Pub Companies - Business and Enterprise Committee Contents

Supplementary evidence from Brian Jacobs

  You will recall that I gave evidence at the previous meeting following written submissions by me personally and separately on behalf of Fair Pint.

  Over the Christmas period I have looked through the minutes of the 9 December which recorded the verbal evidence given by .... the BII, ALMR, BLRA ... and ... the CEO's of Enterprise and Punch.

  There are many points that I have issue with. Following the invitation by the Chairman Peter Luff to offer further presentation regarding things I did not have a chance to say or that I wish to clarify I have selected the particular questions, the answers given by the witness and added my personal comment. In addition I have added at the end evidence that supports my comments. I do hope that you and the Committee will find this useful in your deliberations.

EXAMINING THE UNCORRECTED TRANSCRIPT OF MINUTES OF THE BUSINESS & ENTERPRISE COMMITTEE ON 9 DECEMBER 2008

  Two specific issues come up time and again:

1. The Prime Principle.... that the tied tenant should not be worse off financially than if they were free of tie [133, 178 and 179].

2. The Five Essential recommendations [129/130; 144; 145; 151 and 158] designed to ensure transparency, particularly relative to the "value equation"[ as mentioned in 178 and 179].

  It is important to identify what has not been said, what has not been done.

PART ONE. BBPA, ALMR, BII

  Q137 and Q140 Comment: Mr Hastings of the BBPA failed to mention that none of the Five Essential recommendations or the Prime Principle have been included in their Code of Conduct.

  Q138 and Q144 Comment: Mr McNamarra of the BII. He did not mention that the Training of Pub Tenants to understand and identify profit, rent and lease responsibilities of both landlord and tenant are essential for the survival of pubs. The ability to survive comes first and the nuances of how to improve various elements of the trade, such as ensuring beer pipes are properly cleaned, hygiene standards etc are important but not as important as understanding how to survive. The BII have consistently failed to offer any training with regards to profit assessment in whole detail or for the construction of the rent. The T&ISC recommendations para' 144 and 145 as well as understanding UORR 151 has never been included within your training programmes. It is therefore incorrect to say they have prepared/trained people in readiness for a tenancy. Financial viability is all about survival that comes first followed by standards!

  Q146 Comment: Mr Bish did not mention that between 1994 and 2004 licensed pubs and hotels increased by 8%, 6,000 in number.

  Q146 Comment: It was not made clear that it is the customer who ultimately chooses as to whether they want and will patronise a pub in their neighbourhood irrespective of whether the quality of the people running it can make a success of the business. Customer desires all hinge on the issue of retail cost, accessibility, smoking etc, and none of these relate to the people operating the pub, but all relate to the consumer choice.

  Q148 Comment: Mr Hayward did not make clear that independent advice is only one element for the Pubcos/BBPA have a responsibility to act properly and transparently. [TISC 158] Although the BBPA were urged to include the Five Essential recommendations and the Prime Principle they chose to ignore and did not include in their Code despite requests to do so.

  Q148 Comment: Mr McNamarra did not reveal that the BII have not supported fairness, national accounting standards, knowledge, due diligence or prudence. In fact nowhere do the BII support transparency in their training programmes.

  Although Mr Bish went on to say... the BII have undoubtedly done a sterling job in improving the transparency of codes, that statement cannot be correct or acceptable given the above failures regarding transparency etc by the BII.

  Q149 Comment: It was not revealed that the BII had done nothing towards embracing the Essential Five T&ISC recommendations or the Prime Principle in their package/training. It has to be recognised that to have done so would meant they would have been opposing the Pubco stance which in turn would affect the financing from Pubcos. Unless the tenant has knowledge of profit assessment and rent instilled into them they will have little or no chance of survival.

  Q153 Comment: In response to "Do you agree with Morgan Stanley who similarly reported that 20% to 30% of tied pubs could be uneconomic due to the high rents? Do you think that is true?"

  Mr Bish should have said... If profit and rent are based on unrealistic theory, which may be substantially apart from reality, then pubs will fail. Essentially the T&ISC recognised that point and their Essential Five recommendations, if implemented, would go a very long way to removing this issue. Factual historical performance should be the prime reality check. Pubcos, the BBPA refuse to go down that route and the BII are afraid to give tenants the training that would prepare them to understand that turnover and profits do not increase at a whim, or overnight. Attitudes towards financial integrity relative to the tenant need to change. Theory based on ideology has to be replaced with theory supported by fact relative to the history of the pub as well as proposals.

  Q154 Comment: Relative to RICS guidance being fair, Mr Hayward failed to elaborate on the fact that the House, EU, EC and Appeal Court are all conscious that true and fair competition in the form of the Prime Principle, must transparently exist and that this can only be achieved through full and proper assessment to establish the "value equation" is in balance. That requires the Five Essential recommendations to be adopted, but the Pubcos and BBPA and will not support that and neither will RICS or its members at the present time.

  Q155. Comment: Do RICS take account of the higher cost of tied produce when considering rent? The answer is that there is no such adjustment by RICS although the UK and EU support that Prime Principle. Why is there no offset made when clearly it is essential to ensure that the tied tenant does not suffer substantial injustice? Consider the origin of the problem, which can be grasped from a detailed witness statement prepared by Rob May [as chairman of the RICS Trade-Related Group and ex-officio member of the RICS Appraisal and Valuation Standards Board] who happened to be a senior rent adviser to Inntreprenneur, Unique Pub Company and now Enterprise Inns plc. He is adamant that the RICS rules do not contain any reference to "fairness or transparency" nor does RICS concern itself with methodology when considering rent or capital value. Thus the RICS view is that the whole of the T&ISC should be ignored, fairness should not be considered and most certainly THE TIED TENANT SHOULD BE FINANCIALLY WORSE OFF THAN IF THEY WERE FREE OF TIE. There is the hub of the problem for tied tenants. Almost by decree RICS refuse to accept the Prime Principle or adopt the Five Essential recommendations of the T&ISC.

  Q157 Mr Hayward said: I think it is fair to say, Mr Hoyle, that if one looks at the share valuations in recent weeks, and you have made reference to a particular City company, you make your judgment about pub companies which presumes they are not reaping those monies....

  Comment: That is sheer arrogance and an attempt to hide the real cause. The pub companies are suffering because they paid too much for their pubs, borrowed too much, overvalued their assets, incorrectly [ and probably illegally] defined their assets as tangible, and in order to service that excessive debt have tried to screw more out of the tenants through retaining more discount and increasing rent during a period of falling turnover. The retail trade and profit just are not there to satisfy their demands. The Pubco greed has been recognised by the city.

  Q161 Mr Hayward said: ...there is a regulatory burden associated with employment in the line which makes it uneconomic to have managed houses at a smaller level. The point at which you operate a managed house has risen ever higher in the last two decades.

  Comment: Hayward is suggesting that pubs with lower turnover and profit do not have exactly the same regulatory burdens. That is not only stupid but a total misrepresentation of fact! There are no regulatory burdens for managed houses that do not apply to any pub tenant. That is the problem. BBPA like many Pubcos dishonestly think that by hiving pubs off to individuals then the lessee/tenant can cheat to avoid regulatory burden. That is an unacceptable assumption but it results in Pubcos having the expectation that operating costs can be lowered which in turn allows them to demand a higher rent. Yet another reason why tenants have financial difficulties, and yet another reason to enforce T&ISC recommendation 144 and 145.

  Q163 Mr Hayward said when referring to the BBPA office rent said... BBPA have an upward only rent review built into my rental agreement. Who operates that upward only rent review? Who is my landlord? The Department of Health.

  Comment: Such a statement reveals the lack of his knowledge and understanding regarding pub rent compared to commercial rent. The BBPA is not a pub it is an organisation which does not trade and it occupies commercial premises. That commercial office can be used for virtually any purpose and upward only rent reviews do not depend upon profitability. Pubs however are single use properties rented according to profitability. Profit does not rise in accordance with RPI... hence applying RPI to rent is a totally dishonest application relative to a pub rent. Failure by BBPA and Pubcos to understand that is almost unbelievable but a contributory practice that leads to pub closures.

