Examination of Witnesses (Question Numbers
40-59)
MR BRIAN
JACOBS, MR
CLIVE DAVENPORT
AND MR
PAUL DALY
18 NOVEMBER 2008
Q40 Mr Wright: So you are saying
the three month cooling off period is worth nothing at all.
Mr Jacobs: It is bizarre.
Mr Daly: If you put your life
long earnings into your new life you are not going to leave in
three months. If you have renovated it, presumably bought the
fixtures and fittings or bought new ones and everything else it
all has to be entered into the equation. In my case I spent quarter
of a million.
Mr Davenport: You are still in
a positive mindset at that point in time because it is new, you
have just taken it over and your life is changing. Three months
is nothing. You have not even worked your way around the pub yet;
you do not know where all the nooks and crannies are.
Q41 Mr Weir: Mr Daly mentioned earlier
that personal guarantee is given by publicans who take over pubcos.
Is the reason why people go to pubcos because it is cheaper to
start off there and then in many cases to buy a non-tie pub?
Mr Jacobs: It is not so much cheaper,
it is the choice available. If there are a thousand pubs on the
market and ten of them are free of tie but they are freeholds
as against the other 990 which are leaseholds, you would go for
the leasehold. You are then faced with the situation where you
are going to take those premises on because that is what is available.
Q42 Mr Weir: I understand that, but
is there a substantial difference in cost between taking on a
freehold pub?
Mr Daly: In the free of tie area
you can negotiate. If you are a good negotiator you can negotiate
up to a year's rent free, which is what I did. This is very, very
important factor. You go into a place where you negotiate with
the landlord, he or she owns the building. They understand that
you have a lot of energy for the business. You come in and you
add a lot of value in that first year. Whereas with a tied offer
you are paying rent immediately, so from the get-go the rent is
direct-debited in a non-negotiable situation. In actual fact,
in some cases it is a lot cheaper to get in in a free of tie if
you add it up at the end, if you look at the bigger picture, the
end game.
Mr Jacobs: There are also some
examples where local authorities own pubs and they rent those
pubs to brewers and to pubcos. Those pubcos then lease them back
on. They rent it for £1000 or £5000 a year and the pubcos
take possession of it, add a tie and charge £20,000 a year
rents. If an individual could get to the local authority they
would have got it at £1000 a year but the opportunity is
not always there.
Q43 Mr Wright: What would be the
consequences of removing the beer tie? Would that remove the low
cost entry into the pub industry?
Mr Jacobs: I think if the tie
were removed there would be a greater opportunity for people to
get in because the market would be opened up much better. Yes,
it is possible that some of those rents may go up as against what
they are on a tie basis. When I say rent, that is the dry rent
rather than the wet rent. It is possible that some of those may
go up but even if they went up for every extra hundred pounds
that is available in profits the landlord may get 50 but the tenant
would get an extra 50 and that would take them closer to survival
that to despair.
Mr Daly: These are clever people.
You do not build up a 9000 strong property company without being
a clever person. You know how to re-capitalise. The banks are
doing it at the moment. You sell assets, you re-capitalise the
company. I would buy my head lease in a second and I am sure there
are a lot of people who would do the same. You re-capitalise the
company and market forces take over in the way that they should
now.
Mr Davenport: It would render
the situation more honest because the pubcos would be what they
are and that is property dealers and not brewers at all.
Q44 Mr Wright: Is that one of the
reasons, because of this huge capital asset that is out there—9000
companies—there is always going to be some equivalent of
pubcos.
Mr Daly: It would re-balance without
a shadow of a doubt in a very short amount of time. They will
tell you that they cannot do it. One minute they will say "We
tie everybody in" and the next minute they will say, "We
don't know how our model will work without the tie". How
come the CEOs and chief executives do not know that? Of course
they do.
Q45 Mr Wright: If the beer tie was
to be kept all other ties such as non-alcoholic drinks and amusement
with prize machines would be affected.
Mr Daly: Going back to your question
about the rural pub, people work all day, they sit down in the
evening and have four pints or whatever, they go for the beer;
beer is their mainstay of the time. For example, the percentage
charged on Carling is 61% more for my beer tied venue. The tied
venue charges 61% more so they choose the big products for the
maximum yield. The hit the most popular beer in England the hardest,
then the ales, et cetera.
Mr Jacobs: It is the beer tie
that is the killer for the tenants because so often the actual
dry rents are closer to those of a free of tie pub, therefore
the sum of the two make them just uneconomic to run. Freedom of
tie would in fact open up the opportunity for more pubs to actually
survive.
