Supplementary evidence from Simon Clarke
Thank you for allowing me the opportunity to
speak at the first Committee meeting in respect of the above on
19 November 2008.
I should point out that our Arbitration result,
a rent reduction of 12%, is to the best of our knowledge the first
and only time this has ever been achieved against a Pubco.
I was all too aware that we were pressed for
time and that Mr Luff, quite rightly, was keen to try and draw
the proceedings to a close. Rather than enter into a lengthy debate
on Mr Willis' answers I considered my response would be better
outlined in a further short submission to the Committee which
would clarify my opinion.
In his final question, to the witness Mr Martin
Willis, Mr Luff asked, loosely, "if the valuation approach
used by the RICS is working so well then why are the problems
heard today being described and why are 20-30% of tied pubs are
not economic due to high rents?"
Mr Willis replied "I don't think anyone
is arguing with the profits method of valuation"
No one is arguing that the RICS method, in principle,
is the best method available at this time BUT it does not accommodate
the recommendation from the 2004 Inquiry that tied tenant should
be no worse off than the free of tie tenant. The "tie"
(wet rent) is not adequately allowed for and until it is the tied
tenant will always be worse off.
"Essentially problems faced by the industry
at the moment are largely down to the recession which is effecting
every other form of commercial property in particularly small
businesses" (Martin Willis).
The current economic climate is having a significant
effect on all businesses but pubs have been exploited for so long
most licensees have no "war chest" to weather the storm.
No one has had the opportunity to save for a rainy day and now
we have the perfect storm.
"Any business, maybe a small shop, could
have had a five year rent review where rent was agreed in a boom
period, of course trade has dropped off and there has been increased
competition from the major retailers. Its effecting all small
businesses." (Martin Willis)
Those same "small shops" do not have
inflationary increases every year when trade is in decline, they
are not tied to buy products from a single source. Using the witness
Mr Paul Daley's example, in session one, if you rent a house and
buy your household goods from say Marks and Spencer, and times
get hard, you seek cheaper products elsewhere, and shop at Asda.
You would not think it fair to be forced to continue to buy expensive
products from M&S who may at any time choose to increase their
prices still further.
"We read in press that several pubco's
have ploughed several million back to licensees." (Martin
Willis)
See the Morning Advertiser 30 September
2008, Enterprise Inns has shelled out £5.5 million to 850
struggling tenants. Sounds a lot, big number—lots of noughts!
Actually, amounts to an average of £124 per week for each
of those tenants. We can assume these tenants are suffering severe
financial crisis otherwise they would not have sought help. I
do not believe that an average of less than £18 per day is
going to save them. This is just a publicity stunt.
"Certainly recession and economic situation
over last 15 months is causing all sorts of problems." (Martin
Willis)
Five pubs are day are shutting their doors for
good; 33% more than the same period in 2007. Pubs are now closing
five times faster than in the same period in 2007. Pubs are now
closing nine times faster than in 2006 and 18 times faster than
in 2005." Whilst the economic crisis is no doubt playing
its part in the rate of Pub closures clearly this accelerated
rate of closure started long before our current recession and
the smoking ban. The current economic hardship faced tied tenants
has merely deflected from the fundamental culprit—the tie
and the Pubco's.
Mr Willis openly agreed that the tie (wet rent)
is not considered in the RICS valuation method (confirmed in the
Arbitrators Award quote attached full details available on request).
The RICS valuation method for Pubs is drafted by the "Trading
Related Valuations Group". Rob May of Enterprise Inns was
Chairman and now Mr Willis Chairs this group, whose company derive
significant fees from Pubco's, particularly Enterprise Inns. It
comes as no surprise to me that the RICS valuation approach is
detrimental to tied tenants given the Pubco's influence over the
Trading Related Valuations Group.
I appreciate the Committee may find it hard
to make the abolition of the tie a statutory requirement. The
Pubco's will no doubt argue that it would be an administrative
nightmare. Would it be simpler to require the RICS modify the
valuation method to encompass the recommendation that "tied
tenants should be no worse off than the free of tie tenants?"
Pubco's, without the financial benefit gained
at the tied tenants expense, would probably remove the tie themselves
as it would no longer be to their advantage to maintain it.
INTERIM AWARD
WITH REASONS
Eagle Ale House, 104 Chatham Road, London SW11
6HG, January 2008
PAGE 19
Alternative Valuation Approach
61. In addition to the profits method of
valuation, Mr Clarke has considered an alternative approach whereby
the rent paid by the tied tenant is calculated by first establishing
the notional rent payable on a free of tie basis then deducting
the supply discounts available to the free of tie tenant, which
he describes as "wet rent", leaving a "dry rent"
payable by the tied tenant.
62. This approach is rejected by Mr Gooderham
(the "independent expert" employed by Enterprise Inns)....
I concur with Mr Gooderham that there is no compelling reason
to calculate the rent on this basis.
Arbitrator
T M E Munden Bsc FRICS
Davis Coffer Lyons
19 November 2008
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