Examination of Witnesses (Question Numbers
160-179)
MR ROB
HAYWARD, MR
NICK BISH
AND MR
JOHN MCNAMARA
9 DECEMBER 2008
Q160 Mr Binley: No, I would like
you to do so as well because you operate it.
Mr Hayward: Those are their figures.
In terms of the difference between the leased tenanted estate
and the managed house estate, there has been a marked transfer
from managed houses through to lease tenanted estates over the
last decade. That is the reason the turnover in managed houses
is so much bigger.
Q161 Mr Binley: I understand that
in managed houses it is bigger because the pub companies keep
the best pubs.
Mr Hayward: It is also because
there is a regulatory burden associated with employment in the
line which makes it uneconomic to have managed houses at a smaller
level. The point at which you operate a managed house has risen
ever higher in the last two decades.
Q162 Mr Binley: But not in a year;
this is a difference in a year, Mr Hayward.
Mr Hayward: I was just going to
conclude with the observation that it is in relation to the regulatory
burden that is imposed. There is no question that the difficulties
that are faced by this sector are very substantial and they are
faced by both the pub companies and the ordinary leased tenanted
estates as well. I can identify a whole series of actions which
companies have taken but I will just refer to one, which is relevant
both to Punch and to Enterprise and also to Marston's whom you
have not invited to give evidence but who submitted evidence and
are well known certainly to a number of members of the Committee,
and that is the big individual action which they took in relation
to floods which was an immediate response and landlords are still
facing problems in relation to that. Circumstances have changed
very dramatically. One has to judge the sets of figures because
of those changes that have taken place.
Q163 Mr Binley: Does anyone else
wish to comment on that because they do look terribly suspicious
to me, quite frankly? Let me move on. You will know from the Fair
Pint campaign and indeed others that upward only rent reviews
are still relevant to 29% of the pubs that have reviews. This
is totally in defiance of the recommendations made earlier in
a number of ways. Can you tell us why this should be the case
and can you say why upward only rent reviews should not be removed
from all leases and should have been so already?
Mr Hayward: It is a legal process
to which Nick referred earlier on in relation to any element of
an agreement. They are being phased out, as a number of companies
have referred to. Again I refer to Marston's evidence which actually
talks about the process of phasing those out. Upward only rent
reviews do not only apply to the pub industry. I gave evidence
four years ago and I repeat the evidence. I as the BBPA have an
upward only rent review built into my rental agreement. Who operates
that upward only rent review? Who is my landlord? The Department
of Health.
Q164 Mr Binley: I accept that totally
and I have already been on a general commission which made that
very point, but we are talking about the pub trade and pubcos'
relationship to this particular requirement. They have not done
it, have they?
Mr Hayward: They are being phased
out as a matter of process but changing a rental agreement requires
costs. The fact is that within that process we now have the economic
inhibitions that we face and large numbers of locations are not
only having freezes but they are actually having rent reductions
as well.
Q165 Mr Binley: I have evidence that
suggests that this is not a matter of the passing of time; it
is a wilfil requirement not to put in the leases the fact that
there could be downward rent reviews as well as upward rent reviews.
Is that a fair statement?
Mr Hayward: In which case, you
will have to take that up with the specific landlords, whoever
they may happen to be.
Q166 Mr Binley: Do you have any comments
on that particular point? Do you understand the point that this
gives a really bad impression of the way pubcos work with their
tenants?
Mr Bish: Our experience is as
I said earlier that I think my members are quite sophisticated
businessmen because they operate companies. They are exposed more
frequently to this sort of thing happening. The five-year rent
review is not a five-year occasion; it is happening annually because
it is across their estate. My members are aware of the recommendations
from the last committee. They are also aware that the pubcos largely
have said that they would disregard upward only rent reviews,
notwithstanding that they remained in the lease. I think personally
that they could have issued side letters to confirm that circumstance
rather than it being the quality of the relationship. Therefore,
my members are aware of that and my members tend, not all of them,
to go back to their pubco and say, "I want to talk to you
about my rent. I want it to go down. How can you help me? What
are you doing about it?" This conversation does happen. So
they honour it but when prodded or pushed by their lessee. That
opportunity obviously is available universally. It is taken up
by my members more often than not because, as I say, they are
more sophisticated businessmen. Unfortunately, their experience
is that the pubco will accept the conversation and they might
offer a rent reduction, but usually my members' experience is
that this comes attached with a number of conditions, like introducing
a retail price inflation clause into it so that the rent goes
cranking upwards in spite of the theory of it having come downwards,
and possibly there will be conditions to extend the nature of
the tie. Say it was only a beer tie, they might want to extend
to a wine and spirit tie or a amusement machine tie, on the basis
that they would say, "Well, we want to have a good view of
the total business so that we can be better placed to help you".
Q167 Mr Binley: What you are telling
me is that they pay lip service in cases of upward only rent reviews
and they believe that but they will catch him in other ways? Is
that what you are telling me?
Mr Bish: That is my members' experience.
Q168 Mr Binley: That is surprising.
Can you give examples of a pub company with an upward only rent
review in the lease where the rent has gone down? You have said
that has happened. You said that it was in the lease but there
were examples where rent had been reviewed downwards. Can you
send me examples of that?
Mr Bish: Undoubtedly.
Q169 Mr Binley: Good. We look forward
to receiving them. I am most grateful. Can I ask whether it is
normal or right for rents to be linked to RPI?
Mr Hayward: In terms of agreements,
Nick has already identified that leased tenanted agreements are
as varied almost as the number of pubs we have. There are a lot
with RPI built in.