  Q170 Comment: The question was... Are you saying that RPI rent reviews are the right way to look at individual businesses? Mr Hayward said... What is right is the agreement between a company and another business because both parties enter into that, presumably having taken their own professional advice. Whether that is RPI or whether it is in some other form, that is a decision of two businesses coming together..... That statement by Mr Hayward is an exaggeration because invariably the Pubco policy is that on most matters... take it or leave it.

  Q171 Mr Binley said: Let me put you in my position. Would you advise that they should not use RPI as a factor in defining rent increases?

  Mr Hayward answered: No, I would advise them to take their legal and financial advice as we do and then take a judgment. In current circumstances, all these matters are up for review. Evidence has been given by different companies indicating many of the different processes that are being undertaken, given all the difficulties that are currently being faced.

  Comment: This is a prime example of where Hayward was wrong to say NO; it is demeaning and an insult to integrity! The T&ISC recommended no upward only rent reviews and yet here is a man saying... its OK. No it is not!!

  Q182 The Chairman asked:... with regard to the amusement machine supplier, royalty payments and sharing of income could I ask Mr Hayward to comment on that particular observation from Mr Bish?

  Mr Hayward responded: As far as we are concerned, I disagree with Nick because, as he indicated, as part of the construct, using his term, there is a variety of different forms of leases and tenants' agreements and some include game machines and others do not. In terms of providing game machines, because the companies concerned have experts in those, they will advise pubs as to what sort of gaming machine is best for their particular venue and they have a vested interest in doing that in terms of maximising the take on it. There are varying relationships.

  Comment: However what Hayward failed to say that the BBPA had ignored the T&ISC recommendation that Pubco interference and direct sharing should cease. Here is Hayward supporting its continuance by saying there are many different forms of lease. Different lease types have no bearing on the issue because the income has never been properly reflected in the lease rent structure. Cease the AWP tie and interference it is that simple. Stop their involvement! Such cessation would stop that dishonest Pubco double dealing and top slicing. It needs no legislation and would give a substantial boost to the survival of pubs. The BII were aware of the T&ISC recommendation but did nothing to support the release of the grip of Pubcos on the awp element. Why? Probably because it would affect the relationship of the BII with Pubcos.

  Q185 The question from Mr Wright for the BESC... was how much would the removal of awp tie cost?

  Comment: The financial answer was not given. The accounts of Enterprise and Punch indicate that the removal of the machine direct involvement would cost Punch and Enterprise £25 million each, that is about an average of £3,000 per pub. This is income which should go to the tenant, be included in the profit of the tenant and thereafter included in the rent computation.

  Q199 Comment: While Mr McNamara indicates that they would like to assist in dispute resolution. He claims that the BII as a professional body can offer advice on a Code of Practice issue. He claims that the BII have an accreditation procedure relative to Pubco Codes of Practice and yet.... The BII will not accept and adopt either the Prime Principle or the Five Essential T&ISC recommendations. That failure means that the BII support the Pubco stance of ignoring transparency and thus supporting that the tied tenant will be browbeaten and submit to Pubco rent demands and pricing practices. Such failure by the BII denies any semblance of professionalism, their claim to accredit Codes of Practice or stand in any position relative top dispute resolution.

  Q202 Mr Bailey said : I think everybody would say that the development of a low-cost arbitration service would be a benefit, but the fact that it does not seem to be used seems to indicate that not many tenants either understand, or appreciate, it.

  Comment: Mr McNamara indicated that the BII were taking legal advice and talking to Pubcos indicating that they would like to progress a low cost service and that their national council and our members are very much in support of it.

  How can the BII be trusted? They will not accept the Prime Principle or the Five Essential recommendations both of which are essential to ensure transparency and fairness for the tied tenant which means they can have no status or effect because they are just a pawn for the Pubcos.

  Q203 Mr Bailey stated : Can we just move on to the pub leasing model, the Code of Practice. It would appear that in certain circumstances the leasing model is rather out-of-date and out-of-line with the Code of Practice. What should be done within the industry to align them?

  Comment: Mr Hayward defended the existing model. He could not understand that Fair Pint recognised those small brewers, less than 500 pubs, needed protection for their personal brewing. He did not give any credence to the fact that Pubcos were not brewers; they were in fact nothing more than factoring agents relative to produce, and buy to let agents relative to rent. He also sought to support arbitration, no doubt knowing that arbitrators were in favour of not supporting either the Prime Principle or the Five Essential Recommendations, since this increased Pubco income at the expense of tenants.

  Q204 Mr Bailey asked: Would you like to comment on what Mr Hayward has said, Mr Bish?

  Comment: It is interesting that Mr Bish referred to the sale of leases and that they have been sold for five times earnings. That is worrying because the concept that a lease should be sold for a multiple of profits was and still is a dishonest practice. The lease should only have a value if the tenants profits are greater than those that would equal to rent. If the profit is actually equal to the rent then there is no goodwill or profit improvement passing. A new lease with a tenant even on a free of tie basis is based on no premium and the landlord and tenant sharing profit 50/50... so there is no value to the lease at commencement. Regrettably over the years valuers have been suggesting that a lease has a capital value even if the profit was equal to the rent, ie the same as if it were at the start... that is dishonest.

  Success and hard work over the years that provide an extra profit above and beyond that necessary to equate to the rent would be the figure on which a multiple could be applied, and nothing for the lower figure or the same.

  Q206 The question was... It would appear that in certain circumstances the leasing model is rather out-of-date and out-of-line with the Code of Practice. What should be done within the industry to align them?

  Comment: Mr Hayward stated that the BBPA had made changed to their Code and suggested that lease agreements were an ever changing model. He admitted that the business has changed over the last four years. What Mr Hayward has not revealed is that NONE of the Codes have been adjusted to embrace the Prime Principle or the Essential Five recommendations. If these had been adopted all the changes which are occurring would be reflected in rent adjustments and reviews. It is not the nature of agreements that have to be changed to cater for behavioural and trading circumstances, it is the basis of financial calculations that are not stated or defined in leases.

The following relates to Pubco evidence

  Q208 In response to the question regarding the level of earnings Mr Tuppen quoted... and I believe the numbers are 112 of our licensees, are actually earning profits in the band of £20,000 and below. The average profit for our licensees we estimate to be in the region of £42,000.

  Comment: But is that correct? According to the accounts of Enterprise for 2008 the average licensee was in their opinion, based on their expectations for their 7,500 pubs, was £32,500[1] per annum to which Mr Tuppen has quite erroneously added a figure for what he believes is the benefit of a tenant living in. In the open market when rent or capital values are calculated the benefit of living in is always excluded because it does not exist. Any benefit deemed by the Inland Revenue is taxed. It is therefore exaggeration on the part of Mr Tuppen to include that figure. Additionally it is known that over the last 12 months turnover has fallen and operating costs have increased to such a level that the income of the average tenant will have fallen by at least 50% down to £16,000; and that can be for two persons.

  The statement by Mr Tuppen that... "even though these licensees may be earning less, on average they are still earning enough to have what would be regarded in difficult circumstances as an acceptable living".

  Comment: At an average of £16,000 per annum for one person working only 60 hours per week this equates to £5.12 an hour and if there are two then it would be £2,56 an hour. Hardly an acceptable living given the huge highly personal responsibilities, which are far greater than any employee or even manager may ever have.

  Q211 Mr Thorley said... Our Punch Charter was the first to be accredited by the BII.

  Comment: That statement by Mr Thorley is meaningless because the BII do not support either the Prime Principle or any of the Five Essential recommendations from the T&ISC recommendations. There is no point in using plain English if the essence of transparency is omitted.

  Mr Thorley goes on to say we clearly aim to settle any disputes we have with our customers in an amicable way and in an efficient way and it is just good business to do so.

  Comment: For the tenants the fear of huge financial costs to defend their position generally makes the tenant back off and submit.

  Mr Kendall said "I would reiterate that our business really survives on a partnership".

  Comment: That is some word... partnership... the definition of partners needs to be explained to Punch| their belief is similar to that of people cohabitating suggesting it is the same as marriage but legally, spiritually and practically they are poles apart!.There is no real partnership relationship.

