should be rescinded?
Mr Jacobs: Yes.
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