Pub Companies - Business and Enterprise Committee Contents

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 their tenants.

  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, exceptional.

    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 detail.

    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 negotiate.

    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 licensee—it 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.

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