  Mr Kendall goes on to say In addition to the business relationship manager, we also have experts around property, machines and vending. What Mr Kendal ignores is the recommendation that Pubcos should not control any aspect of awp machines, [T&ISC 129/130]

  Q212 Miss Kirkbride: Mr Tuppen, do you roughly agree with those advantages?

  Mr Tuppen said : The sale of cask ale in our estate runs at about 14% and, as you know, cask ale is something that is very highly valued in this country.

  Comment: Reality is that nationally cask ale represents 6%. For Enterprise to achieve 14% would mean that all the rest of the pubs in the UK are achieving 3% or less. IS THAT REALISTIC? Proof is required. I would guess that Enterprise include more than "cask ale".

  Mr Tuppen also said "There is just one point, I think, for clarification that I would like to draw your attention to, and I am sure you have read it, but the 2004 TISC inquiry did conclude that "the tie usually balances the costs and benefits available to tenants" and that "the existence of the tie provides demonstrable benefits to both tenants and customers alike".

  Comment: Mr Tuppen is right but the T&ISC also said that the "value equation" suggests that the countervailing benefits receive should leave the tied tenants the same position than if they were not tied at all [178] It went on to say they did not have sufficient data to confirm that point. The T&ISC covered this by recommending 144 and 145 which would have drawn together the whole detail of countervailing benefits, how they occurred, how they were accounted for by inclusion in the profit assessment, and how the Pubco would take their share of the "presumed greater profit" thus resulting in a greater rent for the Pubco.

  Mr Tuppen also said "the TISC in 2004 did not conclude that the tied tenant should be financially no worse off than the free-of-tie tenant." That was never a conclusion. It is a point being peddled frequently by the Fair Pint Campaign, but it ignores entirely all of the other benefits which Giles just referred to that we give to our tenants.

  Comment: He is most certainly wrong. The T&ISC said in 133 and 176 that they concurred with the EU, UK competition commission, and the Appeal Court, that the net cost of the beer tie makes them no worse off than if they were free of tie. The Appeal Court also concluded that the dry rent should be reduced to compensate for the higher prices paid for resale goods The proof that the tied tenant is not worse off can only be established by completing the Value Equation. Also it must be remembered that benefits received by the tenants are included in the profit and then shared by the landlord. And therefore so called benefits are not solely for the tenant and cannot form any part of the value equation. Mr Tuppen by his statement is advocating that the tied tenant should be penalised and should not earn as much as if they were free of tie. That is anti-competitive and should not be accepted!

  Q213 Miss Kirkbride said: Why do you like to push your pubs into long-lease tied agreements rather than managed or free houses? Why can they not be allowed to choose?

  Mr Tuppen replied: Well, we do not run a managed estate and we do have some free-of-tie pubs, just a handful.. For that, I also would stress the point that the tied system does provide for licensees a low-cost entry into the pub business. The average cost of a good pub, as you can fully understand, is £700-800,000.

  Comment: Now that figure of £700-800,000 is unsubstantiated. The value of a pub is based on a multiple of earnings, usually actual rather than perceived profit, allowing for borrowings to be capable of being serviced and the owner/operator earning a liveable income. Such a multiple would generally be in the order of a total of five times profit. Enterprise and Punch have values averaging the £700-800,000 figure but their valuation is not based on the profit of the pub but by including a proportion of the awp profit, listing fees income, insurance commission, wholesale profit and any other profit stream that they may make as a group, not as a pub. Technically they should not include those other income streams to value a tangible asset, to include them is tantamount to fraud. [See analysis of their 2008 accounts at the end]

  Q214 Miss Kirkbride: Do you have anything to add to that?

  Mr Thorley: In simple terms, we have around just over 200 pubs which are leased on a free-of-tie basis and one of the businesses that I was involved in was a free-of-tie pub company, so I have seen both parts of the equation. I made this point four years ago and it still is as valid today, that we could lease the pub for £20,000 income[INSERT BY ME... what he is really saying.. Let us be clear about this. The pub free of tie producing £40,000 a year before rent would support a rent of £20,000], 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 supply, and what you have is a very, very much lower cost fixed element, and the other remaining parts are changing all the time.

  Comment: This all sounds good. Thorley is suggesting that the sum of the wet rent and tied rent should equal the total rent, he appears to be advocating the PRIME PRINCIPLE which Tuppen Q212 disagrees with. But that is not what happens in Punch, he is not telling the truth. Following the policies of Punch that same pub would make not £40,000 before rent but £30,000 as a tied tenant, they would take half of that lower profit, that is £15,000 rent and in addition keep the £10,000 from beer and awp, totalling not £20,000, as Thorley suggests, but £25,000. That is where the deception is perpetrated.

  Q215 Miss Kirkbride: Can you give me an idea then about what is going on in your estate. How many of your pubs, taking both of you in turn, are making money for you and how many are making money for your tenants, and we have a rough idea of the average income, but just so that we know what is going on?

  Mr Tuppen: Over the last four years since the TISC inquiry, coincidentally to some extent, although I suppose, given the nature of the agreement, not that surprisingly, our income from pubs, our gross margin earned from pubs has increased by 7% and that is exactly parallel with the growth in earnings for the tenants which has gone up by about 7.2%.

  Comment: There is no proof that this is true. What is true is that EI takes 50% of their assessment of what they believe the pub should make, therefore if their assessment goes up 7% then their rent goes up 7% and that is the basis of their assertion that the tenants income is that it goes up 7%. Their statement is not based on fact.

  Q216 Miss Kirkbride: But how many of your pubs are on rescue packages or have gone bankrupt?

  Mr Tuppen responded. Currently, we have about 800 licensees who are receiving help and the average cost per month for us is running at about £1.3 million, so we have got about 800 pubs in, as I would describe it, some form of intensive care.

  Comment: Tuppens figures say this equates to £1,625 pcm or £19,000 per annum. If the average rent is £32,500 that means that 800 pubs will have a rent of £13,500 and he wants you to believe that the average rent for the group next year would then fall to £30.6k.

  Q218 Miss Kirkbride: Can you give us a flavour of those [closed or aided]for you?

  Mr Thorley: I cannot remember the order, but specifically in terms of aid where we are helping our estate, I think the number that we are helping is slightly higher. There are 1,800 of our pubs that are receiving, and there is a degree of double counting there, some form of rent concession or additional discount on beer, given the unprecedented circumstances in the market at the moment. In terms of the number of failures in the last year, I have not got the number of evictions, but there will be materially less than that. It is 575, of which we have relet 484 in the same timescale, so you can see net that it is just under 100 that have not been relet thus far.

  Comment: But the TSAW statistics available from Punch indicate that there are about 1,654 including those abandoned, changes to short TAW terms, notice, retail failure, customer failure etc.

  Q218 Mr Townsend refers to "whole idea of the business support that we are providing is designed to try and prevent business failure".

  Comment: Actually Mr Townsend probably means "closure" rather than failure. If a pub closes it would probably affect their banking/borrowing covenants and therefore it is essential to keep it operational almost at any cost.

  Mr Townsend also said I would also wish to make one point, that there is a sort of urban myth that has been propounded by various parties that the temporary support provided by companies in some way is repayable, and can I make it very clear that, as far as Enterprise is concerned, no amount of the business support that we provide in additional discounts or rental concessions is repayable; that is simply not the case. This is permanent financial assistance over a temporary period of time designed to prevent the business failing.

  Comment: This is simply not true, they frequently demand harsher trading terms and secrecy.

  Q219 Miss Kirkbride: You both have a rather eye-watering level of debt loaded up into your companies.

  Mr Tuppen replied: We have approximately £6 billion worth of pubs and we have approximately £3.6 billion worth of debt. That is a 60% mortgage. If you knock a few noughts off and if we had a £600,000 pub and a £360,000 mortgage, I do not think that you would regard us as reckless.

  Comment: Now what is the truth? Consider the facts using figures in the 2008 accounts. EI pubs are said to be worth 755k and borrowing is stated at 490k that is 65%.... Now here is the problem. The pubs have not been valued as pubs which could be bought and sold in the open market, if they had the values would have been in 2007-08 about 420k not the 755 stated, and probably 20% less today. The valuations in the annual accounts of both companies Enterprise and Punch include intangible income from wholesaling and listing fees that are separate to the retail operation of the pub all wrapped up, quite wrongly, as being tangible.

