Memorandum submitted by Interpub plc
We submitted a report in 2004 and would wish
to make the following observations to the questions that the new
inquiry has raised.
Has the Licensing Act 2003 had an effect on competition
within the market?
The power now lies in the hands of the Local
Authorities who also control planning, environmental and policing
matters. Thus there is a perception if not reality that the Local
Authority acts as policeman, judge and executioner in the first
instance. It is only at appeal to the Courts that any injustice
can be corrected.
Some councils are overzealous in their desire
to "control" licensed activities and trading hours to
make their life easier with the residents who vote them in. Business
operators who don't reside in the Area have no say even though
they pay huge levels of rates. It is possible for a single resident
to cause significant "nuisance and noise" as part of
the review process and the operator is often painted as being
"guilty" until proven otherwise rather than the reverse.
For example the issue of outside drinking which
has been part of the culture and ambiance of certain areas is
now being challenged by a few residents and councils who take
little or no account of the fact that the pub has been there for
centuries and that civilised street drinking in the summer is
part of the ambiance. Nobody wants a noisy new outlet to open
in a quiet residential street but outside drinking in an area
where it has always taken place should not be challenged in the
same way. The Licensing Act was not designed to change previously
established and accepted norms.
The fact that there is no "independent"
person at the initial hearing to take an impartial view is a weakness
in the system and leaves the impression that the Local Authority
is all powerful.
This in itself can effect local competition
especially where different authorities take a different view for
example on terminal hours. If a pub enjoyed a late closing hour
say until midnight or 1am prior to the Licensing Act 2003 due
to its operators business ability and the neighbouring pubs did
not it had an advantage. Many other pubs have been granted later
licences now but some councils, notably Westminster, have policies
not to grant new licences with hours later than midnight or 1am.
Thus the pub whose trade (and therefore rental assessment) benefited
from the later trading hour prior to the Act is now commercially
To what extent has revisions to the framework
codes of practice met the committees concerns?
It would appear that most pubco's have adopted
codes of practice that deal with rent reviews, disputes and difficult
trading circumstances. Whilst the codes do provide a framework
for discussions they give no absolute guarantees and the operator
has to rely on the relationship they have with the pubco's representative
rather than a legal framework that gives more certainty.
Short of insisting that the codes become part
of the legal agreement between the parties it is difficult to
see how they can become more effective, especially when the economic
climate is tough for both parties and each side needs to fight
To what extent are the codes applied by the pubco's?
As stated the codes do provide a framework for
discussion and it appears that the pubco's are more actively discussing
issues with their tenants and lessees. Whether this is a genuine
desire to help out in difficult circumstances or a response to
the fall in Share Prices and the fact that the Committee is asking
these questions is debateable.
Even if we assume that there is a genuine desire
to help out, and there may well be, there are still key areas
of dispute that remain:
1. The assessment of Fair Maintainable Trade
and how this is affected by market conditions between reviews.
2. The ability to actually obtain a rental
reduction either between or at review.
3. The absolute price of beer for Tied tenants
and lessees compared to those who operate free of tie or to managed
houses operated by the pubcos.
4. The share of machine income which is
often described as 50/50 but in reality is 75/25 as the rent calculation
takes a further 50% of the tenants share!!
Is there a need for further regulation in the
In our previous submission we stated that we
did not wish: "to throw the baby out with the bath water
but rather that the industry should be encouraged to get together
and hammer out a code of practice that guides the way the landlord
and tenant relationship should be developed over the coming years
in such a way that there is a genuine perception of fairness in
the balance of power". We went on to say that: "we live
in an uncertain world climate and that a tenant or lessee only
has to have a swing of 10% of turnover to go from utopia to bankruptcy".
Sadly the truth of that statement is all too
starkly apparent in the current economic climate especially as
not only are overall sales down but the cost base is significantly
increased. (Please make reference to the ALMR Benchmarking Survey)
The effect of the Tie does little to help the situation as the
operator is unable to obtain products at best market prices. Some
pubco leases now tie much more than the beer which makes the situation
even worse. Please see attachment 1 for an example of tied versus
free of tie operating margins.
The cost of operating long leases where the
lessee has full responsibility for the upkeep and repair of the
property is now too great unless they have complete freedom to
negotiate the price they purchase products for.
We do not believe that the model is sustainable
in its current form as all of the increased operating costs are
borne by the lessee not the landlord. The income streams enjoyed
by the pubcos before the economic downturn meant that they were
able to borrow with relative ease which in turn led to a hike
in the price of licensed portfolios. They now have more of a struggle
to pay for these borrowings and it is the operator who is squeezed
the most followed by the suppliers of products. The pubco is in
effect the new "brewery". There is significant pain
in the UK pub industry at present and the model does little to
help that situation.
Whilst any upheaval, due to further legislation
on the tie, would be regrettable and painful for the industry
we do not believe that tied long leases are a sustainable model.
We also believe that a majority of operators on long leases would
rather have a commercial agreement with a landlord with a slightly
higher fixed cost in terms of rent but with the commercial flexibility
to negotiate the price for products. Many "tied" rents
are now at a level where the "competitive disadvantage"
of being tied is in no way addressed by the limited discounting
of some products and the so called added services such as marketing
It is therefore our position that the tied long
lease, just like the tied cottage of feudal times, has no positive
benefit to the industry; in fact the reverse is the case.
2008-09 Free of Tie Margins versus Tied
||Margin %||Annual Margin £
| Free Pub Co Lease||387,866
|Free Commercial Lease||950,634
|Free Commercial Lease||494,549
|Free Commercial Lease||605,885
|Tied PubCo Lease||388,867
|Tied PubCo Lease||343,819
|Tied PubCo Lease||628,689
|Tied PubCo Lease||813,937
|Margin loss %
||Margin loss £|
|Average Tied House||543,828
29 September 2008