Memorandum submitted by The British Beer
and Pub Association
1. Pub Sector
1.1 There are approximately 130,000 on-trade
licensed premises in the UK of which around 57,000 (43%) are pubs
comprising managed (9,000), tenanted/leased (30,800) and free
houses (17,200). Around 80% of pubs are operated as small businesses
by tenants/lessees or independent owners of free trade premises.
This inquiry focuses on tenanted/leased pubs which represent around
54% of the pub market (24% of all on-trade licensed premises).
BBPA pub owning members (major pub operators, vertically integrated
brewers and pub operators and minor pub operators) own approximately
88% of the UK's leased/tenanted pubs.
1.2 Pub owning companies predominantly own
freehold pubs, although a small percentage are leased from third-party
landlords or even from other pub owning companies. The pub owning
companies seek to make a reasonable return on their property assets
for their stakeholders through the letting of pubs to self-employed
operators. Pub company revenue is generally derived from a combination
of rent, margin on the sale of drinks and a share of machine income;
these vary by pub company depending on the type of agreement.
1.3 Prospective tenants and lessees can
choose from a wide selection of pub companies all offering varying
types of business agreement and support. Any tenancy/lease agreement
is a commercial contract that is signed by the operator on a voluntary
basis in full knowledge at the outset of the terms of that agreement.
The fundamentals of such agreements are not amended once the tenant/lessee
is in place.
1.4 Tenancy agreements historically have
been the traditional choice for many licensees providing low cost
entry into a self-employed business. Tenure is for a relatively
short period (around three to five years and normally with the
opportunity to renew) and secured under the Landlord & Tenant
Act. Tenants are likely to be "tied" for all supplies
of drinks with the owning company responsible for the upkeep of
the property. Rents are agreed between the pub owning company
and tenant and are based on what is felt the average-to-good tenant
could achieve. Rent assessments are usually undertaken following
a full profit and loss assessment of the pub and using the company's
in-depth knowledge of the pub's trading history. The resulting
rent generally includes the benefit of tenants living accommodation.
1.5 This flexibility ensures that key factors
such as location, environment, quality of income and demand are
fully reflected in rent discussions. Accounts used for evaluation
should have been audited and prepared by qualified accountants.
1.6 A lease agreement provides a similar
low-cost opportunity but for longer term investment. Lessees can
realise a goodwill benefit through assignment of the lease after
a qualifying period which allows the lessee to make a capital
sum on sale of the business which can be substantial in some cases.
Lessees are likely to be "tied" for the supply of beer
and will normally be responsible for all repairs and decorations
of the premises. Pub leases represent an extremely cost-effective
way of starting up in business and exit costs are also minimal
should the business fail.
1.7 Initial rent is agreed between the pub
owning company and the occupier. Generally speaking the accepted
method for the valuation of pub rents is the "profits basis",
which assumes that the occupier is an "average leaseholder".
Working expenses and any interest on any capital that the lessee
has tied up in the business is then deducted from the gross profits
to arrive at a "divisible balance". This represents
the income to be divided between the pubco and the lessee. The
company representative will use their experience and trading knowledge
of the pub to propose a rental figure and this may be balanced
in certain circumstances in favour of the tenant to ensure that
he or she has the ability to earn a living wage.
1.8 Lease agreements will normally contain
provision for a rent review after five years. On review the fair
maintainable rent will be re-assessed on the basis of the trading
pattern of the pub and what could reasonably be expected of the
business as it exists at that time. Things to be considered will
be changes in demographics, capital investment by the pub owning
company or the lessee, general trading conditions and any other
relevant factors that have an influence on the revenue of the
pub. The rent is then agreed between the parties but if no agreement
can be reached, it is open to either party to seek arbitration
through the accepted channels (RICS Code of Practice "Red
Book"). It should be noted that pub rents can go down
as well as up.
1.9 Rent reviews are generally scheduled
to occur every five years during the term of a lease. However,
on assignment, a new lessee may be faced with a rent review in
a shorter period of time due to the rental term of the original
lease having expired.
2. Changes to the pub sector since the 2004
2.1 The pub sector has undergone considerable
change since the 2004 Review and these changes have had a considerable
impact on the profitability of all pubs.