  Over the last year asset values will have fallen by at least 20% and so even using their own incorrect methodology which would mean they have borrowed 81% but if taken back to the retail profitability, and therefore their realisable value of 420k maximum then clearly the borrowing exceeds asset value. So much for the claims from Mr Tuppen, the company could be insolvent. See data at end of this report.

  Q221 Miss Kirkbride: —property prices or earnings, but that is a matter of conjecture.

  Mr Thorley: The vast majority of our debt, and I mean 95% of our debt, is on a long-term mortgage, it is 30-year money at a fixed rate. In terms of our business, we have £6.5 billion worth of property and we have revalued part of our portfolio down, reflecting the current market conditions, and we have just under £4.5 billion of debt, so it is less than 70% which, in a Mrs Beeton's school of finance, is the same as the vast majority of people have financed their houses in the UK where they have a 70% mortgage on a 25-year fixed basis.

  Comment: Now comparing that statement with the actual 2008 accounts figures for Punch they show asset values at 766k, 574k borrowing 75% ratio. The same argument applies to Punch as for Enterprise. Pub values based need to be based on retail and therefore realisable value, would result in less than 420k each which would reveal that Punch borrowing exceeds realisable asset value. [ Summary of the analysis of their 2008 financial statement are included at the end]

  Q227 Mr Hoyle: Out of?

  Mr Tuppen: Out of 7,500 pubs. I accept the point that you were trying to get to about pub closures, but pub failures may not appear in the statistics and I am completely prepared to accept that, which is why we specifically found these numbers for you. The 170 is about three pubs a week out of 7,500. Now, let us be very clear. There are people who, in very plain terms, are stealing from us from buying outside the tie and we have absolutely no hesitation at all when we catch them in, first of all, giving them a chance and saying, "Okay, you may have made a mistake.

  Comment: Neither myself or Fair Pint would advocate buying out of tie. We do recognise that some tenants, when driven to desperation or because EI refuse to supply on a debt issue, will buy out of tie to keep their pub open.

  The more important question is who is doing the stealing? If you look back to Q212 and 214 you will find that Mr Tuppen does not believe and will not support the PRIME PRINCIPLE while Mr Thorley tries to indicate that he does support the PRIME PRINCIPLE but from the figures he uses it actually confirms that he does not.

  Using the simplest of calculations both of the Pubcos by not supporting the PRIME PRINCIPLE are, in very plain terms, "stealing" [or perhaps more properly defined as misappropriating] at least £5,000 from every tenant under the guise of their lease terms.

  Mr Tuppen suggests that "Were each of our pubs to buy, outside the tie, one barrel a week, we would lose £7.8 million in income."

  Comment: Examination of the accounts for 2008 show that EI earned £352 million from its liquor. If those figures are equated to a single pub that would be [352m/7763pubs] £45.3k per annum or an average, assuming 200 barrels a pub, of £226 a barrel. Now if there was one barrel lost per pub per week the figure of loss would be [352m/52] £6.76 million and not £7.8 million.

  Q232| Mr Hoyle: So it is not the breweries, it is the wholesalers that are all on back-handers?

  Mr Tuppen: No, I did not say all of them, I said in certain instances, and we will happily provide you with evidence.

  Comment: This is interesting. Since pubs are a cash business they often pay for goods in cash. In fact Enterprise and Punch often demand that tenants either pay in cash when goods are delivered or they must take cash to the bank and only after they have supplied a stamped cash pay in slip to them will they deliver. Up to 45% of the pubs in South Wales have to follow this rule. This raises the question.... When deliveries from Enterprise suppliers are made on a cash only basis what proof is there that all that cash and vat is properly accounted for. When these issues are raised... what is sauce for the goose... is sauce for the gander.

  Q235 Mr Hoyle: Come on! It is so serious, yet you are telling me that you do not know.

  Mr Townsend: Please let me finish, and this is so serious. We have got photographic evidence of where wholesalers have been providing equipment to our pubs to allow them to bypass the beer-flow metering equipment that we put into our pubs in order to ensure the validity of the contract that we have with them, and we have got evidence of wholesalers who have done that.

  Comment: The tenant has every right to have the wholesaler supplying and installing the necessary pipework for guest beer or cider. The wholesalers properly supplying guest ale should not go through the Enterprise system or the Brulines system. But Enterprise do not mention this in their evidence.

  Q247 Chairman: But you control the price at which you sell it to them. Can I just ask our colleagues, the Gileses, if they have any observations on this problem about stealing from pubs. Do you recognise it?

  Mr Thorley: The reality of the situation is that the factors that will affect the price of beer are very, very significant, and I would refer you back to our submission and the TISC in 2004. It is in Hansard [sic] Ev 239, Table 2 on page 34 of our submission, and it breaks down a whole heap of things.

  Comment: The comparison Ev 239 shows a false picture. There are four examples shown as negotiable when in fact the reality is that there are none.

  Thorley: We know in everyday life how business works in terms of determining price and it can be a number of factors.

  Comment: When constructing the profit assessment and the rent computation the elements affecting discounts, distance, supply etc should all be reflected in the calculation with the objective of defining what retail profit and rent the pub would yield as a free of tie house and then subsequently what adjustments should be made to the rent to compensate for being tied, eg a deduction for price differential and the double take of awp income. That is the essential "Value Equation" which Punch and Enterprise will not support or produce.

  Q255 Mr Bailey: First of all, it has been put to us that prospective tenants are seduced by pub companies' websites, publicity agents and so on and they submit business plans which are accepted and then subsequently prove to be unacceptable to the tenant.

  Mr Tuppen: We can answer that. One of the things that, I think, is hugely important is that we do not want the wrong people in our pubs.

  Comment: That is why Pubcos will not approve assignment unless they are happy with the incoming tenant.

  Mr Tuppen: Specifically, and Simon has got the numbers, on assignments where the incoming licensee is not actually transacting with us, they are buying a lease at some market value from a third party, about one in three get through, so we turn down two out of three business plans.

  Comment: In fairness Valuers and Agents selling pub leases have to take much of the blame. Invariably those Agents also work for the Pubcos. The problem is that Valuers have been selling on a multiple of the tenant profit rather than a multiple of the goodwill. That has always been a dishonest practice which has been endorsed by Pubcos. As a generality the Pubco asks the potential assignee to submit a business plan, and any sensible plan would include the purchase price of the lease and the financing of that purchase price. The Pubco by approving the assignment know the full projected financial picture.

  Mr Townsend: Under assignments, we have the right to refuse our consent to assign for somebody to sell the remaining portion of their lease to somebody else. We have the right to refuse consent if we do not believe that the business plan is sustainable or that the track record, qualifications or the financing of the person buying that lease are sustainable. To make it very clear here about the difference between assignment and new letting, over 50% of the people who come into an Enterprise pub have actually paid somebody else, paid a capital sum to somebody else for the remaining portion of their lease for the rights to run that pub on the lease which is specified with the terms and conditions in that lease and they have paid an out-goer for the right to be able to do that. ...We clearly have an interest in that transaction and we do our very best to make sure that that transaction is correct and that the information shared between the parties has been complete.

  The final point I would add is that,... inexperienced people coming into a pub must have their business plan signed off by an independent financial adviser as well as a mandatory condition that they take legal advice as well, so we make that very clear. It is not in our interest to allow either naive business plans or over-optimistic business plans which could, therefore, result in a business failure.

  Comment: This reaffirms the fact that Pubcos do validate assignments, cash flows and profit projections relative to the new proposed tenant. They therefore know all the details.

  Some Unique and Enterprise leases state unequivocally that rent is insured for a two year period, but it does not state the terms under which a claim could be made by them. Deceptive? Also what Mr Townsend he has not declared is that when a business fails they will extract the maximum they can under personal guarantees right up to individuals bankruptcy.

  Q257 Mr Bailey: I think, in fairness to the person who submitted the evidence, the term "seduced" was mine. That is what, I think, was a reasonable interpretation of the evidence that was submitted.

  Mr Tuppen: On one thing relating to that, we made it very clear that we do have 90-day cooling-off periods and that was increased following the TISC 2004 from the then 28 days.

