Pub Companies - Business and Enterprise Committee Contents

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 Review

  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:

    —  rent concessions;

    —  special discounts and price trials;

    —  landlord funded developments;

    —  SKY TV subsidies;

    —  free legal help lines;

    —  free training on finance and marketing;

    —  free websites for pub accommodation;

    —  "pub doctor" business development consultancy; and

    —  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 future.

  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 their retailers.


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 new Code.

  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 been taken.

Other Recommendations

  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 lessees.

  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 leaseholder.

  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.


  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 and tenants".

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 severe pressure.

29 September 2008

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