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 CommitteeSimon
Clarke, Garry Mallen and David Morganhave 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
148
Q 176 Back
149
Q 176 Back
150
Trade and Industry Committee, Second Report of Session 2004-05,
Pub Companies, HC128-I para 188 Back
151
Business and Enterprise Committee, Seventh Report of Session 2008-09,
Pub Companies, HC 26-I,para 129 Back
152
RICS, Pub Industry Forum Report and Recommendations, October
2009, para 4 Back
153
Q 5 Back
154
Q 6 Back
155
Q 95 Back
156
Q 96 Back
157
Ev 69 Back
158
Ev 69 Back
159
Business and Enterprise Committee, Seventh Report of Session 2008-09,
Pub Companies, HC 26-II, Ev 84 Back
160
(1) Charles Brooker (2) Leslie Brooker v Unique Pub Properties
Ltd, High Court of Justice, Winchester, 7 September 2009 Back
161
Q 23 Back
162
Trade and Industry Committee, Second Report of Session 2004-04,
Pub Companies, HC128,para 157 Back
163
Business and Enterprise Committee, Seventh Report of Session 2008-09,
Pub Companies, HC 26-I, para 58 Back
164
Business and Enterprise Committee, Seventh Report of Session 2008-09,
Pub Companies, HC 26-I, para 60 Back
165
Q 24 Back
166
RICS, Pub Industry Forum Report and Recommendations, October
2009, para 2 Back
167
Q 24 Back
168
Business and Enterprise Committee, Seventh Report of Session 2008-09,
Pub Companies, HC 26-I, para 47 Back
169
RICS, Briefing Note: Summary of the Pub Industry Forum Report,
October 2009 Back
170
Q 25 Back
171 The
ALMR describes itself as a "network of entrepreneurial retailers
and industry suppliers that champions the smaller independent
companies that own and operate pubs, bars and restaurants in UK". Back
172
Q 29 Back
173
Ev 124 Back
174
RICS, Briefing Note: Summary of the Pub Industry Forum Report,
October 2009 Back
175
Ev 29 Back
176
Ev 29 Back
177
Ev 29 Back
178
Q 172 and 173 Back
179
Ev 29 Back
180
Ev 42 Back
181
Ev 43 Back
182
Q 88 Back
183
Q 25 Back
184
Q 31 Back
185
Q 32 Back
186
Q 50 Back
187
Q 51 Back
188
Q 52 Back
189
Q 26 Back
190
RICS, Briefing Note: Summary of the Pub Industry Forum Report,
October 2009 Back
191
Ev 79 and Q 34 Back
192
Q 34 Back
193
Q 35 Back
194
Q 37 Back
195
Q 35 and Ev 79 Back
196
Q 40 Back
197
Q 46 Back
198
Q 49 Back
199
Q 172 Back
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