House of Commons - Pub companies: follow-up - Business, Innovation and Skills Committee

Pub companies: follow-up - Business, Innovation and Skills Committee Contents

4 RICS guidance on pub rental valuations

Pub Industry Forum Report and Recommendations

103. RICS' primary involvement in the pub industry is in relation to property and rent valuations. Our 2009 Report concluded that:

Given the inherent subjectivity of the rental valuation method, it is very important that there is transparency about the assumptions on which it has been calculated. We note that there is disagreement between lessee representatives and pubcos over whether the Trade and Industry Committee's recommendation that "Pubcos should provide their tenants with a comprehensive breakdown of how their rent was calculated" has been implemented. The evidence that this recommendation has not been fully implemented is confirmed by our survey results which show that 44% of lessees had not been shown a breakdown of how their rent was calculated. This is unacceptable.[136]
We note that, without transparency, rental calculations are open to manipulation by the pubcos, in particular by systematically underestimating the costs for a lessee of running their pub. We recommend that there should be industry guidelines on the average costs of running a pub such as those in the ALMR benchmarking survey. These can be used by lessees as comparators against the rental assessments put forward by their pubco.[137]

104. In the summer of 2009 RICS appointed a Forum headed up by two chartered surveyors and an independent chairman to respond to our findings. The Forum was given the task "to fully understand the issues that exist within the industry and how they can be best resolved."[138] The Forum included a broad cross-section of representatives, pub companies, regional brewers, trade bodies, special interest groups, surveyors and individual licensees. It examined "how rents are set in the pub sector and how the rent review dispute resolution mechanism works in practice".[139] Particular emphasis was placed on the relationship between pub companies and their tenants.[140]

105. On 16 October, the Forum published its report Pub Industry Forum Report and Recommendations. Its recommendations included:

there was a need for enhanced guidance for RICS members on pub rent valuations;
RICS should work with other interested parties to create a new benchmarking scheme; and
RICS should create a Code of Practice for landlord and tenants at rent review and lease renewal.[141]

106. Kate Nicholls, Secretary to the IPC, said that it very much welcomed the Forum Report and that the IPC:

entirely concurs with the analysis and some of the recommendations of this Committee. It is a welcome recognition by an independent third party of the problems that face the industry and our members.[142]

However, the IPC remained concerned "whether, when and how its recommendations will be adopted and implemented."[143]

107. Mr Rusholme, Director, RICS Valuation Professional Group, confirmed that "all the recommendations that have been made in the Forum Report have been endorsed by RICS and will be acted upon."[144]

Valuation guidance

108. RICS is in the process of updating its valuation guidance for surveyors.[145] A first meeting of the working group tasked with producing the revised valuation guidance was held in January with a second meeting in February.[146] RICS asked members of the Trade Related Valuation Group (TRVG) to take the specific recommendations from the Forum and to start work on producing a working draft of guidance. When asked about the involvement of representatives of lessees, Mr Rusholme confirmed that it was "crucial that that takes place".[147] We understand that previous witnesses to our Committee—Simon Clarke, Garry Mallen and David Morgan—have been included in the working group. We welcome the fact that RICS has invited lessee representatives onto its working group to consider the revised RICS guidance. We expect their input to be as valued by RICS as that of industry representatives.

109. Mr Simon Clarke, a publican, member of the IPC and one of the individuals on the RICS working group, warned that the revised guidance would need far greater clarity for it to be successful. He argued:

RICS would be the first to admit that the misinterpretation of the guidance has been used to the benefit of some surveyors. We must ensure that there is now no muddying of the water.[148]

In particular, he highlighted the issue of the valuation of the benefits of a tied relationship:

As to the issue of advantages and disadvantages being valued I believe that is a perfectly valid comment. If those benefits or onerous terms are contractual and are in the terms of the lease they should be included in the valuation. If they are discretionary - some would describe them as onerous - there is no way that effectively they should be quantified and included in the rental valuation.[149]

110. The argument centres around the countervailing benefits pub companies claim they provide to their tied lessees, which are not available to free of tie lessees. This was discussed in the 2004 Report which found that:

On the basis of the evidence presented to us we feel that the immediately quantifiable cost of the tie is usually balanced by the benefits available to tenants.[150]

However, this did not reflect the evidence in our 2009 Report, which concluded:

From the evidence we have received, we are not so convinced. We are particularly struck by the results of our survey which found that 63% of lessees did not think their pubco added any value. The pubcos offer little support that cannot be found by normal market methods.[151]

111. The RICS Forum Report recommended that a correct interpretation of RICS guidance would follow the principle that a tied tenant should be no worse off than a free of tie tenant.[152] This was endorsed by Mr Rusholme who confirmed that the recommendation was "a statement with which we agree wholeheartedly".[153] He was aware of the controversy surrounding this part of RICS guidance and confirmed RICS needed to be "clearer in identifying and making it absolutely transparent when we publish an update of our information paper."[154]

112. For its part, the BBPA said that it would "completely abide" by the RICS guidance when it came out.[155] Mr Alistair Darby from the BBPA added that:

The BBPA code makes very clear that in terms of rent-setting it will abide by the guidelines set by the independent organisation which at the moment is RICS. Therefore, if RICS in its latest guidelines in the industry Forum next year comes up with a methodology for the calculation of tied versus non-tied benefit, which is a complex issue, we will be bound by the code to follow those guidelines.[156]

Simon Clarke argued that if the benefits were not contractual, they should not be in the lease and therefore would not be a matter for rent review.[157] He also brought to our attention that countervailing benefits could be being double counted:

On the one hand we are told [in the pubco evidence] that tied rents are similar to free of tie rents because of countervailing benefits counterbalancing detriment of tie, then we are told that a lower tied rent is a countervailing benefit and last but probably not least we are told that tied product prices are higher than those available to free of tie to counterbalance countervailing benefits. Basically, it looks like double/treble counting of 'countervailing benefits' if indeed any exist at all. [158]

113. We welcome the progress being made by RICS to address the shortcomings of its existing guidance, and we expect the BBPA to deliver on its undertaking to "completely abide" by the new guidance when it is published. However, the acid test of its success will be the extent to which the new guidance provides clarity on valuations and the principle that a tied tenant should be no worse off than a free of tie tenant. This should facilitate clearer discussion on what constitutes a countervailing benefit. If it does, then the guidance will represent a significant step forward in resolving a number of our concerns.

THE BROOKER CASE

114. In its submission to our 2009 inquiry, the ALMR stated that in the division of profits "The assumption is that lessee and landlord each take a 50% share of divisible profits".[159]However, this assumption was recently challenged in court. The High Court Judge in the (1) Charles Brooker (2) Leslie Brooker and Unique Pub Properties Ltd case found a 35:65 division between the landlord and lessee represented a fairer reflection of risk for the parties.[160] Mr Rusholme, from RICS, was aware of the case and offered the following assessment:

What I like about the Brooker case is that it has helped to dispel the myth that RICS or any other body sets in stone that there should be any particular split of divisible balance, be it 50-50 or whatever. Within Brooker there is a lot of discussion about risk and how one encapsulates it ultimately in the amount of money the tenant will pay. That is a very healthy discussion to have and an area where our guidance will provide a lot more support in terms of exactly where risks and rewards are taken into account.[161]

115. We await with interest how RICS guidance will assess risks and rewards in light of the recent court ruling on the divisible balance.

Benchmarking scheme

116. The 2004 Report recommended that there should be a national register of rents.[162]Our 2009 Report returned to this issue, and we made the following recommendations:

A system must be put in place to allow lessees to assess whether their rent is fair and in line with similar businesses. Our predecessor's recommendation to create a register of rent reviews would have increased transparency. We note it has been disregarded, and neither the pubcos nor RICS have taken any serious action to make sure the rental system is not unfairly biased against the lessee.[163]

The rental valuation method for pubs appears to be the product of history and tradition. If it is to be fair, there must be far greater transparency about how rents are calculated to ensure equality between the parties to the negotiations. If this is not improved as a matter of urgency, there are compelling arguments for abandoning the method entirely.[164]

117. A national register of rents was seen as a way of introducing transparency into the system as it would allow a lessee to compare their rent with those of other pubs.

