Further supplementary memorandum submitted
by Simon Clarke
As promised here is the relevant information
you requested regarding the "costs" allocated to the
rent calculation for rent reviews. You will recall that estimated
turnover or FMT (Fair Maintainable Trade) is the
starting point for the calculation. An appropriate Gross Profit
(GP) and cost deduction is applied to FMT leaving
a Divisible Balance, which is split 50:50 landlord and tenant
(the landlords bit being annual rent, the tenants being his wage
for the year).
With the weight of evidence, I sense some of
the Committee might be having a spot of trouble getting their
head round how this calculation can go so badly wrong. Quite simply
it is a tool—used well (impartially) it works, used badly
(abused) and the rental result can cripple a business. So, using
easy numbers, I have outlined the calculation below:
| FMT say (net of Vat)
| £250,000 |
| GP say 50% of FMT (assuming a part tied pub)
| £125,000 |
| less | |
| Costs say 35% of FMT (assuming drinks only pub—no food)
| £87,500 |
| Equals | |
| Divisible Balance (DB) | £37,500
|
| Rent (at 50% of DB) | £18,750
|
| |
Clearly, the higher the costs the lower the divisible balance,
and therefore the rent.
Enterprise Inns have 7,763 tied pubs, some on "open
book accounting" they must have a pretty good idea by now
of the likely costs incurred by the tenant as a percentage of
turnover. You will see from Calculation 1 (attached), the first
rent calculation from Enterprise Inns of their proposed rent at
review (£59,173), that they estimated costs at 28.3%, later
they reduced their rent proposal to £54,990 (Calculation
2—attached), the costs now representing 24.6% of FMT, regardless
of whether I agree with the percentage used why should it change?
Incidentally, the Arbitrator Awarded that costs should represent
33% of FMT. If FMT and GP remained the same and the Arbitrators
awarded "costs" (ie 33%) had been included in the second
Enterprise Inns calculation, the rent would have been £40,222,
I offered £41,000 before Arbitration!
It is not just costs Enterprise Inns manipulate. You will
also note that in Calculation 1 they have an income of £5,000
for "Machines" and £500 for "Food and Catering"
(being crisps and snacks), when I pointed out we have no machines
they "adjusted" this for Calculation 2. There was no
longer any machine income but our Food and Catering Income has
gone up 1,200% to £6,000.
If the cost percentage is too low then the Divisible Balance
is falsely high, the landlord gets a higher rent the tenant less
profit. Using the simple calculation above, for every 1% the costs
are too low the landlord gains £1,250 the tenant loses the
same. So if the costs are set at 30%, but should have been 35%,
the rent would be £25,000 and the tenants profit only £12,500.
(I have this on a spreadsheet on my computer which I can show
you or send you—all you have to do is alter the costs percentage
to see the difference).
My point is that Enterprise Inns continually manipulated
the costs and other variables to support a desired rental figure.
Rather than input appropriate variables to determine a rental
level, they worked backwards from a sought after rent until the
calculation fits their requirements.
I should add that the attached calculations are as they were
emailed to us with no amendment, note that in Calculation 2 they
have neglected to represent costs as a percentage. Also note there
is no supporting evidence for any of the variables. Despite requesting
evidence, 13 times in writing, Enterprise Inns never supplied
it and preferred to allow the matter to proceed to Arbitration,
an extremely off putting resort for most tenants due to the cost
implications.
5 January 2009
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