Pub Companies - Business and Enterprise Committee Contents

Memorandum submitted by Nigel Wakefield

  I have been asked by a member of Fair Pint to submit my findings to the Select Committee, I would like to stress that I am doing this independently of Fair Pint and my research was instigated by the amount of BII members who were in trouble and called me asking for advice. One of the founders of Fair Pint has been good enough to provide a pro bono service for these people and has now gone on to give advice to the Welfare Section of the Licensed Trade Charity, which I am also a member, it is he who asked me if I would write to you.

  I have for the last 36 years been involved in the licensed industry, owning free houses, restaurants and commercial property, I have in addition held a Consultancy job with the BII (British Institute of Inn keeping) since 1997 looking after membership in a large area of the South West and have covered most of the South of England at different times during that period.

  Initially the changeover rate in pubs averaged about every three years for the majority of pubs, the total failure rate was minimal, since a struggling licensee normally managed to sell before they got in to serious trouble.

  However the failure rate has escalated dramatically with the growth of the Pub Co's following the Beer Orders restrictions on brewer's ownership of large numbers of pubs.

  My concerns were the amount of members ringing me for advice because they were in trouble and the ones that I met who were struggling, the main problem appeared initially to be with the major Pub Co's with high rents and lack of discounts within the tie. As time progressed, licensees from, in my opinion, the better brewers were also in trouble with unsustainable rents and the tie.

  I met the Chief Executive of Enterprise Inns some five years ago and he said that he wanted the best operators in the country and I said he needed to change his method of operation, as a result I had a lengthy meeting with their Senior Development Manager. I suggested a number of proposals such as incentive based discounts within the tie and realistic rents rather than unsustainable ones, which he discounted. I also suggested that they sell their underperforming pubs back into the open market individually to create stability within the free house sector, rather than creating an enhanced scarcity value for available good free houses, he said that they would not do this and gave me a strange smile, they would in fact only sell them in tranches to other Pub Co's or for alternative use with an exclusion on being used for a pub again. The smile rather than his comments caused me concern until I realised what was actually going on, by buying all available good free houses and starving the free house market, paying in a number of cases over the top prices and in turn putting unsustainable rents on the properties, the high rent level was then used to create an artificially high pub value, they were inflating the values of their estates to fund further borrowing and expansion.

  By selling tranches of underperforming pubs with high rents and high values to other lesser Pub Co's the high values persisted. On paper with the high rents and the high values they sounded like a good proposition. One major Pub Co's so called average valuation of their pubs was £762,000 if you look at the Free houses for sale in any Trade Paper and they run from £200,000 to £650,000 for a very good one, there are others in the millions with exceptional business, but the bulk are within the lesser range. The £200-650K pubs are valued in the main on turnover and viability, not over hyped rents.

  However the failure rate across the board escalated, the majority of pub owning companies followed suit in raising rents to unsustainable levels, again enhancing their estate valuations, even more lessees and tenants were and are struggling.

  The root cause of this rent hike goes back to Valuation Document 2 produced by the RICS (Royal Institution of Chartered Surveyors). A committee was set up by the RICS, chaired by a Robert May who described himself as Pub Expert, but in fact was and is the Chief Rent Negotiator for Enterprise Inns, a number of other members of the committee I have been informed were also either retained surveyors or in the employ of the Pub Co's directly or indirectly. This would appear to have been a reasonably logical thing to do by the RICS, to have people who were directly involved in settings rents and valuations within the industry, with hind sight these people were dependent on Pub Co fees and remuneration and very much under their paymasters demands, there would not however appear to be any Surveyors on the committee who had solely represented lessees or tenants interests or a Surveyor who had the foresight to realise the long term implications of this document for lessees or tenants. From their correspondence I am lead to believe that all members of the committee acted for Pub Co's in a greater or lesser way.

  The document states that rent should be assessed on future sustainable trading potential by a competent operator, in another section of the document suitability and economic adaptability of the property for a different and more profitable style of operation.

  Both these statements enable the landlords surveyor to cherry pick almost any scenario or valuation that they care to choose, if they are going to ignore the existing trading accounts, which they frequently claim are not available or not reliable, even with newly acquired properties or repossessed leases, in my opinion the majority of rents are far beyond the capability of competent operators and certainly way beyond the people that they are assigning leases to.

  The term competent operator as defined by the Vice Chairman of the BII is a person with at least three years profitable trading and advanced BII qualifications or five years profitable trading and basic qualifications, which I as a senior member of the BII agree. The RICS did not consult with the BII as to an accurate definition of a competent operator and as to how you can accurately calculate the future sustainable trading potential of a pub. None of these Surveyors have ever run pubs to the standard of competent operator, it would take me up to a week of serious research with accounts, investigating where my business would come from and a full SWAT analysis to give a conservative and reasonably precise estimate of a pubs trading potential. Yet these Surveyors pay a fleeting visit if at all, rely on a BDM's (Business Development Manager) view of the business, very few of the BDM's that I have met have ever run pubs successfully and are usually ex trade reps who understand corporate targets and paper work. They are both under corporate pressure to achieve the highest rent possible regardless of the consequences, new leases would appear to go mainly to new people to the business, they believe the corporate welcome package and never question the rent and basis for it's level, these newcomers fail in the main within eighteen months, a few survive but they are very disillusioned and are looking to get out.

