Memorandum submitted by Simon Clarke
1. RENT REVIEW
We have a small, back street community pub,
The Eagle, we had a rent review due in November 2006. In May 2006
having, heard nothing from our landlord, Enterprise Inns plc,
we instigated negotiations and requested a rent review notice.
Our Business Development Manager (BDM) sought to agree the rent
by discussion, indicating the formalities could be bypassed, and
implying a rental increase from £52,000 to £70,000 might
be provable but he would settle for £59,000 if we agreed
without a quarrel. We again asked for a rent review notice, refusing
to discuss the matter until it was received. Eventually a notice
arrived but without a proposed rent, this threw into question
the validity of the notice itself so we again requested a `valid'
notice with a proposed rent.
We believed the pub to be over rented and were
seeking a rent reduction, both our BDM and Enterprise Divisional
Director indicated that the rent could not go down given we had
an upward only rent review (UORR) clause in our lease. When we
pointed out that Enterprise Inns had given statements to the Select
Committee in 2004, to the effect that they would no longer enforce
UORR clauses, we were told that we should check our sources. We
subsequently sent a copy of the relevant statement to both the
BDM and Divisional Director of Enterprise Inns and asked them
to confirm that the rent review clause would not be enforced (see
copy email dated 24 September 2006). Neither responded to our
request.
Even a basic open market rental valuation requires
a number of variables, barrelage, rate per barrel, gross profit
and costs. Whilst Enterprise Inns provided a rental calculation
we repeatedly asked them to offer evidence to support the variables
used therein (I have dozens of emails to prove it). This evidence
was never provided and as a result we began to suspect that Enterprise
had simply established a desired rental and manipulated a valuation
to fit. After several months with no progress we suggested that
the matter should be referred to Arbitration. Enterprise Inns
seemed reluctant to proceed to third party (presumably as they
knew the property to be over rented) and would not respond to
our request preferring to continue, after the rent review date,
with us paying the previous excessive rent. This was unacceptable
and we, the tenants, referred the matter to Arbitration (relatively
unheard of). Even self represented against Enterprise Inns appointed
professional representative we successfully argued that the rent
should be reduced.
The Arbitrator agreed with our view and concluded
that the rent should be reduced by approximately 12% from £52,000
to £45,750. To the best of our knowledge this is the only
time a tenant has successfully taken Enterprise Inns to Arbitration
and succeeded in arguing a rent reduction. In total the whole
exercise took more than two years and remains undocumented by
Enterprise Inns.
Our point is that there was no transparency
in the method in which the rent was calculated and that the Pubco
tried to deceive us in both the negotiation and, later, in respect
of their position on UORR's. We were lucky, Enterprise Inns had
overlooked that I am a qualified Chartered Surveyor with several
years experience in rent reviews, we had no professional fees
to meet in the procedure. To an average tenant, the cost would
have been to the order of £20,000 for their own professional
fees. If they lost they would been liable for both the entire
Arbitrators fee (£14,000 in this case) and those of Enterprise
Inns, in total they would have to risk in excess of £54,000
just to prove their opinion of value was right.
Given our rent was £52,000, I believe any
one will agree, to risk over a years rent on a one man battle
against a FTSE 100 registered company, with a property portfolio
of around 7,500 pubs worth around £5 billion and a share
value of over £4 billion (at the time), who have appointed
a former Director of Humberts International, with over 20 years
experience, in pub valuations and rent reviews, might be somewhat
unwise. We, however, needed to make a point and fight our corner,
for all tenants—and we were proved right.
I believe the technique is nothing more than
"bullying" and the reason so few tenants proceed to
third party referral is the cost and time implications, if they
lost it would mean probable bankruptcy. A nominal increase in
rent, justified or not, is still considered a lesser risk than
Arbitration. Enterprise Inns will argue that there are few tenants
taking rents to Arbitration—I consider this is not an indication
that they are satisfied with the valuation it is an indication
that they are too scared to take the risk.
From 13 June 2006 we asked the BDM on at least
13 occasions to supply information substantiating their rent proposal,
it never came.
We had a good result, our rent was reduced.
