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.
| 
