Lessees' attitude to being 'tied'
134. Throughout our examination of the rental
system to public houses we have been struck by the extent to which
the valuation system is described as something which should be
close to objective, but is in reality much closer to an assessment
of what the market will bear, negotiated between the company and
the lessee. In our view, the more transparency there is in those
negotiations, the better. We are concerned that the beer tie
contributes to the lack of clarity about what it is that lessees
can expect to pay for their pubs.
135. When asked what would happen if the tie
was removed, Giles Thorley of Punch said:
you would see a significant reduction in the amount
of inward investment into pubs by the pub companies because we
would have no incentive and we would have no connection with the
trade of the pub anymore.
Ted Tuppen of Enterprise told us that if there was
no supply tie pubcos would become:
just straightforward property companies and, for
a start, one would not see anything like the £9 million of
support that we gave to our licensees in the past year.
It is clear that rents would increase, Giles Thorley
of Punch told us:
we could lease the pub for £20,000 income, just
straight rent on a free-of-tie basis, or, alternatively, we could
lease the pub for £8,000 and we would receive, say, £2,000
for the machine tie and £10,000 from the tie for the beer
Morgan Stanley said they thought that it was unlikely
that if lessees were offered to go free of tie they would take
under the terms of their contract, pubcos can put
up rent if the tie is removed, and we doubt lessees want a doubling
of their fixed rental cost.
However Enterprise told us that it was not in their
best interests to over-rent:
"Over-renting" a pub is completely counter-productive,
leading to an increased likelihood of debt and outright business
failure. Furthermore, "over-renting" is likely to result
in limited future growth prospects, limited assignment prospects,
a lack of reinvestment, disillusioned licensees and ultimately
the complete breakdown of our business relationship.
136. Despite the very real prospect of an increase
in rent, there is an almost unanimous view from lessees and their
representatives that the tie needs to be broken. We were struck
by our survey responses to the lack of satisfaction with the tie
only 13% of those responded were happy with their tie.
The only pubco which had more satisfied than dissatisfied lessees
operated free of tie. In addition 94% of respondees to the FSB
poll wanted an end to the tie. One of their members said "I
would rather pay more rent and have no tie to products, leaving
us free to shop around for the best prices."
137. We are also keenly aware of the very real
and serious financial pressures under which the pubcos are operating.
While at least one pubco does operate without a tie, the tie is
integral to most companies' operations. We are concerned that
the simple breaking of the tie in these very challenging economic
times could lead to a chaotic situation in which the finances
of the pubcos were completely undermined, with unforeseeable consequences
for their ability to maintain their businesses and, we believe,
the very real risk of widespread pub closures as a direct result.
We have no wish to be the cause of an even sharper decline in
the number of public houses.
138. The dispute over the tie
could be ended easily: every lessee could be offered the choice
of being free or being tied. This would enable both sides to
prove their competing claims. We believe each and every existing
lessee should, in a phased programme, be offered this choice and
the same choice should be offered to every new lessee as he or
she takes on the lease. To make the choice fair, the process of
agreeing revised rents must first be improved as we have previously
139. Although a voluntary agreement
is preferable, we doubt that the pubcos would respond effectively
to such an approach. We therefore recommend that the Department
considers how best to achieve this end and that it opens an urgent
consultation into the principle and phasing of this proposal.
The status quo is not an option.