Examination of Witnesses (Questions 280
- 299)
TUESDAY 6 JULY 2004
BRITISH BEER
AND PUB
ASSOCIATION
Q280 Linda Perham: Are they people
who own the freehold?
Dr Rawlings: Yes, the independents
would own the freehold or maybe they lease from some nice property
developer. So what you have seen in that time is a lot of new
entrants into the market, they have come into new leases, they
can be five to 20 years long or they can be traditional tenancies
for three years or more. That provides the lease company with
the least expensive route into market. What it does is allow you
to realise the capital value. You can take on a new lease for
no money, you can work that for a few years and you can sell it
for £100,000 and more. That is a capital appreciation in
the business which almost exclusively was not available pre the
Beer Orders. We would also argue that what it has done is to improve
the professionalism in the business. There has been a lot of growth
in training. The British Institute of Innkeeping issued 40,000
licensing qualifications last year to the licensed trade. What
has also happened is that you have lots of different models. We
are assuming here that there is only one lease; there are all
sorts of lengths, all sorts of conditions, they are with a tie
for beer, a tie for other things. At the end of all that, the
people who sign these leases are protected by the Landlord and
Tenant Act, so that you cannot change a lease just on a whim,
you cannot force anybody with a tenancy agreement to change it
unless they want to. I have probably gone on long enough.
Q281 Sir Robert Smith: Keeping on
the issue of the tenancy agreements and leases, one of the things
which has been raised with us is concern about the advertising
to tempt people into the trade and the quality of the information
which prospective tenants are supplied with. Do you agree with
this concern?
Dr Rawlings: I certainly do not
agree with misleading advertising.
Q282 Sir Robert Smith: Do you think
it is a problem though?
Dr Rawlings: It is a problem.
We do get calls from people saying they have seen an advert and
they can go on a course for £3,000 and they will get a pub.
We say "Please don't do that. Please talk to the British
Institute of Innkeeping, get some knowledge of the trade, talk
to your local Licensed Victuallers Association if you can and
get some advice. Look on company websites". There is a lot
of information on those from reputable companies. I should just
like to press the point that there is the framework code which
we as an association have and I sent it round to the Committee
last week and I hope you have a copy of that. Our members sign
up to that. That is the information we agree should be provided
to incoming tenants. If people do not do that, we would say it
is not right.
Q283 Sir Robert Smith: If they want
to be members of your association they have to have a code which
would implement the terms of this general code.
Dr Rawlings: Yes; essentially.
Q284 Sir Robert Smith: Do you police
that?
Dr Rawlings: We do not police
it in terms of any enforceability; as a trade association we do
not have enforcement powers. We can and we have asked the people
who have done it and we did that when we first issued it and we
did it again a few years ago. We are aware that people have them
and a lot of companies make them freely available and publish
them on their websites, you can see them.
Q285 Sir Robert Smith: One of the
key things here is that the lessee should understand that he should
take proper independent professional advice prior to accepting
a tenancy or a lease and during the operation of the lease whenever
the need arises.
Dr Rawlings: Absolutely.
Q286 Sir Robert Smith: So that is
advice given, but if the person chooses to ignore that advice
and blunders on . . .?
Dr Rawlings: It happens; it happens
when people buy houses. They do not carry out surveys, they do
not take proper solicitor's advice and so forth. It is the wrong
thing to do, but you cannot force people to invest properly in
their own future.
Q287 Sir Robert Smith: Is there any
attempt in the spirit of that code at least to check with the
person potentially signing on the other side that they have consciously
chosen not to take advice?
Dr Rawlings: That would be done
through the training courses the companies run. Before taking
up the tenancy they would go through that and that would be checked
out with them. They still have a choice.
Q288 Mr Clapham: When you made your
address you referred to the differences in the sorts of tenants
and it is fair to say that you said they are such that it is not
reflected greatly in the price of the beer. One of the things
we have been told is that free-from-tie tenants will be able to
purchase their beer at a bigger discount than pubco tied tenants.
That seems fair. Relating that to the rent, the other thing we
have been told and which was confirmed this afternoon by ALMR
is that the wet rent and the dry rent actually equal the rent
of a non-tied tenancy. Given that, would you agree that is so?
Would you agree with ALMR that that is the situation?
Mr Hayward: In broad principle,
yes. The observation I made in relation to the price earlier on
was that there is a whole series of factors in relation to pricing.
Clearly some people are in a position to buy their beer at a different
price, but they are operating in a different economic model, which
is how you finish up with the position which I identified.
Q289 Mr Clapham: Could I take that
a little further and put to you the question which I put to ALMR?
If pubcos were charging a full market rent to their tenants and
in doing so split the business between the wholesale side and
the estate side, would there be a greater transparency and possibly
would that reflect through into a cheaper price of beer?
Mr Hayward: No. I am not sure
that there would be greater transparency and I think Nick Bish
called that into question as well. You can think of wholesalers
in the food market for example and you have no more clear idea
what they paid for their products than you do in relation to these
sets of circumstances. One is in a position whereby you are negotiating
a set of arrangements and I identified previously that if you
move away from a beer tie you are moving from companies who are
purely interested in the property and there are inherent risks
associated with those.