  Comment: When a person takes on a tenancy it takes them at least three months to get their feet under the table, a further six months to try and bring into line and under control and a further six to 12 to review their real financial position... that is two years minimum. That perhaps is why the tenants on average change every three years... one more year it may take for them to get out!

  Q260 Mr Bailey: Brulines—there are complaints that they are designed to measure beer and potential fraud, but actually they fail to distinguish between water going through the process and the result is that there have been false accusations made against tenants. Could I have comments from those who use Brulines?

  Mr Kendall: Yes, I can comment on that. You can actually measure the water that goes through, so that is not factually correct.

  Chairman: Could we have a technical note on that rather than spend time on it now?

  Comment: Any technical note should be supported by a factual example. In the few cases I have examined there was no mechanism to differentiate between... water.. the cleaning fluid passing through the pipes or the beer lost at commencement of cleaning or resumption of service. The statement by Mr Kendall I believe is false.

  Q262 Mr Bailey: Lastly, there are clauses in some pub sales that premises cannot be used as a pub again after they have been sold.

  Mr Tuppen: We tend to put these covenants in if we have an area that is substantially "over-pubbed". I think there is agreement that there probably are too many pubs and the current economic climate is probably making it less possible for the unviable to survive.

  Comment: Is it not true that if you sold as a pub you would have to reveal its trading history and condition? Invariably that would create a very low price. It is therefore better to sell as a piece of property not to be used as a pub but for some alternative use and get a better price. That is up until right now when the credit crunch impedes even that course. It is accepted that where an area is over pub'd then cessation may be better for the remainder. However the real problem is that if a freetrader took the pub, dropped retail prices etc because of their freedom then it would be unfair competition to the tied pubs and it could kill those tied pubs in the vicinity; therefore alternative use sale protects and perpetuates the Pubco model.

  Q263 Mr Oaten: So is it in your business plan to help that natural reduction happen?

  Mr Tuppen: We will be looking to sell any pubs that we do not see as being viable. What is the point of having a point where somebody may over-enthusiastically take it on only to fail? If we just cannot see the possibility of a business plan coming together that could give a proper living to somebody, why on earth would we do that? Now, your point about the residential market is fair and in the current market it is very difficult to sell pubs, but we are still selling. If a pub really has no future, the best thing to do is to sell it for some alternative use.

  Comment: But their judgement that it may not be viable rests with their view of what the rent should be as a tied house. A sole trader, selling say real ales and specialist lagers may well find they could make a sustainable profit and a good living but a Pubco would not tolerate because it does not fit their blinkered model. If such a sole trader took possession then it would wreak havoc on the tied pubs in the vicinity.

  Q264 Mr Clapham: Just turning to the point you made a little earlier when you referred to a re-evaluation of your estate, did it indicate that you have previously been over-valued?

  Mr Tuppen: When this valuation was done, it was done on a pub-by-pub basis because you do not look at the whole thing and value it on a spreadsheet, like a banker might.

  Comment: This is not a true statement, in fact it is very deceptive. To conform to accounting standards| true and fair view| the valuation should be on the basis of the open market value, ignoring any purchaser with a special interest such as a wholesaler, assuming that the pubs were not part of a fire sale but reflect a realisable value that would look to the profit of the business to be able to both fund realistic debt levels and a liveable income for the owner operator, and that is the basis on which a banker may consider support.

  The valuations are in fact carried out on the basis but the profitability of the pub is enhanced by the additional profit that can be achieved by the special purchaser namely a wholesale profit stream plus any other profit stream that may be developed such as listing fees, awp royalties, top slicing of awp income etc. In other words the properties are not valued on their realisable value or an individual basis. The profit base that should be used for individual valuation is inflated. Instead of valuing those other income streams as separate, intangible, assets they have been merged with a view to increasing the apparent tangible asset worth[2].

  Q268 Mr Clapham: Given your reply to Mr Oaten regarding the market and the likelihood of some closures, what would you do there? Would you put them in a land bank, ready to sell for development at some time in the future?

  Mr Tuppen: We are tending to sell them on a regular basis. We are selling five or six pubs a week at the moment.

  Comment: That is 300 a year, 1500 over five years and that 20% of your estate, or 4% per annum.

  Q270 Mr Clapham: On to the rent situation, when a prospective tenant is moving into one of your public houses, do you divulge to them the previous sort of performance of that public house? Do you tell them about the bankruptcies, if there have been any bankruptcies? Do you tell them about the performance of the last person in that public house?

  Mr Townsend: I am almost sure that we would not divulge the personal information relating to the prior occupier of a house and the personal financial situation, but the trading history of the pub, absolutely. We will share with them the information that we have available, and that is typically the sales of products that we make into the pub and the share of gaming income that we may have enjoyed from the pub. We do not have access to the pub's books in the circumstances of either a new let or indeed an assignment. As has wrongly been suggested to this inquiry on an earlier occasion, we do not have access to the tenant's books.

  Comment. It is a fact that virtually all Pubco leases state that copies of VAT returns and the annual accounts must be supplied on request, and so they do have access. Throughput volumes can have no bearing upon profitability and to suggest that it would have is deception at best, fraud at worst. (SEE END ATTACHMENT.)

  Q271 Mr Clapham: Mr Thorley, on that question of divulging to the person who is coming in the previous financial performance of the property, do you do that?

  Mr Thorley: Yes, we do and not only do we provide the volumes that we have provided, but we will also provide, and we do this at the same time as a rent review, a breakdown of our calculation of the rent, and it is in Appendix 3 in our submission, so you can see a clear breakdown of our expectation in terms of the volume, the gross profit on each product line and how the rent is calculated.

  Comment: I have not seen the Appendix 3 referred to but I would almost certainly guarantee, without sight, that the gross profit margins have not made an full allowance for pipe cleaning, line by line, or breakages or normal anticipated cash shortages or staff drinks all of which should be in detail in the supporting data. Also the wages will not be broken down in any form of realistic manning schedule, and neither will the operating costs. The price differential between the open market prices and what Punch charge will not have been included in the profit assessment or adjusted in the rent computation. Also neither will the extra take from the awp machines have been included in the profit assessment or the rent computation. The claim of giving full information is spurious.

  Q272 Mr Clapham: Given what we have said about the re-evaluation, have you had a re-evaluation carried out of your estate or do you intend to do that?

  Mr Thorley: We did as of the end of August and we actually reduced the value of our estate by just under £300 million, really more focused on the part of the estate which, we think, is struggling where the valuations are not sustainable.

  Comment: Above the answer to Q264 and footnote applies. The valuation of the estate is based not on the individual profitability of each pub but that figure plus all the other intangible income streams. Those other income streams should form the basis of an intangible asset valuation. By merging profit sources the tangible asset value can be inflated to justify greater borrowing. This is highly questionable.

  Q274 Mr Clapham: With regards to the rents, and this is a question to both companies, are you sort of changing any of the clauses that refer to upwards-only rent reviews? Have you still got upwards-only rent reviews?

  Mr Townsend: I think our position on upwards-only rent reviews is very widely known. We do not enforce any upwards-only rent review clauses in our business. There is no upwards-only rent review clause in any Enterprise agreement that has been issued since 1997.

  Comment: Not true! The 2006 Retail Partnership agreement includes in Schedule 3 provision for the rent to be increased annually by RPI and if the RPI falls then the rent remains the same.

  Mr Townsend: and, in every agreement that we have acquired since then, our Code of Practice overrides any clause within the lease, so, just to be very clear, we do not rely on an upwards-only rent review clause in any circumstances.

  Comment: But many rent invoices each month contain an a figure greater than the rent agreed at the last review because it does include RPI increases.

  Mr Townsend: Now, there are agreements which have that clause within them and that clause can be removed. There is a legal cost associated with that, I think one of the gentlemen from the trade associations mentioned it, and I can tell you that it costs about £500.

  Comment: A more realistic figure of £100 has been mooted. It is a straightforward "Deed of Variation" same words for every lease to say... the clause relating to upward only rent reviews and any annual increase in rent is hereby removed.... It can be duplicated by the hundred and all that would be required is the name of the pub, date of the original lease, date exercised, signed by a Director of the Pubco and lessee. The problem is that if the Pubco does this then it devalues its estate because without that Deed they can sell the property as being with having an annual RPI increase in rent.

