Pub Companies - Business and Enterprise Committee Contents

Memorandum submitted by Justice for Licensees

  In January 2007 Justice for Licensees was formed and currently has approximately 1,000 members. We formed as a group after a few of us realised that we were not alone in the perception of how pub companies operated.

  Over the past year or so we have heard of many tales of woe from the tenants of the major Pubcos.

  Historically Brewers acted in a paternalistic manner which was to the best interests of both the brewer, the tenant and the consumer. As time went by they changed and their monopoly was used against tenants. From 1989 when the Beer Orders were formed to adjust the brewers monopolistic control Pubcos emerged. As time has gone by their growth fuelled by easy money has allowed them to pay high prices and also grow substantially in size. The expression power corrupts and absolute power corrupts absolutely perfectly describes Pubcos in their current form. Their sole interest is apply heady levels of rent, charge the highest supply prices possible and extract little extras, which amount to millions, by taking royalties and listing fees from suppliers as well as an extra slice of the awp takings which they all ignore when it comes to assessing rent.

  It is JFL's opinion that there is a much more serious situation now than there was in 1989. Many of the benefits for tenants that were introduced during the Beer Orders now no longer exist and it is a fact that many tenants are now more tied than they were in 1989.

  We have spoken to trade groups, Pubcos, shareholders and tenants to see if there is a common goal that we can work towards but our discussions reveal intransigence on the part of the Pubcos. They just want money to service their debt, pay their shareholder dividends and increase the share price. Tenants and consumers come a long way down the list of interest.

  There are two very important bodies which Pubcos appear to have infiltrated and use to their own interest. They are the BBPA and RICS. The BBPA relative to the discounts that they extract, and RICS regarding the levels of rent, their control of arbitrations, valuers and independent experts.

  The British Beer and Pub Association purports to represent the trade and yet the majority of its members are brewers and Pubcos. Taken from the BBPA website Our members account for 98% of beer brewed in the UK and own more than half of Britain's 58,000 pubs.

  Chairman: Michael Turner (Fuller Smith & Turner plc)

Vice Chairman: Ralph Findlay (Marstons plc)

Vice Chairman: Mark Hunter (Coors Brewers Ltd)

Chief Executive: Robert Hayward OBE

Executive Groups

  There are three Executive Groups as follows:

    —  Brand Owners & Brewers Group (Chairman—Jonathan Neame—Shepherd Neame Ltd);

    —  Pub & Leisure Group (Chairman—Ralph Findlay—Marstons plc); and

    —  Communications Group (Chairman—Simon Townsend—Enterprise Inns plc).

  The former Chairman and the Vice President is one Mr Graham Edward Tuppen, the CEO of Enterprise Inns. Mr Tuppen was quoted in the press stating that he thought that the MP's who were looking to have the Pubcos re-investigated were moronic.

  While the BBPA holds itself out to represent the retail trade they in fact only represent less than 10,000 retail operations relating to managed houses and members of AMLR. Their stance in claiming to represent the retail trade is totally and absolutely dishonest. It is recognised that nearly 30,000 pubs are owned by Brewers and Pubcos but that is in the capacity as property companies which lease out the properties to retailers, often with a supply tie. They do not and cannot act in a retail capacity for those leased properties. The BBPA neither represents the tenants or the opinions of the tenants. Evidence supplied by the BBPA will only reflect the opinions of the Pubcos and brewers

  We are also of the view that the Pubcos, in their desire to increase their earnings, apply pressure through the BBPA to obtain more discounts off the wholesale price. It does not take a genius to recognise that for the Pubcos to extract an extra discount of £30-£50 a barrel over the last four years it has to come from somewhere. The brewers were not making so much that they could give that kind of money away. Looking at how the wholesale prices have increased it would seem clear that as the Pubco asks for more the Brewer puts up their prices to cover the discounts. This is not new. The small brewers admitted to the T&ISC that they put their prices up so that the Pubco could get a bigger discount.[43] It has been happening to the bigger boys as well.