  One very seriously misleading requirement is a Business Plan demanded by the Pub Co's, I had until last week assumed that this was produced by the lessee to prove the viability of his intentions and ability to meet the rental levels, overheads etc and produce a profit. A solicitor told me that over the last five years no Business Plan had been queried or rejected by any of the Pub Co's that he dealt with. I had talked to one of his clients three weeks ago who wanted advice on the BII and he told me that he was completing on the lease purchase because the Pub Co had approved his Business Plan, the inference was that it was totally viable. I then realised that he would need to increase his business by very nearly if not 300% to break even, which in this climate is virtually impossible. On further checking I have discovered that many more honest, naive people failed to take further professional advice because of the acceptance by the Pub Co of the Business Plan convinced them that their plans were viable. Pub Co's hiding behind Caveat Emptor is legal but morally unacceptable. The following is an extract from a member of the RICS who is well aware of this misleading abuse by the Pub Co's.

  The mantra used by the Pub Co's is that an application for assignment is to test the applicant's financial probity. They will always say that they are not privy to the vendor's accounts and thus the genuine viability of a proposed business plan is not a matter for them to form a judgement. In law they cannot be faulted for this line of reasoning. In equity however they are in a position of vicarious responsibility and should give a total support package which includes business viability. After all, that issue is at the very core of rent review.

  Having set a high rent the lease is cast in stone and unless they can sell it on to another naive would be licensee, otherwise they are liable for the duration of the lease. The rent bears no relation to the trading viability of the pub except with high turnover pubs where the bricks and mortar valuation is below the valuation set by the turnover, the middle and lower end pubs have high unsustainable rents which enhances the freehold value.

  The Pub Co's put most of their new lessees through basic qualifications, the NCPLH (National Certificate for Personal Licence Holders) and sometimes the BII Licensed Retailing Exam which replaced the old BII Induction Exam, a three day elementary course on running licensed premises, totally insufficient to qualify as a competent operator.

  The old brewers always used to put new licensees into starter pubs and then if they progressed, into promotion pubs. With leases, there is no escape they are tied until they can assign it or fail and get evicted, even then they are tied as guarantor for whoever they have assigned the lease to.

  The high unsustainable rents and abuses of the tie by a large number of Pub Co's is causing extreme hardship to thousands of people, the Licensed Trade Charity is inundated with welfare cases, not from new lessees but long term professionals who are being evicted from their pubs.

  I was sent a copy of one Pub Co's failed, abandoned, repossessed records for the last two and a half years, it shows just under 6,000 pubs, some have changed many times. The person that sent it to me is horrified at what is happening within the company, these details were also confirmed by a senior manager with the company who is equally as unhappy, this is a terrible indictment of the Pub Co operation. I cannot use these statistics since they were sent to me anonymously. But I hope that you can insist on these Pub Co's producing these records, the final detail that you should insist on are the amounts of pubs on cash with order or rescue packages, their future unless they can sell the lease is decidedly limited, their cash flow is non existent, the rescue packages almost always insist on a tie for every item that they sell. The Pub Co's inflate the prices of all goods supplied to extract the maximum discount for themselves and do not pass on to the lessee, any benefit that they supposedly give is repayable should the lessee sell the lease, the chances of a lessee surviving under these conditions is minimal, they are corporately expendable and it is purely time before another one comes in with sufficient money to survive for a year. The leases have minimal value, since the rents have been set so high the majority of experienced operators would consider them uneconomic, but there are always people that believe the corporate web sites.

  I have raised the valuation issues with the RICS, which from their correspondence are either totally unaware of the realities of the pub industry in it's present form or are choosing to sit on their hands rather than admit that their instructions are being used to the most detrimental effect. They would appear to be more concerned with protecting their professional integrity than investigating the distress created across the industry by surveyors who it could be very easily construed as having vested interests in raising rents to extreme or unsustainable levels to suit their paymasters and employers.

  I am enclosing a copy of "The Great Pub Co Con" (not printed here) which I am assured by members of these companies is exactly what has gone on and is going on, the names have been removed for legal reasons, it is designed to make people ask questions and hopefully make you also ask questions. I am also enclosing all my correspondence to the RICS and their replies and any other correspondence (not printed here), including the Valuation Document with the offending sections highlighted, that I think will help you. The BII have insisted that I am doing this on my own, regardless of the fact that a number of senior and ordinary members are supporting me including members of the BII General Council.

  Two final suggestions to be considered one would be that an independant regulatory body be set up to investigate abuses within the tied and leased industry, that is not funded by or reliant on pub owning companies for their financial support, the other a totally open method of rent calculation based on existing business and not a convoluted jumble of calculations that only one person understands, more caring Pub owners work on a realistic percentage of turnover, if the turnover is low there is an incentive to increase the business and where a tie exists the owner benefits from increased sales.

  My apologies for the profuse correspondence and repetition, but I consider the abuse of the rent assessment as the key to the problems and failures within the industry, the tie and misuse of that I will leave to others more knowledgeable than I.

  I have no objection to my comments being put into the Public Domain, and should you so require be pleased to discuss my comments with your Committee.

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