118. David Rusholme recognised that "for a long time there have been calls for a national register of rents", but concluded that there were "lots of difficulties related to data protection issues and gaining the co-operation of the industry to make that happen".[165] Furthermore, RICS was concerned that such a register had the potential to be misleading unless all of the terms of the lease were included.[166]

119. Instead, Mr Rusholme highlighted the fact that the RICS Forum Report proposed the idea of a national database of trading information, in line with the ALMR benchmarking survey:

We looked at a number of other industries which had a trading element, for example hotels. There is a good deal of benchmarking information provided in that industry which is very helpful in getting the parties to come together in negotiations. That is one part of it. The other part is that chartered surveyors who act in that sector have their own databases of information and it is part of their skill and job to put together that information. One needs a whole range of information sources to make the process easier. We believe that benchmarking will do that job and that is achievable because there is an averaging of data from different sources; it is not just identifiable to one particular public house, for example. By averaging and making trading information slightly more discrete one is better able to get the whole industry to start to make more of that data available. We believe there is a lot of mileage in pursuing a benchmarking scheme and at the moment our efforts are devoted to trying to make that happen.[167]

Our 2009 Report recognised that this could be of great potential to the industry.[168]

120. RICS stated that it actively supported the creation of a "database of trading information used to estimate fair maintainable trade and the divisible balance by advising on the correct criteria for data selection",[169] and that it was having a "healthy dialogue"[170]with the Association of Licensed Multiple Retailers (ALMR)[171] as to whether its benchmarking survey was something they would wish to build upon. In addition to those conversations, RICS was also considering using either commercial providers of databases or whether it had the capacity to manage an in-house database.[172]RICS subsequently told us that it had scheduled meetings with "several parties who believe that they may have an answer to the benchmarking topic".[173]

121. That said, RICS acknowledged that for any scheme to be successful it would need both landlord and lessee input:

The scheme can only be successful if both landlords and tenants are prepared to cooperate fully and submit sufficient accurate data, so that a critical mass can be achieved.[174]

122. The ALMR benchmarking survey was originally confined to ALMR members but this year it was extended to "non-ALMR members and individual lessees".[175] In other changes to the scheme the ALMR also pledged to establish a cross-industry 'editorial board', chaired by RICS, to analyse the findings and it has commissioned an independent research company to collate the data. The deadline for the latest survey was extended to encourage participation.[176]

123. However, despite these changes, we learned that a number of BBPA members had pulled out of the benchmarking survey and "no additional companies have confirmed their participation to date".[177] When asked why BBPA members had pulled out, Mrs Nicholls gave the following response:

I have been told that it is because of ALMR's participation in the IPC.[178]

The ALMR has since announced that it would:

relinquish ownership of the survey and results and 'gift' it to the industry. This is because ALMR ownership or badging of the survey appears to be the major sticking point for some.[179]

124. Even with these changes, Brigid Simmonds said that the BBPA did not consider the ALMR benchmarking study to be:

properly representative, as it collected data from only managed pubs and also from clubs and wine bars, which while perhaps useful as comparators, did not provide information of much use to traditional tenants or leaseholders.[180]

Furthermore, the BBPA concluded that:

We believe that the complexities of benchmarking within the pub sector have been under-estimated: this is an issue that cannot be resolved hastily without wider consideration.[181]

These last two statements from the BBPA seem entirely at odds with Brigid Simmonds' earlier assertion to us in evidence. For the record we set out the oral evidence below:

Q88 Mr Wright: The previous witness gave evidence about the RICS national benchmarking scheme. In your submission you make clear that it is not part of the pub company's role to disclose commercial information. Does it mean that you will not work with RICS on its benchmarking scheme?

Mrs Simmonds: The pub companies are absolutely committed to provide the right information. Whether it is the ALMR benchmarking or, as the RICS said, some other system we will provide the information to make sure they have the best information on which to base the rent setting.[182]

We cannot prove the claim that the BBPA's reluctance to engage with the ALMR scheme is a consequence of ALMR involvement with the IPC. What is clear is that despite the assertion that the BBPA is "absolutely committed" to providing information, we are not confident that the BBPA is committed to greater transparency in this area.

