Examination of Witnesses (Questions 360
- 379)
TUESDAY 20 JULY 2004
ENTERPRISE INNS
PLC
Q360 Richard Burden: I may be being
thick here but you describe licence rent with a capital RENT—that
is the overall package. You have then described the property rent,
wet rent and the machine share. When it goes to independent arbitration,
is it the licence rent that goes to independent arbitration or
is it the property rent?
Mr Tuppen: It is the entire package.
Anyone offering arbitration will know the exact circumstances
of that particular lease, because clearly it will make a difference
if somebody is or is not getting £40 a barrel discount. If
they are getting £40 a barrel discount it will be reasonable
to expect the rent to be a bit higher than a comparable pub where
they are not getting a discount. An arbitrator, as indeed I would
hope the licensee and we would be, should be in possession of
all of the relevant information.
Q361 Chairman: Can I just go back
one stage. You have referred to the retail valuer—he is
an employee of yours, is that right?
Mr Tuppen: Yes.
Q362 Chairman: When you come to starting
off, as it were, it would be one of your employees who would set
the relevant figures. They may well be qualified but they work
within your framework. Is that correct?
Mr Tuppen: I think again I would
avoid the word "set". They will go along and they will
try and assess it. My regional managers would feel rather stupid
if they turned up and said, "I understand you want to rent
this pub from us", and the chap wanting to rent it said,
"How much is the rent?", and he said, "I don't
know. What do you think?"
Q363 Chairman: I wanted to correct
the impression, which I think you inadvertently sought to convey,
that somehow these people were independent; in fact they are employees
of yours, and the retail valuer is one of your employees and it
is only after the initial period, when rents come for review,
that an independent assessment is made by someone outwith the
organisation.
Mr Tuppen: One of the things I
would suggest should be part of the independent advice a new tenant
is getting would be, if he felt it was necessary, to get an independent
review of whether that rent was fair. The majority of tenants,
to be fair, will be able to work that out for themselves from
their business plan. Quite clearly, after rent there is either
going to be enough profit left over or there is not. The key point
I would make there is, having assessed that rent and having started
to negotiate with it, at that point the tenant has the absolute
right of veto. At that moment he has not signed up.
Q364 Chairman: Would you envisage
that someone with the capability to advise on the rental package
would be one of the people whom you would consider to be appropriate
to be put in this group of independent advisers, whom you would
have at the point when the person is just about to sign the initial
agreement with you; but these independent advisers you envisage
will include someone who has specialist knowledge of the rental
system. Is that correct?
Mr Tuppen: I think if we are defining
independent advice properly then it is very important that the
ranges of skill, necessary to make that advice worthwhile, are
there. As we said earlier, just sending them off to a lawyer,
they might well understand—
Q365 Chairman: I did not want to
rehearse that again, I just wanted to get it clear because it
seemed that you had moved a wee bit, in the sense that you were
more specific now than you had been when we started the discussion
about an hour ago when we were asking you about independent advice.
The independent advice you would envisage would include this kind
of specialist knowledge?
Mr Tuppen: Yes, it would.
Q366 Mr Hoyle: As you are exploring
rent it would be a shame to break what we are already on. In the
case of upwards-only rent reviews, as a pubco do you have upwards
rent reviews and only upwards rent reviews with some of your licensees?
Mr Harrison: Technically we removed
all upwards-only rent review clauses from all new Enterprise agreements
from 1996 onwards. It was at the same time that we removed privity
of contract provisions from the same agreement, so those are covered.
As a matter of policy we have enshrined the principle of abandoning
upwards-only rent reviews within our Code of Practice. If I may
just quote one short paragraph, our Code of Practice says: "The
company adopts the general principle of fairness when determining
rent. We therefore accept that in certain circumstances it may
be appropriate for a rent to be reduced at the time of a review.
To this end Enterprise has removed from its lease and tenancy
agreements the requirement that rent should be subject to upwards-only
reviews". That said and more recently, we acquired a company
during the course of this year that still has upwards-only rent
review clauses within their agreement. It is our intention to
negotiate with our bankers and to remove these clauses at the
earliest point. At that juncture, upwards-only rent reviews will
be completely eradicated from our business. The reason we do that
is because we believe the upwards-only rent review clauses are
intrinsically unfair. We have always maintained that and in every
form of agreement we have subsequently acquired and inherited
we have adopted the practice of abandoning those clauses.
Q367 Mr Hoyle: You must be congratulated
if what I say is correct, that all your existing licensees have
had it removed?
Mr Harrison: Correct.
Q368 Mr Hoyle: It is a new company
you have bought which still has upwards-only rent reviews; and
those are being removed as soon as it is legally possible?
Mr Harrison: Correct.