All small businesses, particularly those in
the hospitality sector, have been burdened by compliance costs
resulting from a raft of new legislation. This has included licensing
reform, gambling laws, smoking ban, fire regulations and employment
legislation. (See BBPA economic review "A Wake-Up for Westminster"
attached to this submission.)
2.2 Licensing reform cost the sector a one-off
transition of around £95 million in additional costs of meeting
new conditions imposed by licensing authorities. Annual fees are
now amounting to around £40 million. The cost of variations
to premises licences now run into several thousands of pounds
resulting in significant on-going costs in terms of operator cash
flow and company investment. The BBPA exercise in quantifying
the DCMS simplification plans revealed that the cost savings estimated
by DCMS have not been realised.
2.3 The smoking bans introduced in Scotland,
England and Wales have resulted in further investment of around
£100 million in tenanted/leased pubs in an attempt to retain
trade by improving external trading areas. Nevertheless, wet-led
community based pubs have seen a significant decline in sales
since the introduction of the ban.
2.4 In March 2008 beer duty was increased
by an unprecedented 9.1% and an "escalator" was introduced
to increase alcohol taxes by two percent above the rate of inflation
per year for the next four years. This will further reduce alcoholic
drink sales in the pub sector which are already seriously in decline.
Conversely, there has been a significant growth in off-trade sales
through the increased expansion of off-licence trading hours and
a heavily discounted supermarket pricing strategy. In particular
the 2003 Licensing Act has given much more accessibility to the
off trade and has been instrumental in accelerating a long-term
trend towards drinking at home.
2.5 Over the last 12 months pubs have seen
alcohol sales fall as consumer confidence has been eroded on the
back of the credit crunch with rising costs of food, fuel, mortgages,
direct and indirect taxes putting further pressure on disposable
income and discretionary spend.
2.6 The cost of utilities (gas, electricity)
has seen steep rises (increase of 30%) which has further impacted
on the profitability of all pubs, in particular those that are
trying to grow food sales to offset the declining beer sales caused
by off-trade pricing, duty rises etc.
3. Assistance to tenants/lessees
3.1 During these difficult times pub companies
have spent around £35-40 million supporting their lessees
to maintain viable businesses. (See attached press cutting (not
printed here)). This support has included:
special discounts and price trials;
landlord funded developments;
free training on finance and marketing;
free websites for pub accommodation;
"pub doctor" business development
on-line services such as payroll,
promotions, wine lists and food menus.
3.2 As BBPA members pub owning companies
have also invested considerable resource, both through membership
subscriptions and management expertise in fighting the legislative
and commercial burden currently faced by pubs. Lessees have benefited
directly from this support which has included judicial review
of specific aspects of licensing law, challenging increased tariffs
by PPL, gaining increases in machine stakes and prizes and vigorous
defence of the pub in all dealings with Government and enforcers.
The value of this support cannot be quantified in profit terms
but has significant benefits for all pub businesses.
4. A Challenging Time for the pub industry
4.1 With a combination of spiralling costs
and severe market conditions it is generally accepted that hospitality
is a challenging sector with businesses that rely on discretionary
spend. A BERR Report on business survival states that hospitality
has one of the lowest business survival rates of all sectors.
4.2 Pub closures have climbed from two a
week in 2005 to the record rate of 36 a week (five a day). With
this background of increasing overheads, a toughening market and
loss of customer confidence there is no doubt that some tenants/lessees
are themselves feeling insecure and unsure of their long-term
4.3 On a more positive note, even despite
the additional costs and difficult trading conditions, the tenanted/leased
model ensures that pub owning companies retain a vested interest
in maintaining trading pubs and they have invested heavily to
support their tenants through compliance with legislation over
the last four years, continuous investment in developing pubs
and latterly through a wide-range of financial concessions and
business retention activity to dilute the full impact of the changing
market. Pub owning companies have a vested interest in ensuring
their pubs are occupied and trading well.
4.4 Independent free trade operators have
a greater financial exposure with banks due to the size of equity
required to enter the sector as a free trader. On the other hand
a tenant/lessee is protected from this level of investment risk
but the changing market and increasing overheads will no doubt
result in an accelerated closure of failed pubs.