Q290 Mr Clapham: Would a full market
price, allowing, for example, a tenant to purchase his beer from
any wholesaler and purchase that beer at a greater discount, not
help in my area which is 70% rural, in the rural side of my area?
Mr Hayward: No, what would then
happen would be that you would need more money to get into the
market in the first place, because it would be the full market
price. I said earlier that this is a way of entering into the
market for people who may have more limited resources. So there
are different options open to different people.
Q291 Mr Clapham: But can you see
that many tenants feel that if they were charged a market price
for their rent, they might be in a better position than they are
currently?
Mr Hayward: I can understand that
people do think that. I equally take the view that Tony Payne
did, that one has to look at it as an overall package.
Q292 Sir Robert Smith: There has
been talk already about abolishing upwards-only rent reviews and
they have certainly been thorns in a lot of people's sides. How
far has that movement developed?
Mr Hayward: May I say before I
answer this question, that there may be one or two elements of
this answer which relate not purely to this industry but to others.
Upwards-only rent reviews are not unique to the pub sector. I
have in front of me a copy of my BBPA rent agreement with our
landlord and the page relating to rent reviews is headed "Upward-only
rent reviews". That is an agreement with the Department of
Health. So would you please address any recommendation you make
to government departments as well as to the pub companies?
Q293 Chairman: The value of the property
and therefore the value of the rent may not necessarily be dependent
on the kind of market factors which impact upon the valuation
of a public house.
Mr Hayward: Absolutely.
Q294 Chairman: I think that is where
there would be a certain divergence of opinion between property
rent of a general kind and boozers.
Mr Hayward: But following Mr Clapham's
questions earlier on about property negotiations, if one were
go to down the route of having a property-only tie of some form
or another, this would apply. What I was meaning was that one
is looking at an overall market in terms of property. Yes, a fair
number of companies have moved away from upward-only rent reviews.
There is in fact currently a review being undertaken by the ODPM
in relation to this issue. We are preparing our submission at
the moment. It is likely that we will be arguing that we should
not have upward-only rent reviews. A series of options is being
considered by the association and we will be moving away from
those in terms of our own submission.
Q295 Sir Robert Smith: Has that already
happened with some pubcos?
Mr Hayward: Yes.
Q296 Sir Robert Smith: Is that for
new leases or have they actually gone into old leases?
Mr Hayward: I am not absolutely
sure, but I would imagine it would be new leases. You have one
or two of the pub companies coming and they can cite specific
examples.
Q297 Linda Perham: Previous witnesses
have suggested that a lack of transparency in the pricing structures
calculated by pubcos and an unwillingness to disclose exactly
how their rents are calculated has added to the sense of unfairness
which we have identified among tenants. Why do the pubcos keep
the actual price they pay the brewers away from their tenants?
Is this considered confidential?
Dr Rawlings: It is confidential
for a number of reasons, not least of which is that they do deals
with different breweries. If they were to make that information
available to everybody that would make negotiations virtually
impossible with anybody. It would be very unusual in any business
to disclose the price you pay when you on-sell; I cannot think
of any retail business where you as a customer, which a tenant
is in that sense, would know what the original starting point
was. You could have a guess, but it is confidential to the business.
The point is that if the business model works and the rents and
everything else are transparent, then that is the deal you are
signing up to. We go back again to making sure you get the best
advice and making sure that the business is one you can operate.
Q298 Linda Perham: The tenants should
really get some sort of breakdown as to how the rent is calculated
though, should they not?
Dr Rawlings: If you look at our
code, what we say is that what they should have is what we might
call the trading history of the pub and that is essentially how
many tied products have gone through in the past, if there is
any history. What the company does essentially is look at what
is a fair maintainable rent for this business. If I were running
this business, what could I actually make out of this business?
Therefore, what is the achievable rent? When you fix that, the
company will say this is worth £10,000 a year and it is offered
on the free market to people who want to buy that business, because
that is what they are doing. They are not buying a job, they are
buying a business and the price for that business is £10,000,
or £9,000 if you can beat them down, or £11,000 if the
pub company can get a better deal.
Q299 Linda Perham: In your submission
you suggested that it is easy for a tied retailer to enter or
leave the pub market. One of our previous witnesses has suggested
that even though their pubco knew they were in difficulty, they
had put up high barriers to exit such as a penalty of 20% of the
selling price for their lease. Is that something you have heard
about? Is that a practice which you have heard of?
Mr Hayward: The circumstances
which were being referred to were probably in relation to an assignment
of lease after a short period of time. I clearly cannot comment
on the detail of that particular case, although I was here when
the evidence was given. That is a matter between the pubco and
the individual concerned. It is specifically relating to a set
of circumstances where somebody has been in for a short period
of time and wants to assign that lease on at a profit to somebody
else. That is what it sounds like. Your question relates to other
circumstances where people are in difficulties, where they want
to get out of the business and those sorts of things. Under those
circumstances, from the best of my knowledge, from the checking
I have done, there are not the barriers to which you are referring.
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