We remained, however, of the opinion that the Arbitrator had made
a mistake in his assessment of the variable, gross profit, and
that his Awarded rent was still unrealistically high. In accordance
with Arbitration legislation we requested the Arbitrator reconsidered
this element of his Award, he chose not to alter his decision.
It later became apparent that the Arbitrators company, Davis Coffer
Lyons, in fact had relationships with Enterprise Inns, our landlord,
that were not disclosed during the Arbitration process. The Arbitrator
subsequently apologised for this lapse. This may have been considered
a `conflict of interest' and is being investigated by the RICS.
A conflict could have been considered a serious irregularity and
a justified argument to dispute the Arbitrators Award. Enterprise
Inns offered to remove our UORR clause (which they had stated
at the last Committee would be removed from leases where they
still existed unconditionally see attached Appendix 2) in exchange
for our agreement to the Award. We elected to accept the offer
on the 17 July 2008, our review remains undocumented and our rent
review clause remains in place.
Gordon Harrison and Ted Tuppen indicated to
the last Committee that Enterprise Inns would be removing upward
only rent review clauses, ours still remains despite repeated
requests to remove it and we are aware of no instances where it
has been removed unconditionally from an existing lease.
Enterprise Inns will argue that their new leases
`Retail Partnership Agreements', typically 10 years long, do not
have UORR clauses, however, they neglect to mention that the agreements
are outside the provisions of the Landlord and Tenant Act and
therefore offer the tenant no rights of renewal or compensation
at the end of the term.
2. THE TIE
We estimate that we pay an additional "wet
rent" of in excess of £40,000 per annum (this is conservative
working on the basis of £100 per barrel) over and above our
property rent of £45,750 (subject to RPI increases). The
equivalent "normal commercial rent" is therefore currently
£85,750 per annum.
There is plenty of evidence, that we are sure
will be presented to you, by parties more qualified than ourselves
to justify that our rent should be to the order of 16% of net
turnover, or £50,000, FREE OF TIE. Surely anyone can see
the inequity of this system. We would happily accept a straightforward
property rent as an alternative to the current tied arrangement.
I find it amazing that Pubco's are still trying
to convince those less well informed that the part tied tenant
is in no better or worse position than the free of tie tenant.
3. SELECT COMMITTEE
2004
The Select Committee in 2004 issued concerns
to which Enterprise Inns responded—I consider this Committee
would do well to review some of that dialogue and I include comments
of my own.
Issue
— The link between the wholesale beer
prices charged by pubcos and the rents they charge their tenants.
— Pubcos' margins with regard to the
prices paid by pubcos to breweries and those they charge to their
tenants.
— The difference in the beer price
that pubcos charge their tenants and the free market price.
Concern
Is the combination of rent and beer prices
charged to licensees under an Enterprise agreement unfairly expensive
to licensees, does it lead to higher prices for consumers and
does it constrain a licensee's ability to compete effectively?
Response
2.1 Licensee "RENT" constitutes
a variable combination of "property rent", "wet
rent" and "machine share", which in total equates
to a normal commercial rent.
Not so. Say a pub sells 200 barrels its turnover
net of vat is £200,000. A "free of tie" pub rent:turnover
ratio is widely accepted to be around 14-16% (evidence) this is
a straight forward property rent only of £28,000-32,000,
no wet rent, no machine income. The same pub, but with a beer
tie only, should have a rent:turnover ratio of 11-13% (evidence)
the property rent would be £22,000-26,000 the cost of the
tie is around £180 per barrel, equating to approximately
18% of turnover, the "wet rent" is therefore £36,000.
It follows that the equivalent "normal commercial rent"
for the tied house is £58,000-62,000 (property rent plus
wet rent) or 30-32% rent:turnover, almost double that of the free
house. This does not equate to a normal Commercial Rent.
2.2 Licensees can make fair margins on tied
products supplied by Enterprise.
In our rent review an Arbitrator anticipated
an overall margin of 58.5%. We actually achieve 52-54% but our
Pubco (Enterprise Inns) objected to our actual figures being submitted.
As a result, in order to achieve the same profit margin we would
need to increase the product price to customers by 12.5-14.6%.