4.5 Despite difficult trading conditions
many pub businesses are continuing to thrive through innovation,
diversification and creative marketing assisted by the advice
and support of pub owning companies working in partnership with
TRADE & INDUSTRY
5. The Tie
5.1 For nearly 40 years the tie has been
the subject of scrutiny by competition authorities both in Europe
and the UK and in all cases the rationale for, and the importance
of, the property tie have been upheld.
5.2 Following the most recent and thorough
review of the tie in 2004, the BBPA welcomed the Trade & Industry
Committee's conclusion that "the removal of the beer tie
would not necessarily benefit tenants". The tie continues
to provide individual entrepreneurs with a low-cost opportunity
to establish profitable pub businesses.
5.3 The "tie" is of crucial importance
to the success and sustainability of the tenanted and leased pub
sector. It is also fundamental to the survival of vertically-integrated
regional and family brewers in the UK enabling them to sell their
beer within their own estates and also to promote their brands
within the wider pub market.
5.4 The BBPA would strongly argue that if
the "tie" had been previously removed, tenants/lessees
would be significantly worse off today as the pub owning companies
would have fully rentalised the drinks and machine "ties"
in a much more positive climate. With a fixed rent they would
not be sharing the pain of loss of sales and would have little
interest in supporting their tenants through tough market conditions.
5.5 Pub tenancy/lease agreements provide
different business models enabling entrepreneurs to enter the
sector as independent operators, with parallels to similar "tied"
businesses such as food and drink franchises. However a pub tenancy
or lease is far less restrictive than a typical franchise in that
they provide the opportunity and flexibility for talented lessees
to structure and model their own businesses using the free support
and expertise offered by the pub owning company. A franchise business
in the food and drink sector requires a much higher level of investment
at entry and franchisees must follow a strict business format
using a package and products approved by the franchise owner.
On-going management and advertising fees, on top of rent, are
also often levied based on a percentage of annual turnover.
6. Conclusions and Recommendations
6.1 BBPA Code of Practice Framework: The
principal recommendation from the Inquiry was that BBPA should
as a matter of urgency revise its Code of Practice Framework to
cover areas such as rent reviews, the role of business development
managers, complaint and dispute procedures, disclosure and the
availability of information, and the taking of legal and professional
advice by prospective tenants. Mindful of the recommendations,
BBPA commenced work on drawing up a new Code soon after the Committee's
report and, following extensive consultation with a wide range
of individuals and organisations, published the revised and updated
Code towards the end of 2005. (A copy of the BBPA Code is attached
to this submission (not printed here).)
6.2 The Association believes that its revised
Code fulfils most of the requirements of the Select Committee
Inquiry. All member companies were subsequently invited to review
their codes and revise them as appropriate in line with the BBPA's
6.3 In reviewing the BBPA Code the following
specific recommendations were addressed:
6.4 Role of BDM's: A new section
covering business support was inserted into the Code which included
the role of BDM's (or equivalent) and the level of support and
professional guidance available.
6.5 Complaint and dispute procedure:
Dispute procedures have been given greater prominence in the Code
with BBPA offering to take on the role of intermediary to resolve
any misunderstandings. Since the Code was revised BBPA has received
no request to act in this capacity. It is more customary for tenants/lessees
to approach their professional trade bodies, ie FLVA or BII but
it is our understanding from members that very few disputes have
in fact arisen.
6.6 Disclosure and availability of information:
This is covered by the Code which prescribes in greater detail
the kind of information a lessee/tenant might be expected to receive.
6.7 Taking legal and professional advice
by prospective tenants: Significant emphasis has been given
to the importance of taking external professional advice on all
aspects of the business. Companies emphasise this within their
Codes and some require written confirmation that such advice has
6.8 Pub owning companies to allow their
tenants more flexibility in their choice of the products they
sell: Pubco lessees have an ever-increasing range of products
from which to choose as well as the major brands demanded by customers.
Major pub owning companies have also introduced schemes to allow
a wide range of smaller brewers beer to be purchased by their
6.9 AWP machine tie to be removed:
A new section has been included that seeks to ensure that a full
and transparent description of the terms of the machine is provided.