Q369 Mr Hoyle: I congratulate you
on that, because that has been one of the bugbears of the industry.
I am really pleased we are hearing that today. Can you tell me
if rivals out there are still continuing with rent increases going
up?
Mr Harrison: When we removed them
from our own agreements in 1996 we probably were the forerunners.
I believe from that time other companies have either withdrawn
those clauses or adopted a practice of ignoring them. I am afraid
my industry information is not complete and I could not tell you
what proportion they are.
Q370 Mr Hoyle: We do know that it
must exist because you have just bought a company where it exists.
We do know at this moment it does exist. The message is: follow
the Code of Practice that you have and that ought to set the trend
for the rest of the industry, and the sooner they catch up the
better it will be. It will be more transparent and above board.
I am amazed other companies have not followed your lead as you
are the big boys in the business. Mr Townsend was quite clear
in the way he spelt out how Government takes all this money in
tax on beer, and I understand how he set it all up, but would
he not agree with me if he feels it is the Government (and quite
rightly pointed out as evidence today) that takes this big share
in tax, that the way to beat the Government is to drop the beer
prices?
Mr Townsend: I think you are taking
us into territory where I would prefer not to go under the terms
of this particular inquiry. I would not like to challenge the
Government on its policy.
Q371 Mr Hoyle: I think we can tempt
you a little bit more, Mr Townsend, without any help from the
middle! Is it not fair to say that the answer is if you were to
drop your price the Government would take a reduction in tax,
people would celebrate that and, in actual fact, the punter who
goes to the pub would benefit as well? Is that fair?
Mr Tuppen: Perhaps I could answer
that. If the Government were to drop duty—
Mr Hoyle: Yes or no. We do not need a
big rambling—
Q372 Chairman: VAT is 17.5% which
is pro rata, so if the price of beer was reduced the amount of
VAT would be reduced. Excise duty is of a different order and
is calculated differently, so we are only talking about VAT here.
33p on a £2.20 pint of lager could be reduced in price for
the punter if you were prepared to cut your price. It would fall
in two ways: firstly, the price and, secondly, the VAT element?
Mr Townsend: Mathematically, of
course, you are correct.
Chairman: That is how you pay for things.
Q373 Mr Hoyle: I just wanted to help
you. You were so concerned about pointing out how much the Government
takes that I said you could actually help the punter and take
some back off the Government by you reducing the price. We both
agree on that. Could you just clear up another point for me that
concerns me which is about the rent and going to arbitration between
the two parties. Is that binding on both sides? I did not quite
understand that.
Mr Tuppen: Yes, it is. There is
arbitration and independent review. Unfortunately arbitration
can be pretty expensive. One of the things we think is important
is that the availability of independent review, binding on both
parties generally, comes out at about three% of the rent, so it
is £750 of costs which are shared; arbitration is a much
longer and more tedious process. I do believe that the costs and
time involved in arbitration may, in some instances, have put
off people from raising an issue about a thousand pounds here
or there; which is why independent review offers an excellent
low cost alternative which is binding on both parties.
Q374 Mr Hoyle: That is the accepted
route. Is that also the accepted route for other pubcos?
Mr Tuppen: I would be surprised
if it was not, but obviously I do not know.
Q375 Chairman: You have 9,000 pubs,
how many of them go to independent review, and how many go to
arbitration? Are there serial independent review tenants?
Mr Tuppen: In the year to September
2003 we had 716 rent reviews and three of them went to arbitration
or review. In the six months to March 2004 we had 410 rent reviews
and none of them went to arbitration or review.
Q376 Chairman: In how many instances
were you trying to increase rents?
Mr Tuppen: The 716 rent reviews
answers that and three went to review. Incidentally you might
also like to know that of those 716, six rents went down.
Q377 Chairman: Of the 9,000 that
you have, in any year you are talking of round about 700 or so
of the tenancies which will have their rents reviewed?
Mr Tuppen: I apologise for a slight
misunderstanding here. That 716 relates to the estate of about
5,000 pubs that we had prior to acquiring our latest pubs. You
are probably looking at about 15% of the estate being reviewed
every year.
Q378 Chairman: Does that mean rents
are reviewed only once every six years?
Mr Tuppen: Every five years.
Q379 Chairman: Whenever you choose
to increase rent the tenant will exercise their right to have
a review of it?
Mr Tuppen: They will sit down
with their regional manager and hopefully reach a satisfactory
conclusion. Clearly in 713 cases out of 716 they reached a solution
that both sides felt was fair. So far in the six months through
to March 2004 all 410 reached the conclusion both parties felt
was fair. We genuinely have no interest in over-renting pubs.
We want successful licensees who feel it is worth getting up in
the morning.
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