  The T&ISC stated that the BBPA should review its code in the light of their recommendations. They ignored virtually everyone, except to a small degree on UORR. They agreed that rent could go down but then said that it could not fall below the floor level of the lease. In other words there was a limit to how much it could fall. Even worse they refused to accept that the annual increase in rent based on RPI were upward only. Since when did RPI ever come down? Never! So the new Code was just deception.

  In a nutshell BBPA have overseen price fixing of produce, to the detriment of tenants and consumers, destruction of the T&ISC recommendations and misrepresentation of their persona.

  The other prime issue is the rental basis.

  The T&ISC in Para 158 stated that all tenants should be treated fairly and rents should be reasonable and sustainable. The amount of tenants who feel that they have been treated unfairly and /or their rents are not reasonable or sustainable has astounded JFL. This has not been secluded to one particular area but is apparent across the whole of Britain.

  It is known that the T&ISC issued recommendations regarding the construction of profit assessment and rental construction.

  The T&ISC said

    144.  The industry could and should establish clear guidelines for the valuation process. Where they do not already exist, new national guidance for rent calculation should be compiled, and disclosure rules clarified. The profit assessment method of calculating rent should be carried out in accordance with national accounting standards and with knowledge, prudence and due diligence.

  145. Pubcos should provide their tenants with a comprehensive breakdown of how their rent was calculated. This should reveal the whole detail of the profit assessment and how the specific requirements of the lease conditions had been interpreted by valuers. The profit assessment should form an addendum to leases, with any subsequent review, to ensure transparency.

  We have already identified that the BBPA would not endorse these two recommendations. But what about RICS?

  JFL has learnt that how the rents are set for the tenanted sector is covered by the VIP2 paper. This was drafted by Mr Luay Al-Khatib, an associate director of the Royal Institute of Chartered Surveyors, and the Chairman of the TRVG Committee, Mr Robert May. Mr May was introduced to ourselves as the Rent Controller for Enterprise Inns plc. The rents are set not only on the premise that the tenant should be an efficient operator but also that the tenant should be capable of turning back the tide on national and regional decline. As for International Accounting Standards they just do not accept that this standard is required.

  The view has been given that RICS assumed that the prospective tenant would have a reasonable amount of training and experience but that is not reality. Most of the Pubco training is given after signing the lease.


  With reference to Mr Robert May, who is employed by Enterprise Inns. We believe that in Mr May co-drafting the VIP 2 paper there would not only have been a huge conflict of interest but also there would have been a vested interest on Mr May's part, it is in his employers interest to ensure that the highest return possible is achieved. It was in Mr May's interest to ensure that his employers were happy with the outcome of the paper.

  The T&ISC was adamant that the tied tenant should not be worse off than if they were free of tie. This concurred not only with the EU but the Appeal Court. In addition it gave clear guidelines, see 144 and 145 above, how transparency could be achieved. RICS under the guidance of Robert May could not possibly accept those standards since it would be contrary to their personal objectives, the instructions given to the valuers and thereby arbitrators. Observance of the T&ISC recommendations would cost the Pubcos dearly and could have serious repercussions for those who were proven to have been deceitful. There could be enormous claims for malpractice.

   Many tenants are suffering due to the un-sustainability and the complexities of the current rental system but the Pubcos achieving their comfortable profits at the expense of the tenants and consumers.

  RICS have been shown to have been infiltrated, their standards diminished, and since they do not believe in transparency when it comes to assessing the rent of tied premises they must be seen to be totally untrustworthy.

  These are two prime issues, the tie and the rents. Neither the Pubcos or RICS can be trusted to adjust rents to ensure that the tied tenant is not worse off than if they were free of tie or that the tenant[s] should have a liveable income. They either do the sums correctly or remove the tie. They cannot be trusted, so remove the tie.