Q170 Mr Binley: You have already
made the point that the pub trade is so diverse that the average
is meaningless. RPI is an average. Are you still saying that that
is the right way to look at an individual business, because that
is how rent reviews are applied?
Mr Hayward: What I am saying is
that there is a very wide range of agreements between one business
and another, as Nick has already identified. He is representing
primarily a different sector of business. What is right is the
agreement between a company and another business because both
parties enter into that, presumably having taken their own professional
advice. Whether that is RPI or whether it is in some other form,
that is a decision of two businesses coming together.
Q171 Mr Binley: Let me put you in
my position. Would you advise that they should not use RPI as
a factor in defining rent increases?
Mr Hayward: No, I would advise
them to take their legal and financial advice as we do and then
take a judgment. In current circumstances, all these matters are
up for review. Evidence has been given by different companies
indicating many of the different processes that are being undertaken,
given all the difficulties that are currently being faced.
Mr Bish: As I said a moment ago,
we see RPI as obviously inimical; it is not fair because it is
based on the average and it tends to be introduced into a lease,
or has been in high inflationary times, and is still there. We
do not like it. If you have a downward rent review, we see it
as a device to compensate for the expression of help that turns
out to be not quite so helpful as we thought in the first place,
and so we would be against it.
Q172 Mr Binley: I am most grateful.
Mr McNamara, can you comment on that?
Mr McNamara: We obviously have
some members who contact us. We offer a free legal help line for
example. We have about 2,200 calls on that help line in a half
year. In the half year to October, 203 of those were around Landlord
and Tenant Act relationships. There will be within that data some
matters around rent negotiation, rent disputes—what is arbitration
and how does that work? We do get into some of those arbitration
discussions. It is mainly in a broad sense around, "Can you
help me to arbitration?" rather than "Can you justify
this or not?"
Q173 Mr Binley: My final question
is about arbitration. Can you tell me what percentage of rent
reviews go to arbitration; what is the average cost of that arbitration;
what percentage of arbitrations are found in favour of pubcos;
and who represents those tenants who are not the clever ones who
join your organisation, Mr Bish, but are the ordinary guys like
me who do not bother? Who represents and helps them? It used to
be the LVA big time. Are they still around in that respect?
Mr Bish: The Federation of Licensed
Victuallers Association and some small LVAs exist. We do not represent
individual licensees or individual lessees.
Q174 Mr Binley: Perhaps you could
answer my three points there about: what percentage of rent reviews
go to arbitration; what is the average cost of arbitration; and
what percentage of arbitrations are found in favour of pubcos?
Mr Bish: I do not have that information.
Mr Hayward: I do not have that
information either.
Mr McNamara: I do not have that
information. What I do know, and perhaps we all know, is that
if you go to an arbitration service you run a risk of substantive
costs and if you lose out, if you are at the wrong end of that
arbitration, you pay the other side's costs as well. What we try
to do, at our members' request again, is to come up with an independent
expert determination service, which would be a low cost, short
term process. All our members have supported that and the road
shows we have done recently on rent review negotiations have all
supported that. We are talking to some pub companies that will
also hopefully become involved in that.
Chairman: We want to look at some of
the alternatives later on. Deal with the arbitration issue at
present.
Mr Binley: Can I suggest that you do
not know but you are able to find out and I think that information
will be very important to us. All three of you might write to
us so that we can get your individual views and information in
this respect. Is that fair, Mr Chairman?
Chairman: Providing information is certainly
fair. We will have a conversation about this. Thank you.
Q175 Roger Berry: Mr Binley asked
for examples where upward only rent review clauses had not been
enforced and the rents had actually come down. I am more interested
in how often that happens, what proportion of pubco rent review
clauses are cast aside in favour of rents coming down, and of
those, what proportion attach new strings and what proportion
do not? I think those proportions are far more significant. Name
me a few examples.
Mr Bish: I made the point, so
perhaps I could answer first. It is very low and I would also
say it is not scientific in the sense that what I have told you
is anecdotal. It is repeated frequently but not in any scientific
research way. Again, we could explore that.
Q176 Roger Berry: If you have the
figures, the Committee would be grateful. If you have not—
Mr Bish: We have not got them
today.
Q177 Mr Oaten: Mr Hayward said "a
large number".
Mr Hayward: I do not think I used
the phrase "a large number". I certainly indicated the
number is growing but I was going to make the comment to Roger
Berry that in relation to it if one took the most recent time
period, and this comes back to my desire to be accurate for the
Committee, the figure would be largest. Because of the serious
economic circumstances we face, all companies of whatever size
are providing more and more assistance in terms not only of rent
concessions but a whole raft of other forms of financial assistance
as well, which again are very well laid out in the Marston's evidence
under section 3; they list 13 different forms of assistance which
they have provided recently.
Q178 Roger Berry: That does however,
does it not, Mr Hayward, suggest the BBPA's code is not the reason
why the leasing arrangements are changing. You are saying the
market is doing this for us. If that is the case, Rob, it suggests
it is not your code that is doing it.
Mr Hayward: No, I was answering
a question in relation to Brian Binley's question about upward
only rent reviews and I was commenting specifically on that particular
matter. There is no question that there are other factors that
have now stepped in and are dramatically affecting the market
and the companies are responding to those circumstances.
Q179 Mr Oaten: I was confused about
who helps the pubs with arbitration.
Mr Hayward: In terms of individual,
they will generally either turn to the LVAs, of which there are
regrettably very few nowadays, or alternatively they will refer
to their professional advisers, some of whom you gathered evidence
from at the previous session.
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