Mr Davenport: I am in danger of
becoming the statistics expert here, but in our survey we asked
that question and 94% of recipients said that they would support
the removal of the tie. All of those are landlords so they are
looking at it in a rounded way about their business, asking would
it be good or would it be bad and 94% are saying it would be good.
Q46 Mr Wright: For that one thing
to happen, the removal of beer tie, that would in your opinion
help towards reversing the decline of the pubs.
Mr Jacobs: It would be a whole
new injection.
Mr Daly: It is an outdated model,
it is over. It is not if, it is when.
Mr Davenport: One of the points
to make is that Weatherspoons, the most popular chain, is a different
model from pubcos. Weatherspoons are profitable, making a good
deal of money doing it the way they do it. Everybody involved
in pubcos, from the statistics we have, is not making money, so
there is something wrong with the market. That is the question
that has to be addressed and resolved.
Q47 Mr Wright: So what you are saying
is, look at the Weatherspoons model.
Mr Davenport: The Weatherspoons
model is a completely different model in the sense that they own
the pub and they own everything there is. They buy for all of
their pubs on a single market point so their negotiation ability
is much stronger than any individual. We need the colour of all
those different pub landlords. We do not need to have 54,000 Weatherspoons
around the country; I think we would all go insane if that were
the situation.
Mr Daly: Their buying power is
the same as Enterprise or Punch but they pass that discount on
to the customers and then they get a retro as well which Enterprise
and Punch do, but they do not pass it on. We are paying huge prices
for things that they buy for nothing. For my beer tied bar I buy
them 15% more than they buy them and I am making a 75% margin
which I need to employ all those people et cetera. They are buying
it for even less than I buy it then they charge you 61% more.
It is pure extortion.
Q48 Mr Wright: Finally on this particular
point, in terms of AWPs in pubs do they contribute significantly
to the income of the pub?
Mr Jacobs: AWP machines can contribute
significantly to the smaller pubs, there is no doubt about that.
One of the big problems with the AWP machines is that the pubco
charges the machine operator a royalty for citing a machine in
the pub. The supplier adds that royalty into the rents, so the
rent to the pub goes up with the pubco taking their piece. When
the machine is emptied, as a generality, the pubco takes a slice
of that machine income as it is emptied and the rest of it is
left with the tenants after deducting the rent, VAT and so on.
What is left with the tenant is then calculated in the tenant's
profit and loss accounts and the rent for the pub is justified
on 50% of that profit. So they have taken a further 50%. By the
time they have added all those percentages up the pubco is taking
something in the order of 80% or 85% of the total takings of that
pub. That is not a partnership situation; that is not fairness.
Q49 Mr Binley: The whole concept
of the beer tie leads right from the very beginning to a dishonest
relationship between brewer and tenant. Is that not the real concern?
When that is linked to long term leasing and the previous tenant
who has run a pub down (because it is not just like leasing property,
you are leasing a business and you are leasing the good will of
that business) and who easily fell out with the brewery because
of that relationship and that repeats itself, it could be argued
that the beer tie is bad for the pubcos as well.
Mr Daly: Totally, you buy that
bad will. It is impossible to get rid of that ghost.
Q50 Chairman: Can I just clarify
what you are saying about the beer tie, is it specifically for
pubcos or totally?
Mr Jacobs: I am saying that beer
ties should be extinguished across the board with one exception.
There are small brewers out there with less than 500 pubs—some
of them are in 20 or 30 pubs—but they brew a specific beer
for their location, their area. They are very personal; they are
run on a personal basis very much like the paternalistic brewers
of years past. Those should be allowed to continue because it
is in the interests of promoting the establishment of beer in
areas which are individual to that area.
Mr Daly: And production of beer
in England, which is a famous country for beer.
Mr Jacobs: All the major sales
in this country are from continental brewers now.
Q51 Chairman: Presumably there are
working men's clubs and sports associations and so on who would
rather benefit from investment in a freely entered into tie.
Mr Jacobs: Very often that type
of club gets a very large discount from brewers. Historically,
years ago, they used to get what used to be called a free trade
loan but that got knocked on the head with beer orders and the
rest of it which I am sure you are familiar with because you were
involved.
Mr Daly: If you do not cut the
tie completely, if the company is not an actual brewery they will
work out some way of out manoeuvring and us yet again. So it has
to be just cut.
Q52 Chairman: If we turned pubcos
into literally buy to let landlords who have no interest in the
use of the property, just to derive maximum value from it, what
would the consequence be? Would there be alternative uses for
pubs you can think of?
Mr Davenport: There are already
alternative uses. I can think of four in Cardiff alone that have
been converted into flats. The very large Victorian monolith hotels
are all being converted into flats because it is cost effective
to do it because you cannot make any money out of those at all.