  Addressing the actual calculation of rent, RICS have made it clear that they do not accept that there should be whole detail or that the profit assessment should observe National Accounting Principle. They may not like it but it is a case that they must do so under statute or it should be taken away from them. RICS require a shake up. Their President cannot stay in his ivory tower while his minions are raping our industry, our pubs and our livelihoods. The BESC should make sure that they are brought to heel!

  We have carried out further research and listened to our members relative to the un-sustainability of the rents and the price of the tie. The effects of these two areas are pivotal in the "swinging door" analogy of the tenanted sector.

  The following records some of our research:

    (i) The Pubcos have refused to release the figures for surrenders or forfeiture of leases, we feel that this is due to the amount of tenants that are surrendering their leases, going bankrupt or taken to court by their pubco for forfeiture of lease. We believe that if these figures were released it would damage the Pubcos stance that there is nothing wrong with their model or their estates.

    (ii) JFL is fully aware that the Pubcos have refused to produce the prices that they pay for the products, stating that it would be detrimental to their business. We believe this to be a true statement of facts, although we do not believe in the sense as the Pubcos are intending. We believe that if the true price that they pay for a barrel was to emerge they could not possibly justify the increase and burden they place on their tenants.

    (iii) JFL has been advised that many Pubcos carry alleviation clauses within their contracts with the brewers. These are in place to ease any burden of price increases throughout the duration of the contract, and yet the Pubcos immediately pass on any increases to their tenants and the consumer.

    (iv) The Pubcos have been very vocal on the benefits of the model especially the cheapness of entry theory. Whilst in theory there may well be an initial saving in entering the trade through the tenanted market, however as is being proven on countless occasions, this is where the benefit ends as the reality is that it too often proves the most expensive route.

    (v) Although Para 165 discussed the benefits of training and how they would like the Pubcos to benefit from better trained tenants. The Pubcos are offering training but always at the expense of the tenant. However JFL is aware of at least one case, a new tenant of less than a year standing who was offered no training whatsoever. We do not believe he is a lone case.

    (vi) Regarding the tie it has become clear that there are different variations contained in lease contracts. These vary from being tied just on dispensed lager and beer to the full on tie where tenants are tied on all pump products, packaged products, wines, minerals and spirits. Although there was supposed to be a benefit of having the tie in that there was a lower rent than the free trade sector, to compensate the reality is that tied rents appear are the same as those in the free trade sector; the benefit of the tie has been removed by the Pubcos.

    (vii) Many tenants are of the opinion that there is no longer any benefit to the tie. There are concerns over the cost of the tie, many tenants are fully aware that they are paying in excess of £40.00 per keg or more from the pubco than if they had the freedom to choose their supplier. Freedom from the tie would guarantee more income for the tenant and potentially better prices for the consumer.

    (viii) There are also concerns over the restrictions arising from the tie, such as restrictions on the deliveries, if you're lucky two deliveries per week whereas if they were free of tie they could ensure deliveries at least five days of the week. The tenants also view that being able to place an order in the morning and receive the delivery later that day or early the next day would definitely be beneficial and this is something denied to them as a consequence of the tie.

  We at JFL consider that Pubcos, BBPA and RICS have collectively abused the system, and tenants, and in many cases mainly for their own gain. That is unacceptable! The T&ISC made recommendations four years ago and if they had been applied it would have brought transparency and fairness into the tenant system. Those recommendations have been subverted, sidelined or ignored. Had the recommendations been implemented we believe that virtually all parties would have benefited. We have found that the most dissent has come from the tenants of Punch Taverns and Enterprise Inns with Admiral and SNPE. These Pubcos have proven not to care for either their licensees or their pubs and are driven solely by profits, at the expense of all others. It is too late for the Pubcos to now adopt the T&ISC recommendations the damage to the industry and tenants has been done

  The Government have to step in and stop the abuse of the position of power and strength that the Pubcos hold. We of JFL require the BESC to recommend to the Government the removal of the tie and paragraphs 144 and 145 of the T&ISC recommendations mandatory together with the full and total removal of upward only rent reviews and the pernicious annual indexation of rent.

43   See T&ISC report paragraph 51 and 52. Back

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