As it is, like many tenants, we recognise that increasing prices
to accommodate our Pubco's false impression of our "fair
margins" will deter customers and lead to diminishing sales.
Tenants like ourselves have tried to absorb the costs and as a
result our proportion of net profit (which is supposed to be 50:50
with the landlord) is unfairly diminished. Landlords get a higher
margin on products and, because this is not recognised at rent
review or Arbitration, end up with a larger proportion of net
profit than they are entitled to. The tenant loses both ways.
2.3 Enterprise's track record of adjustments
to product pricing demonstrates that prices and price increases
are broadly in line with the UK market.
Have Enterprise Inns provided any evidence to
this effect? They should be required to supply their own price
lists which can then be compared to those of a wholesaler. It
should be clear by the sheer backlash that the above Enterprise
statement is nothing more than propaganda.
2.4 ... and the increases to, and commitments
made in relation to, licensee discounts demonstrate the Company's
fair and equitable approach.
There are discounts for some pubs these appear
generous, however, the greater the discount the greater the gross
profit margin and therefore the "normal commercial rent"
will be higher to reflect the level of discount available to a
tenant. A pub with a large discount simply pays for it in the
form of a disproportionate increase in rent. Discount equals higher
rent, the tenant has gained nothing, what is fair and equitable
about that ?
2.5 Price is not the principal factor which
determines the nature of competition in a local marketplace.
There are many factors determining the nature
of competition in a local market place but to discount price as
altogether irrelevant is an insult to anyone's intelligence.
2.6 An Enterprise tenancy or lease agreement
provides potential opportunities for trading profit.
Given the level of pub closures over the past
few years it is clear the actual trading profit is not sufficient
to sustain a reasonable standard of living. The proof is in the
pudding.
2.7 ...and capital growth through the successful
assignment of the unexpired term of a lease agreement.
A positive premium is not simply a reflection
of profit. A premium on assignment can be based upon several factors,
parties will also consider their perception of latent value, potential,
job security, domestic security (accommodation). Just because
a premium is achieved it does not follow that the pub in question
has a healthy or sustainable gross profit.
2.8 The cost of entry, and risk profile
for a licensee under an Enterprise tenancy or lease agreement
is lower than that for a comparable free house.
My pub has been valued at £610,000 and
pays a rent of £45,750 per annum, the cost of the tie is
£40,000 (400 barrels x £100) it follows that our annual
"rent" (property rent plus wet rent) is £85,750.
A 10 year commercial loan can be approved at 3% over base and
therefore would equate to 8.5% (at the time of writing). It follows
that I could, if the Pubco would sell at market price, buy my
freehold and pay around £112,850 per annum in interest and
capital repayment and potentially own the pub outright in 10 years
with no loan repayments, Plus I would be able to negotiate my
own discounts direct with brewers and suppliers and I conservatively
estimate these would amount to £40,000 (400 barrels x 100).
This saving could be offset against my repayments and therefore
my overall annual outgoing would be £72,850 (£112,850—£40,000).
The annual outgoing is less and more importantly not subject to
rent review or annual RPI increases. The cost of entry and risk
profile for a licensee under an Enterprise tenancy is therefore
higher NOT lower than that for a comparable free house.
2.9 A wide range of fairly priced opportunities
exist for licensees wishing to acquire a free house in preference
to entering into a tenancy or lease agreement.
Comparatively, few freeholds come to the market,
as the number of pubs in the UK is diminishing at an alarming
rate, those that come available are generally bought by Pubco's
as they are aware that the investment value of the property and
wet rent combined outweigh the freehold value to an owner occupier.
2.10 Enterprise invests substantial capital
into its estate annually.
Where? I have known my pub for over 16 years
and other than actually investing the capital to purchase am aware
of no addition investment over the entire term.
2.11 Enterprise utilises its purchasing
leverage to secure advantageous terms for tenants and lessees.
We are unaware of any advantageous terms passed
on to us that are better than those available to us in the open
market. In fact many are worse.
2.12 Enterprise licensees may receive goods
and services from Enterprise which can provide added value, real
benefit and competitive advantage.