125. We welcome the ALMR's decision to open up its benchmarking survey to the whole of the pub sector, the work it is doing to encourage other companies to provide data and the fact that it has undertaken to 'gift' the survey to the industry. We further welcome the undertaking by RICS to pursue the objective of a more open and transparent method of comparing and assessing rents. The same cannot be said of the BBPA which has appeared to resort to resistance, obfuscation and hostility. We appreciate the fact that there are 'complexities' in the pub sector but the BBPA has had long enough to overcome these problems.

126. We believe that the publication of industry data on the costs of running a pub, such as that available in the ALMR's benchmarking survey, represent a significant step forward in increasing transparency in the industry.

A WAGE FOR LESSEES TO BE TREATED AS A VARIABLE COST?

127. The IPC recommended to the Committee that a salary for a lessee should be seen as a 'cost' in the calculation of rent. RICS said it had been "conducting a lot of work on the type of variables in a benchmarking system which will be useful to the industry".[183]We asked RICS whether the salary of a lessee could be considered as a variable and Mr Rusholme told us that although it would be possible to capture such information in a database[184] he was unsure as to whether it would "add a great deal to the process".[185] He explained that there was "no one line in the calculation that deals with a wage to the lessee"[186]but that "it would be ridiculous to set rents that did not make an allowance in the split of profit for making a living or profit out of the business".[187] He believed that it was only right that RICS' "rent guidance reflects a fair reward at the end of the day for the operator".[188]

128. Mr Rusholme told us that RICS will be pulling all of its discussions and work on this matter together in the 'next few months' and at that stage it will be able to "recommend the right direction in which it should go."[189] We invite an update from RICS about the scope and progress of the national database of trading information by June 2010. We hope that it has greater success in its discussions with the BBPA than the ALMR had achieved.

RICS Code of Practice for Rent Review

129. The Forum Report proposed that RICS should create a Code of Practice for landlord and tenants at rent review and lease renewal.[190] Although this recommendation was welcomed, concerns were raised that it could lead to duplication with the work of BBPA on its Framework Code.[191]

130. Mr Rusholme recognised that it was "an industry with quite a lot of codes"[192] but argued that RICS' thinking was that it should provide a "RICS code covering the issues that pertain purely to property and rent setting."[193] He believed that if it was part of the BBPA Code it could become "somewhat diluted and there will be confusion as to where authority and enforceability lie".[194]

131. There was also concern over how any RICS Code would be enforced. It would only be mandatory for RICS members[195] and yet many of the people who value pubs and carry out rent reviews are pub company staff who are not members of RICS. Mr Rusholme acknowledged this fact but pointed out that RICS could only develop a code for its own members".[196] He told us that:

the carrot is to come up with well thought-out advice in the code which has the industry behind it. If we can carry those involved along with us in preparing the code there must be a greater chance that people will stick to it once it is published.[197]

He also said that "if there are some mandatory ways to make this happen we would very much welcome it".[198]The IPC have confirmed that they would be very happy to work with RICS on its industry code and to "endorse it."[199]

132. We expect the BBPA and its constituent members to endorse the RICS Code of Practice for valuing pubs and to enshrine it into the BBPA Framework Code of Practice and individual company codes.

136 RICS, Pub Industry Forum Report and Recommendations, October 2009, para 45 Back

137 RICS, Pub Industry Forum Report and Recommendations, October 2009, para 47 Back

138 RICS, Briefing Note: Summary of the Pub Industry Forum Report, October 2009 Back

139 RICS, Briefing Note: Summary of the Pub Industry Forum Report, October 2009 Back

140 RICS, Briefing Note: Summary of the Pub Industry Forum Report, October 2009 Back

141 RICS, Briefing Note: Summary of the Pub Industry Forum Report, October 2009 Back

142 Q 171 Back

143 Ev 101 Back

144 Q 1 Back

145 RICS Valuation Information Paper 2: The Capital and Rental Valuation of Restaurants, Bars, Public Houses and Nightclubs in England, Wales and Scotland, 2007 Back

146 Ev 124 Back

147 Q 4 Back