  Mr Townsend: It is a straightforward legal cost to remove that clause from the agreement by deed of variation for ever. That can be done by anybody at any time merely on paying the cost associated with doing it. Any lessee, on renewal of their agreement, can also renew on to a new Enterprise agreement with no change to the commercial terms at all.

  Comment: It is absolutely essential that the clause is removed by Deed of Variation. Should a Pubco sell to another Pubco or even a property company, which has been done frequently in the past, that new freehold owner can say... the lease states UORR and RPI and we will apply |. and the tenant can do nothing!

  Mr Townsend: Again, completely contrary to the evidence that was given by an earlier witness suggesting that we try and negotiate wider conditions in return for removing, it is absolutely not the case.

  Comment: There is proof to support that witness... but it was recommended that you do remove UORR, which includes RPI, by the T&ISC after six months of their investigation but you have not done this.

  Q275 Mr Clapham: Mr Thorley, can I just ask you the same question?

  Mr Thorley: if anybody wishes to have a deed of variation in relation to removing that for ever, I will happily make sure that we instigate that.

  Comment: But Punch have still included annual RPI increases in their new leases. Unless I am mistaken the RPI has never fallen which means that it will always go up. It should be removed totally from all leases by a Deed of Variation.

  Q276 Mr Clapham: It is interesting that you both have said, "As the re-evaluation has come about, we've seen downward rents, rents coming down". Do you pursue a policy at all now to ensure that your tenants are in receipt of a living wage?

  Mr Tuppen: Yes, absolutely. Whenever we look at the potential for a pub, we always consider that there is no point in letting that pub at a level where the tenant cannot survive. There is absolutely no point in our maintaining a pub where it is impossible for the tenant to earn a decent living.

  Comment : To the best of my knowledge there is no evidence supplied to support that statement. Enterprise generally state in their lease[3] that annual accounts must be supplied to them by their tenant as a condition of the lease. It should be possible for the Auditors of the company [so as to be independent] to aggregate all the profit and loss accounts for a given area such as South Wales, or Worcester plus Warwickshire plus Shropshire and give an average true profit and loss account which will show the true factual position of turnover, costs, rent etc culminating in an equation to see if the PRIME PRINCIPLE is observed and also if the average tenant[s] earn more than the national minimum wage assuming that all tenants work 60 hours per week. It may take a few weeks to prepare but it would supply the true and provable answer; and it would prevent the Pubco cherrypicking.

  Q277 Mr Clapham: Finally, given that you say you do not have access to the books, do you encourage your tenants to actually use given accountants or solicitors?

  Comment: See footnote 2.

  In the more current leases for Enterprise paragraph 23 says "within three months of the expiry of your trading or accounting year you must supply us with a copy of your trading accounts and... provide a copy of each vat return within one month of submission".

  Q278 Mr Clapham: Mr Thorley?

  Mr Thorley: Yes, in our introduction to the new agreements on the first page, it sets out all of the advisers that should be needed for a pub and in relation to all new agreements they use a company called Milestone which provides accounting services specifically for pubs and again on a very favourable rate to make it as competitive as possible because we do not want to burden them with undue costs.

  Comment: So not only do Pubcos insist on having annual accounts submitted to them they even suggest the name of a firm that can produce them.

  Q279 Mr Clapham: So, if you have got pubs in my constituency out on that west side, I can tell my landlords and landladies that rents are coming down and they are going to survive?

  Mr Townsend: We can make it very clear that rents should be at the right level. It is completely counterproductive for us to "over-rent" a pub on any occasion. The primary objective is to make sure that the rent is the right rent for that pub and a sustainable rent for that pub, providing the lessee with a sustainable living.

  Comment: While he states Pubcos do not want to "over-rent" neither Enterprise or Punch will observe the ESSENTIAL FIVE Recommendations from the T&ISC which would enable the point to be proven. They cannot prove their statement and they clearly indicate that they do not support the PRIME PRINCIPLE.

  Q282 Mr Wright: Going back to the wet rents issue again, we have established that the pubcos do lease their pubs free of the tie, but can you just tell us what proportion of your business is free-of-tie? Also, what differential is there between rents? I think, Mr Thorley, you pull in £20,000 for a free-of-tie with an £8,000 rent and obviously £10,000 for the wet rent and £2,000 for the machine. Would that be the sort of 40% mark? Would that be possible?

  Mr Thorley: Yes, I have actually given the breakdown in our submission between the different income streams, so it is roughly that. I can refer you to the page. It is actually in the summary on page 2. It is 44% rent, 50% beer margin and 6% machine, so that is pretty close in terms of the numbers. We have a couple of hundred pubs which are leased on a free-of-tie basis and they reflect the circumstances of those pubs, so we will take that into consideration where it is relevant in terms of the strategy of the pub.

  Comment. Mr Thorley has dogged the question. See Q214 and comments|.. Thorley is suggesting that the sum of the wet rent and tied rent should equal the total rent, he appears to be advocating the PRIME PRINCIPLE which Tuppen Q212 disagrees with. But that is not what happens. That same pub he illustrated would make not £40,000 before rent but £30,000 as a tied tenant, they would take half, that is £15,000 rent plus the £10,000 from beer and awp, totalling not £20,000 as Thorley suggests but £25,000. That is where the deception lays. Punch are not taking the same as would a free of tie pub but more|. much more £25,000 instead of £20,000 and that £5,000 difference comes straight out of the tenants pocket. Using their own figures Punch take not 50% but 62.5%. The examples of odd pubs that may be Free of tie or restaurants are of no significance if the assessment is carried out properly and the Value analysis properly calculated. What has to be remembered is that when a pub is free of tie Punch lose the extra wholesale profit of about £100-120 a barrel.

  Q287 Mr Wright: So, if a potential tenant came to you and said, "Look, I don't want this tied, I want this free-of-tie", would that be offered to him or would you say, "Sorry, but we're not going to do it this way because we can see the potential for ourselves"?

  Mr Thorley: Well, I think the answer is that we would look at the circumstances of that pub and if it was suitable for that type of operation. Remember, as we were discussing earlier with Mr Bailey, we do see the business plans and we get an idea of what is happening, what is proposed in that pub and that will give us an idea.

  Comment: What Mr Thorley has not revealed is that if this were a pub that was doing 200 barrels the tenant would get in the open market about £100, whereas Punch would only give them £40 a barrel. It looks like there is a difference of 200 barrels at £60, £12,000 as a difference and that is what they may ask as additional rent if it were free of tie. The sting which they will not reveal is that if they let that tenant free of tie they would lose their extra wholesale profit. They get about £220+ a barrel, usually give only £40 but if the pub was free of tie the tenant would buy elsewhere and then the Pubco would lose the wholesale profit of 200 barrels at [220-100] £120 = £24,000. Of course they will not let that pub go free of tie. Arguments of suitability will be balanced against that extra £24,000 they may lose.

  Q289 Mr Wright: Not just for that course, but overall. In other words, what is the difference between a tied pub and a free-of-tie pub in terms of the benefit that you would suggest that you give to them in terms of training and the whole package which they themselves would have to pick up if they were free-of-tie? [That is the question!!!]

  Mr Townsend: I am sorry, I am not sure I have completely got the question. We clearly provide an array of services and I think the Punch gentleman described the detail of some of the services that we provide. That is the whole emphasis of our business, it is what we do to try and help pubs be successful, so, whether you have got the regional manager as a business adviser with the investment we have put into regional managers in the last couple of years and the investment we have put into systems and tools to enable them to spend more time in pubs, we have got 30,000 quality business reviews which have been undertaken by regional managers in the last year and 8,000 property reviews by the regional property team. Now, we believe that is a very added-value service. There will be some protagonists to the tie who will say that the regional manager adds no value.

