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
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
It is important to identify what has not been
said, what has not been done.
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
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
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
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
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,
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
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
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
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
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
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  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
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
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
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
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
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
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
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
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
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: Brulinesthere 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
Mr Kendall: Yes, I can comment on that. You
can actually measure the water that goes through, so that is not
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
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.
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
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
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
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
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
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
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
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
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
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
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
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.
REFERENCE Q270 THE FOLLOWING IS AN EXTRACT
FROM A RECENT PROPOSED ENTERPRISE LEASE
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
2007 WITH 2008
Punch financial report shows:
Value of estate
|Number of pubs||9,064
|Average value per pub||739k
|Av Debt Per Pub||543k
||574||a 5.7% increase|
|Leased Pubs Av for year||7,873
|Leased Pubs at year end||7,561
|Value of leased estate||same
|Av value per pub||719.6k
|Av Debt per pub||485.8k
|Guess at av brl per pub||180
|Liquor as wet rent est||12.6k
|Liquor as wholesale profit||23.9k
|Average pub profit as owner/occupied based on Punch estimates
|And free of tie [APPOOFOT]||75.8k
|Ratio debt to APPOOFOT||6.4times
|Ratio Value to APPOOFOT||9.5times
|Av Shareholders funds P P||191.6k
|% of share funds/property||25.9%
|Of property per pub||341.1k
|Enterprise Inns plc Comparison of 2007 results with 2008
|Value of estate||5.710b
|Number of pubs||7763||7763
|Average value per pub||735k
|Av Debt Per Pub||490k
|Guess at av brl per pub||200
|Liquor as wet rent est||14.0k
|Liquor as wholesale profit||31.3k
|Average pub profit as owner/occupied based on Enterprise estimates
|And free of tie [APPOOFOT]||82.6k
|[average pub profit owner occupied free of tie]
|Ratio debt to APPOOFOT||5.9 times
|Ratio Value to APPOOFOT||8.9 times
|Av Shareholders funds P P||191.0k
|% of share funds/property||25.9%
|Of property per pub||322.1k
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.
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
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
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
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