The Association considered the Committee's recommendation that
the machine tie be removed, but it was concluded that the BBPA
Code of Practice should not include a recommendation that companies
should cease a legitimate commercial practice. This remains a
matter for negotiation between the pub owning company and the
6.10 Removal of upward only rent reviews
(UORR) from agreements: The BBPA Code now states explicitly
that new leases should not contain upward only rent reviews. Leases
inherited by a pub owning company that contain UORR's will be
documented and, in reality, rents are applied flexibly with some
going down as well as up. (See also para 3.1 for details of further
assistance provided to lessees.)
6.11 Assignment and surrender: The
Code has new sections setting out the level of detail that lessees
should be provided with on assignment and surrender.
6.12 Industry to review the support offered
to tenants by BDM's to ensure the application of best practice
in the provision of support to individual businesses: It is
our understanding that companies have been active in reviewing
their licensee support and many operate customer forums whereby
a representative group of licensees hold regular meetings with
company representatives to address issues of concern regarding
the industry or the company itself. BBPA cannot comment on individual
cases as these are matters between the pubco and the lessee/tenant.
2008 COMMITTEE TERMS
Here we address the specific questions highlighted
in the BERR announcement of the Select Committee Inquiry:
7. Has the Licensing Act 2003 had an effect
on competition within the market?
7.1 The Licensing Act 2003 has increased
competition enabling pubs to compete with other late-night venues
but, whilst increasing overheads, it has not necessarily had a
significant impact on volumes.
7.2 The cost of the new Licensing Act has
been significant with transition costs alone amounting to £2,000
per pub. There have also been significant on-going costs for some
pubs where the premises licence has been subject to review or
appeal. There might also be restraints on the business as a result
of conditions on the premises licence imposed either by the licensing
authority or the premises licence holder.
7.3 A major consequence of the Licensing
Act has been the ability of the off-trade to sell alcohol during
all permitted opening hours. Off-trade pricing strategies have
had a major impact on the pub sector with customers choosing to
spend more time at home drinking cheap supermarket beer etc. There
is evidence that pub goers are pre-loading with cheap alcohol
before visiting pub premises later in the evening.
7.4 The concept of "24 hour drinking"
is a myth as there have been only 600 24 hour licences granted
of which 400 are supermarkets. The additional length of pub opening
times following licensing reform is on average 22 minutes.
7.5 The DCMS Select Committee has recently
announced an inquiry into the effects of the Licensing Act to
which BBPA will be submitting evidence also.
7.6 The smoking ban has driven customers
outside pubs and this has resulted in neighbouring residents seeking
a review of premises' licences on the grounds of public nuisance.
This has made trading difficult for many pubs without external
smoking facilities and some local authorities have imposed unreasonable
conditions resulting in increased compliance costs.
8. To what extent have revisions to the codes
of practice framework met the Committee's concerns?
8.1 The BBPA's response is set out above.
9. To what extent are the Codes applied by
the pub owning companies?
9.1 The BBPA's Code of Practice Framework
has been adopted widely by its members and to the best of our
ability we believe the Code is working well. BBPA has received
a small number of enquiries which we have been able to answer
by reference to the Code.
9.2 In addition following the TISC Inquiry
major pub companies representing over 22,000 leased and tenanted
pubs have revised their Codes and sought accreditation for them
by the BII (professional body for licensees). Many other companies
are seeking similar accreditation. The BII Benchmarking and Accreditation
Scheme has evaluated these Codes and "judged them to be a
clear statement of the Company's Code of Practice for lessees
10. Is there a need for further regulation
of the industry
10.1 We do not believe that any further
regulation is necessary and if it were to be introduced, this
would need to be applied to all commercial dealings. The brewing
and pub sector is already highly regulated and further legislation
would impose additional compliance costs on a struggling sector.
10.2 There is a danger that further legislation
could well see pub owning companies simply operate as pure property
companies and withdrawal from their flexible approach to business
support and on-going investment which has made the British pub
famous. This would be a retrogressive step leading to more business
failures and pub closures at a time when the whole sector is under
29 September 2008