Pub Companies - Business and Enterprise Committee Contents

Memorandum submitted by Simon Clarke


  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.


  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.


  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.


    —  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.


   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?


  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

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