Pub Companies - Business and Enterprise Committee Contents

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