Letter from RICS to Nigel Wakefield dated
11 August 2008
Re: Your letter dated 7th July 2008
Following receipt of your letter of 7 July,
I referred it to two longstanding licensed property specialists,
both of whom are in private practice. Each has dealt with public
house valuation for over twenty-five years and both they, and
colleagues, accept instructions from both landlords and tenants.
This includes clients from the large public house companies and
The following is their response to your letter:
We have reviewed Mr Wakefield's letter.
We believe that there is a fundamental misunderstanding
of the technical approach to the Profits Method of Valuation,
which is the appropriate method to adopt for all forms of trading
asset. Public houses are only a sector of the trading asset market.
Each sector requires specialist knowledge, particularly with regard
to operational issues. The way a ten-pin bowling complex is valued,
or a theatre, will be the same but the valuer must be experienced
in the operational aspects of the business in order to adopt the
Profits Method of Valuation.
The fundamental principle of any profits valuation
is that of Fair Maintainable Trade and Net Profit. It is the valuer's
job to assess what level of turnover and profit a Reasonably Efficient
Operator would achieve from the business, assuming the premises
are properly repaired, maintained and decorated.
The actual trading results of a business will
be reviewed and analysed if they are available, but this should
not form the only reference information for the valuation as is
suggested by Mr Wakefield. This is for several reasons. Firstly,
the premises may not be properly repaired, maintained and decorated.
The valuer will need to assess the trading potential of the Reasonably
Efficient Operator in the FMT scenario, and then, if required,
make an allowance to bring the premises up to the appropriate
standard. With a rent review of a lease, the valuer, whether acting
for landlord or tenant, will need to assume all the covenants
of the lease have been complied with. This is particularly important
where the lease incorporates full repairing and decorating provisions.
Secondly, the actual accounts might relate to a business which
does not trade to full potential, eg a licensee who chooses not
to provide the full range of services usually associated with
a business of its style and location, or an elderly licensee not
wanting to work so many hours. Most importantly, the valuer must
disregard any personal goodwill, which will have the opposite
effect to the above examples, where the business opens all day,
every day and provides all manor of additional services due to
the licensees entrepreneurial flair. It is just as unfair on a
landlord to value on the actual accounts of a mediocre licensee
as it is on a tenant who is clearly above average, or indeed,
Quite often valuers do not fully understand the
full principles of the Profits Method of Valuation, which gives
rise to apparent anomalies in its application. This is why it
is essential that valuers who accept such instructions have the
appropriate knowledge and experience.
With regard to the large PubCos employing Chartered
Surveyors, this is a commercial matter, and the engagement of
qualified and experienced specialists must be correct. We understand
the valuer will be looking to present the best case in negotiation
for his "client", the landlord. Similarly, a valuer
acting on behalf of a tenant will do everything he can to present
his case for the lowest possible rent; this is no different to
any rent review negotiation.
With regard to Mr May's position as Chairman
of the TRVG Committee, he has several important areas of responsibility,
largely communication between Committees such as those that deal
with accounting standards, international matters, plant and machinery,
taxation etc. VIP 2 was drafted by the two of us and approved
by the committee as a whole. It was revised to take account of
some ambiguous aspects and to ensure it complies with the latest
legislation. We were also asked to address rental matters in more
Chartered Surveyors do not create a market. They
analyse what the market is transacting. All sale and lease transactions
are freely negotiated. Different parties will play to a different
agenda. It is the valuer's task to investigate and analyse such
transactions and apply the evidence to a specific situation. In
negotiation, the valuer will attempt to agree the best result
for his client. Each party is free to walk away from a proposed
transaction. Unfortunately, many public house licensees choose
not to seek advice for personal reasons, and freely agree terms
which may not be in line with the raft of evidence.
A valuer who is appointed to report as an Expert
is in a different position to one who is appointed to advise and
Overall, we do not see how a landlord will benefit,
in the long term, by agreeing rents at an artificially high level.
If it puts an individual business in jeopardy, it will have a
negative effect on the overall business. What is important is
that valuers fully understand what they are doing and how to do
it. The Profits Method of Valuation has always been the most appropriate
method to adopt; it is the application that is key to a successful
market. At the same time, the market needs to reflect changing
circumstances, but inevitably there will be some lag due to the
nature of property transactions. The current economic situation
is clearly causing difficulties to all types of retailer; public
houses included. The fact that the industry is also suffering
the effects of the Smoking Ban and the severe competition from
the off-trade, are matters that experienced licensed property
valuers are well aware of and seek to reflect in the advice they
provide. We believe most public house landlord companies are well
aware of these facts. We cannot comment upon the recruitment processes
of the PubCos other than to say that they appear top provide more
support and training today than has been the case in the past.
The principle of FMT assumes a Reasonably Efficient Operator,
a term derived from International Accounting Standards. This is
what we used to call an average competent licenseeit does
not suggest a highly trained, longstanding licensee, but someone
with a reasonable amount of training and experience, perhaps as
a manager or senior support staff.
This is a direct copy of the response they have
provided to your letter. We will respond to the BERR consultation
on the subject in due course.