All goods and services offered to us by Enterprise
come at a price which render them ineffective. We have seen no
reason to accept any goods or services offered by Enterprise in
our entire period of ownership. Enterprise wish to imply to people
like Select Committees that they offer something over and above
simply being landlords and collecting rent but in reality we see
the goods and services as no benefit to us what so ever.
2.13 Enterprise makes reasonable profits
for its shareholders and has demonstrated that attractive returns
to investors are not at the expense of licensee profitability.
Shareholders, until recently, have indeed made
reasonable profits, some might say extortionate profits. It is
now a well known fact that hundreds of licensees have failed and
gone into liquidation, if their profitability were maintained
then I would suggest they would still be around.
2.14 The targeted growth in profits will
not be achieved at the expense of licensee profitability or consumer
choice.
The prospect of a growth in profits for Enterprise
is now a looking somewhat uncertain but it should be clear by
the sheer number of pub closures that previous profits has been
at the expense of licensee profitability.
2.15 The majority of Enterprise licensees
are profitable and are able to fulfil their financial and repairing
obligations.
I refer you to the Morning Advertiser
article dated 10 September 2008. A Morgan Stanley analyst has
stated that he believes 20-30% of Enterprise and Punch leased
pubs may be "uneconomic" because the licensees are making
under £20,000 a year—the level considered to be the
minimum to make a pub worth running.
2.16 Enterprise recognises that its reputation
in the marketplace and its ability to attract and retain well
qualified, profitable licensees is the key to its long-term success.
How many tenants have been refused an Enterprise
Inns pub on the basis their Business Plan is not adequate? I know
of none. Enterprise grants leases takes a rent deposit and rent
in advance and if the tenant is unsuccessful Enterprise have the
best part of 4 months rent on account before the pub will actually
start costing them money (plus I am led to believe that included
in the insurance policy is a clause offering protection against
tenant failure, this is of course reimbursed to Enterprise Inns
by the tenant in the form of building insurance premiums). In
this four month period they either seek another unwitting tenant
or pursue planning permission for change of use/redevelopment
based on the argument that the pub is unsustainable. The investment
value as a tenanted pub is considerably less than the redevelopment
value with vacant possession. Once sold the income derived from
sale is used to buy further pubs to include in the freehold `churn'
policy thereby diminishing the number of pubs available to free
traders still further.
2.17 Evidence indicates widespread licensee
satisfaction with the fairness of the Company's approach, through
its success in recruitment... and in its rent review negotiations...
and in its handling of complaints.
What evidence? I am an Enterprise Inns tenant,
neither I, nor any other tenant I know is satisfied with the fairness
in respect of the above. Given that I have just negotiated my
own rent review that required me to take Enterprise Inns to Arbitration
I have contacted many tenants with a view to obtaining comparable
evidence for valuation, not one tenant has indicated satisfaction.
2.18 Evidence indicates that Enterprise's
relationships with its tenants and lessees are improving.
What evidence? How many tenants have submitted
evidence indicating the latter to this Committee?
In conclusion, if the Enterprise were asked
the same questions again today they would be unable to offer the
same answers, any answers should be evidenced and an opportunity
offered for tenants to comment. Enterprise Inns were far from
transparent in respect of the calculation of the rent review,
they were intimidating and unhelpful. The tie is detrimental to
us and we can think of no benefit to us from our `partnership'
with our Pubco landlord. We, like many tenants, would consider
purchasing our freehold if it were made available at an open market
value but we are informed Enterprise Inns will not entertain freehold
purchase discussions. The UORR clause that Enterprise Inns stated
they would remove at the TISC is still present four years later.
The current circumstances and tenants outcry
that have led to this inquiry should be sufficient to convince
any reasonable man that Enterprise Inns have not adequately complied
to the Select Committees recommendations and that any purported
claims that progress have been made are no more than paying lip
service to this current inquiry. The Pubco's are too powerful
for tenants to deal with and therefore require `policing' by Government
and legislation.
I confirm that I have copious documentation
in respect of all my statements above and would welcome the opportunity
to be questioned as a witness in the presence of the Committee.
I do not doubt much technical information and opinion will be
offered for the Committees consideration and consider my unique
position as a surveyor and publican could prove useful in many
areas of interpretation.
27 September 2008
| 