Mr Daly: A lot of them have big
gardens so you can get the affordable housing in there too; you
can get the whole ratio.
Mr Jacobs: The other issue of
course is that although pubs could have an alternative use, the
actual tenants may be in there with a lease that says they shall
operate that premises as a pub and nothing else. From the pubco
point of view—particularly Enterprise rather than Punch,
so I will use Enterprise as an example—they do not have
a managed division so under the Landlord and Tenant Act they cannot
go and kick a tenant out when it comes to the end of their lease;
the tenant has the right to renew. Seeing that they have the right
to renew, that will be a pub and will trade as a pub until such
time as that tenant says, "I will give it to you back".
At that point the pubco would have the opportunity of saying they
will convert it into flats or whatever.
Mr Daly: Sometimes you can buy
a tenant out of a lease.
Mr Hoyle: We have also seen other pub
car parks where the have become small housing estates even if
it has been a successful pub because they have had a better offer
from building companies. We have also seen McDonald's taking over
pubs. They are always looking for alternatives so it does not
really matter. It is market forces that dictate it.
Q53 Roger Berry: It seems to me that
tenants need a decent trade union here. If I am a tenant and I
am having problems with my pubco, where do I go for support?
Mr Jacobs: There is nobody out
there.
Q54 Roger Berry: There is no organisation
out there to help?
Mr Davenport: As an organisation
we are closely looking at it because, during the survey, we realised
how little support there is for publicans. It is quite incredible.
You automatically think—well, I did—of the Licensed
Victuallers Association but that virtually does not exist any
more. We are looking at what sort of package we can put together
to try to offer some support for them ourselves because it is
a dire situation.
Mr Jacobs: People think that the
BBPA would be the ideal vehicle but it is not because they are
only there for the interests of the brewers and the pubcos. They
are not interested in the tenants.
Q55 Roger Berry: In the evidence
from the British Beer and Pub Association they say that the revised
code of practice offers its services to "take on the role
of intermediary to resolve and misunderstandings" but it
has not actually received any requests to act in that capacity.
Is this true, that the organisation claims its job is to act as
intermediary to facilitate resolving problems and misunderstandings
and yet it is perfectly clear that nobody is using them? Is it
really like this?
Mr Jacobs: They claim to represent
the tenants and the retail trade and yet when you stop and look
at it there are 9000 managed houses out of 56,000 and the companies
that own those 9000 are members of BBPA. There is nobody that
is a member of the 56,000; they claim they are because they own
another 30-odd thousand. That is where the problem lies. They
claim they own it and they give the illusion that they have an
interest, but they do not. They are not interested in how a tenant
survives at all.
Q56 Roger Berry: Do you think therefore
there needs to be a tribunal system and, if so, what should it
cover?
Mr Jacobs: I think it is possible
to set up a tribunal system but I think that the tribunal system
would probably only work if there was not a tie. I do not think
it could possibly work if a tie exists. One of the other benefits
of removing the tie is that you remove the conflict within the
valuer's situation; it has gone, there is no conflict. Yes, you
could have a tribunal but if you did have a tribunal I would say
it should be manned by the three prime disciplines: accounting,
valuers, legal. It should be manned by those three somewhere down
the line. You should not let the valuers have their own way and
you should never let accountants or lawyers have their own way
either.
Q57 Roger Berry: I would like to
know if Mr Daly and Mr Davenport agree with that.
Mr Daly: The answer is you will
come back in so there will not be an us and them scenario as much
because they would be property people, that is what they are.
They would be able to readdress that balance value-wise of their
companies and then it would be much more open book.
Mr Davenport: There are so many
vested interests with a tied situation and that is where the problem
lies.
Q58 Roger Berry: Could I ask about
rent review? Mr Daly, in your evidence earlier on you referred
to the situation where a tenant might not go for a rent review
because if they did they would have to do it on an annual basis.
Mr Daly: Yes, that was a client
of mine. His previous partner was struggling with the rent so
consequently he was in a weak position. The BDM out-manoeuvred
him and negotiated a much more severe tie so he was not only tied
for beer he was suddenly tied for wine and all sorts of things.
So he increased the tie and they also increased the rent reviews
to yearly RPI index. What happened was very onerous, just because
he was weak. The partnership fell out of the window on that occasion.
Q59 Roger Berry: What about the opportunity
for arbitration on rent reviews?
Mr Daly: He was weak. If you go
back to the whole rural thing some people do not have a lawyer.
Some people do not reach for their lawyer; they do not pick up
the telephone. They try and negotiate things themselves and all
sorts of things happen and they are out-manoeuvred. There are
9,500 of them.
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