  Comment: If there were any value that could be attributed to the efforts of regional managers etc then the value would pass into the profit assessment of which the Pubco gets half. Remember that Pubcos and Valuers generally project turnover and margins higher than those being achieved and costs lower than those being expended. The effect is that the projected profit is substantially higher than being achieved or achievable. If the regional managers can help the tenants get towards the projected levels then the Pubco has taken a cut of profit before it has been achieved. Unfortunately no comparison has been supplied between what the tenants actually generate and the profit assessment for rental purposes says it should be making. Such a measure as previously mentioned is important in order to establish if there is any consistency between actual performance and opinion of what the performance should be, upon which the latter has been used to establish rent. The truth needs to be transparent!

  Mr Townsend: I am sorry, I cannot argue that with them on an individual basis, but we passionately believe in the tie and we believe that the services that we can provide can help pubs be more successful, and clearly we are going to continue to try to do that.

  Comment: He has not answered the question. A tied tenant will pay an amount for training that is greater than a free of tie tenant. For some courses the free of tie tenant will pay nothing.

  Mr Tuppen: One tends to go into outfits and smaller numbers. In numbers terms, we provide training and we provide a free rating service.

  Comment: Is it not true that the rating service uses valuers that a Pubco would use for either the capital or rental valuation of their pubs? Secondly how many of the members of the free rating service use turnover to argue rateable value on behalf of the tenant compared with the more correct legal methodology of actual profit? I would suspect that many valuers use the turnover method in which case the free service is in fact a burden to the tenant. As a matter of both fact and principle turnover does not mean profit, rent is equated to profit on a projected basis while rates are equated to profit using actual data. The erroneous use of turnover as the method can cost tenants thousands of pounds.

  Q290 Mr Wright: I just think that is an add-on cost to a lot of the tied pubs which is probably unnecessary.

  Mr Tuppen: It is not just training, there are so many other things. What we can do, and I would be very happy to put this in a letter to you afterwards, are, for example, special buy-in deals where our licensees, because they are Enterprise licensees, at no kick-back whatsoever to us get things more cheaply than they could otherwise get them, so there are real benefits there. There are a whole series of things, and I would draw your attention again to the 2004 TISC conclusion which says, "The tie usually balances the costs and benefits available to tenants and the existence of the tie provides demonstrable benefits to both tenants and customers alike".

  Comment: He is not correct. The answer by the T&ISC was given in their 178 and 179. The truth is that the T&ISC did not receive sufficient data to judge the issue that there was balance. The fact is that the costs and benefits are actually included within the profit and loss account and so if the profit has increased then the rent has increased. Not only has the tenant benefited, if indeed he has, but so has the Pubco. That is why 144 and 145 are so important. Without that detail to give transparency a lie can be perpetrated and hidden, as I believe it has been. That is why neither Punch or Enterprise can supply that "Value equation". That is why 144 and 145 will not be accepted by Pubcos and that is why as a conclusion to this review freedom of tie is essential.

  Tuppen went on to say : I would very happily either find the appendix that went with that comment or perhaps give you an update to it so that you can get yourself more comfortable that there is real value because, I agree with you, if there were no value added, then the tie principle would be less tenable.

  Comment: The secret is that they get 50% of any improvement Enterprise deem to be possible in the future ... even if it does not materialise!

  Q292 Responding to Mr Wright who dealt with a single brewer and the question of removing the tie.

  Mr Thorley: That single brewer would not have been willing to provide its competitors' products. We are.

  Comment: Punch are a wholesaler as well as a Pubco. Mr Wright could have dealt with a wholesaler and still had the same benefits.

  Mr Thorley: Single brewer would not have been prepared to give a guarantee of supply for the remaining life of your tenure as secretary or for the life of the club. We are for the life of the lease.

  Comment: What poppycock. If Punch sell a batch of leases to another Pubco that claim is null and void!! Any new Pubco would efine its own suppliers and brands and Thorley knows that.

  Thorley: A wholesaler would not necessarily give you complete freedom in terms of your stocking. We do. Now, for an individual pub buying 200 barrels of beer a year, trying to deal to get the best market position which would logically be the number one products in each category, he has to deal with six different suppliers or he has to sub-optimise and deal with a wholesaler.

  Comment: Punch would give £40 a barrel and a wholesaler for those six beers would probably give £100 a barrel or more.

  Thorley: Now, that is the difference that we offer in terms of just the beer supply, so certainty of credit, certainty of terms, no minimum purchase obligations and guaranteed delivery on a 24-hour basis, six days a week, so we do provide a very significant service and we have put the infrastructure in.

  Comment: That is not entirely true. If a pub runs out and they deal with a wholesaler they can go anywhere and get supplies but with Punch if they go elsewhere they will be severely punished.

  Thorley: If the tie went, it would not be the individual pubs that would benefit, but, sadly, there are executives in Copenhagen or in Amsterdam or in Golden, Colorado or in São Paolo who would be sitting there, saying, "Now's our chance to reap more profit from the pub industry", and they are not going to plough that back into the individual pubs, I am afraid they are simply not, whereas we have spent £300 million on our pub estate in the last five years.

  Comment: The probability is that if the pubs became free of tie they would get £100-120 a barrel, the wholesalers would be buying with a discount of £200 a barrel making £80 to £100 and the brewers would be giving £200 a barrel away instead of the £220 to 240. Everyone would benefit except the Pubcos, but then they have created their own problem. Brewers have been squeezed and that is why when Pubcos want more brewers just put up their wholesale prices so that Pubcos blame the increases on them.

  Q294 Mr Wright: What would be the effect if the beer tie were removed?

  Mr Thorley said : 80% of our beer sales in the UK are still controlled by four major operators all of whom are foreign organisations, and they would simply redirect their efforts into off-trade promotions, their marketing efforts, and you would see a significant reduction in the amount of inward investment into pubs.

  Comment: If the rents were fair and sustainable and the tenant could have a liveable income then there is every possibility that the tenants could carry out improvements.

  Mr Tuppen said: Were the tie to be removed, we would indeed 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, and Giles gave similar amounts.

  Comment: If the rents had been fairer, and calculated in a manner that ensured transparency and a provable liveable income for the tenant, rather than the deceptive profit projections ensuring high income for the Pubco and slavery for the tenant, then the tenants would be self supporting. The Pubcos are squeezing harshly with one hand and offering a crust with the other proclaiming the crust to demonstrate fairness, help and goodwill, which we can all acknowledge as true deception.

  Tuppen said: We have an interest in the success of the pub that is exactly aligned with those of our licensees and the reality also is that, if the tie were removed, there would be even more pub closures and there would be a significant reduction in choice for the consumer.

  Comment: This is his Opinion. The alternative is that local brands would flourish, people would become more interested in local beers, tenants would have a liveable income, provided 144 and 145 were mandatory, and many more pubs would survive|.. but sadly Pubcos would not.

  Q296 Chairman: : The evidence on discounts is confusing and contradictory. We have heard particularly that supermarkets are passing on these discounts to consumers and, therefore, are undercutting pubs and the Association of Licensed Multiple Retailers give us completely different figures on discounts?

  Mr Tuppen: We have eight human beings who are the regional managers who are so roundly pilloried the whole time and who spend their lives trying to help pubs. We can show you the discounts if you spend time with us.

  Comment: The eight RM's have a job but the company policy is to ensure that the tied tenants are far worse off than if they were free of tie. The tenants are justified in pilloring Regional Managers for what is rightfully theirs. The issue is that the tenants are not being treated fairly in a financial sense The T&ISC recognised that and that gave rise to the ESSENTIAL FIVE Recommendations in conjunction with the PRIME PRINCIPLE. Mr Tuppen does not accept the PRIME PRINCIPLE|.. why? | because Enterprise cannot afford to|. because the Pubco model is based on the principle that the tied tenant should be worse off|. and then to make matters worse he will also not support the ESSENTIAL FIVE. The consequence of their obduracy is that the tenants are paying far too much for goods and rent| they are the ones suffering and because those so called "eight human beings" are toeing the Pubco line they deservedly get pilloried. Mr Tuppen and Mr Thorley cannot be brought into line voluntarily|. that was tried by the T&ISC|.remove all the ties and make them observe and practice the ESSENTIAL FIVE. To do otherwise encourages their anti-competitive practices which are inexcusable.

  Q301 Mr Binley: the question is about the arbitration process and cost?

  Mr Tuppen said : But the solution lies in support, which we give unconditionally, for the BII proposal to produce a £1,000 fixed-cost professional arbitration system. Now, we support this entirely and we are working with them because, I do agree with you, if you are to criticise the arbitration process, we can afford to pay £20,000 if we really feel strongly about it and the licensee cannot, and we have to change that process.

  Comment: Here at last is a part of the truth. Pubcos can bear the cost of arbitration but tenants cannot afford to. Pubcos can use their strength to pressure tenants into submission. However it has to be recognised that neither the BII, Giles Thorley or Ted Tuppen support the Prime Principle or the Essential Five T&ISC recommendations. The collusion between these parties is tantamount to a recipe for corruption and that coupled with the existing stranglehold of RICS and would be to the total detriment of the tenant. Removal of all supply ties, enforcement of the essential five recommendations and removal of the arbitration process from RICS to either a new team/panel comprised of the three disciplines or to the Chartered Institute of Arbitrators provided that they are not members of RICS could provide a solution.

  Q307 Mr Binley: Now, how much do arbitration cases cost and who bears the cost.

  Comment: The ultimate problem with arbitration is that none of the arbitrators or independent experts accept the Prime Principle or the Essential Five recommendations; That means that the outcome of any arbitration cannot possibly be fair. The tied tenant will always lose out. As for cost the Pubcos could be £20,000-£30,000, the Arbitrator £10,000 to £15,000 and the advisor for the tenant £15,000 to £20,000. The cost split 50/50 could be £25,000 to £30,000 but it could be that the tenant is saddled with the total cost for both parties, £50,000-£60,000 and then they go bust.

  BELOW:

REFERENCE Q270 THE FOLLOWING IS AN EXTRACT FROM A RECENT PROPOSED ENTERPRISE LEASE

23.  ACCOUNTS

  23.1  Within three months of the expiry of your trading or accounting year you must supply us with a copy of your trading accounts (including reasonable evidence of turnover) for the Business for the year in question and notify us of any changes in the dates of your accounting year.

  23.2  You must provide us with a copy of each quarterly VAT return for the Business within one month of the date of submission required by HM Revenue & Customs.

THE FOLLOWING IS A DETAILED ANALYSIS OF INFORMATION CONTAINED IN THESE TWO COMPANIES PUBLISHED FINANCIAL STATEMENTS

PUNCH TAVERNS PLC COMPARE 2007 WITH 2008

Punch financial report shows:	2007	2008
Value of estate	6.703b	6.467b
Number of pubs	9,064	8,442
Average value per pub	739k	766k	3.6% increase
DEBT	4.923b	4.852b
Av Debt Per Pub	543k	574	a 5.7% increase
Leased Pubs Av for year	7,873	7,572
Leased Pubs at year end	7,561	7,572
Value of leased estate	same	5.441b
Av value per pub	719.6k	718.6k
Leased Debt	3.673b	3.602b
Av Debt per pub	485.8k	475.6k
Total rent	235.0m	233.1m
Total awp	25m	25m
Total liquor	287m	285.6m
Per pub:
Guess at av brl per pub	180	180
Av Rent	30.0k	30.8k
Av awp	3.2k	3.3k
Liquor as wet rent est	12.6k	14.4k
Liquor as wholesale profit	23.9k	29.3k
Average pub profit as owner/occupied based on Punch estimates
And free of tie [APPOOFOT]	75.8k	79.3k
Ratio debt to APPOOFOT	6.4times	6.0 times
Ratio Value to APPOOFOT	9.5times	9.1 times
Shareholders funds	1.737b	1.930b est
Av Shareholders funds P P	191.6k	228.6k
% of share funds/property	25.9%	29.8%
Possible overvaluation
Of property per pub	341.1k	325.1k
Enterprise Inns plc Comparison of 2007 results with 2008
Value of estate	5.710b	5.859b
Number of pubs	7763	7763
Average value per pub	735k	755k	2.7% increase
DEBT	3.806b	3.802b
Av Debt Per Pub	490k	490k
Total rent	254m	253m
Total awp	25m	25m
Total liquor	352m	351m
Per pub:
Guess at av brl per pub	200	200
Av Rent	32.7k	32.5k
Av awp	3.2k	3.2k
Liquor as wet rent est	14.0k	16.0k
Liquor as wholesale profit	31.3k	29.3k
Average pub profit as owner/occupied based on Enterprise estimates
And free of tie [APPOOFOT]	82.6k	84.2k
[average pub profit owner occupied free of tie]
Ratio debt to APPOOFOT	5.9 times	5.8 times
Ratio Value to APPOOFOT	8.9 times	9.0 times
Shareholders funds	1.483b	1.548b est
Av Shareholders funds P P	191.0k	199.4k
% of share funds/property	25.9%	26.4%
Possible overvaluation
Of property per pub	322.1k	336.8k

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16.0 VALUATION OF THE PUNCH ESTATE

The Punch Estate comprises 4,304 properties. The valuation has attributed a single figure to the whole Punch Estate rather than individual values for each of the properties. In our opinion, the Punch Estate would be marketed as a portfolio and sold as a whole rather than as individual units. The valuation reflects the most likely manner in which the Punch Estate would be sold/offered for sale in the market.

We have deducted purchaser's costs of 5.75%. from the value of the Punch Estate. It is acknowledged that in practice large portfolios of pubs are purchased by way of a corporate acquisition and therefore stamp duty at 4.00%. would not be payable. However, a deduction of purchaser's costs at 5.75%. reflects the fact that a valuation of property is being undertaken and not a corporate entity.

From information provided to us in respect of the Punch Estate by the Borrower at the date of valuation, the Punch Estate had a net rental income of approximately £114,523,955 per annum exclusive and generated a barrelage volume of circa 936,734 barrels per annum.

In arriving at our valuation we have looked at each of the three levels of income referred to below, based on its respective security. The most secure income is inevitably the net contracted rentals from the occupational tenants which as we have stated above amounts to approximately £114,523,955 net per annum exclusive.

The second level of income is in respect of the discount which has been negotiated in respect of the Punch Estate with breweries for the supply of beers based on a total sales volume of circa 936,734 barrels per annum.

The third level relates to the income derived from machines and other unlicensed income from individual pubs. This we are advised by the Borrower currently equates to approximately £15,398,850 per annum exclusive.

We have attributed different yields to each element of income to reflect its "risk" in terms of potential growth and its continuity into the future. The overall "blended" yield for the respective different incomes has then also been applied to the annual cost, which totals approximately £11,709,700 of repairing obligations and additional management costs associated with the Punch Estate which are the responsibility of the Borrower. The management costs are based on 7.5%. of the annual net contractual income for the Punch Estate. With regard to repairs and maintenance expenditure, we are advised by the Borrower that the budgeted cost for the forthcoming year is approximately £3,120,000.

We are advised by the Borrower that this sum represents the average in unrecoverable repair and maintenance costs that would be expected for such a portfolio. Guidance has also been taken from the estimate of the costs supplied by Fleurets and based on their inspections of the Punch Estate Sample. The annual cost of repairs amounting to £3,120,000 has been capitalised at the blended yield and the resultant figure has been deducted from the gross value.

In accordance with our instructions we have specifically not made any deduction for the cost of buying out the Carlsberg-Tetley Agreement since we understand this is dealt with elsewhere in the accounts of the Borrower. The Valuation set out below represents the value of the Punch Estate as a whole and does not represent the sum of the individual property values.

17.0 VALUATION

We are of the opinion that the Market Value for the Punch Estate in its existing use, at the Valuation Date, subject to the assumptions and comments in this report is:

£2,339,000,000 (Two Billion Three Hundred and Thirty Nine Million)

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1   The accounts of Enterprise reveal a rent of £32,500 for 2007. Given that they calculate rent on 50% of the tied tenants profit means that they believe the tied tenant earns £32,500 Back

2   See Punch Taverns securitisation valuation of assets available on the Web showing the inclusion of all supplementary income streams. The following is an extract. Back

3   In the more current Enterprise leases paragraph 23 says "within three months of the expiry of your trading or accounting year you must supply us with a copy of your trading accounts and |.. provide a copy of each vat return within one month of submission" SEE END OF DOCUMENT Back

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Prepared 13 May 2009