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


Memorandum submitted by Simon Clarke

SUMMARY OF THE MAIN POINTS

  The pub industry is a modern day "Easter Island". The pubcos, like the Rapanui people, over exploited their islands natural resources, are over exploiting the resources of tied tenants resulting in the collapse of a finely balanced system and the extinction of British pubs at a rate of seven a day. Eventually the Rapanui died of starvation at the expense of the natural resources and species of their island leaving only "moai", the statue monuments of their past. The islanders had no foresight that their actions would end in their ultimate demise and no one to advise or control their destructive nature. Sadly, the pub industry is incapable of policing itself and government should intervene to help preserve its future.

A number of initiatives have taken place which give the appearance of significant changes in the industry and a willingness to self regulate. The formation of a much needed voice for tenants, the Independent Pub Confederation (IPC), a position formerly falsely claimed by the British Beer and Pub Association (BBPA) who, in reality, represent the interests of major pubcos and brewers. The Royal Institution of Chartered Surveyors (RICS) report, clarifying that their existing valuation guidance, if undertaken correctly should result in the tied tenant being no worse off than the free of tie tenant and acknowledging the possibility of perceived conflicts of interest within their Trading Related Valuations Group (TRVG) and the BBPA revised code of practise, which claims to offer the solution to all the industries ills but in reality is little more than an effort to avoid government intervention in exchange for a few insignificant and unenforceable "good housekeeping" measures.

PERSONAL INTRODUCTION

  I am a tied publican and chartered surveyor. During the BESC inquiry I presented a number of submissions, five of which were published in Volume II, more than any other individual contributor, and I gave verbal witness evidence to the Committee on the 18 November 2008.

  I wholly endorsed the findings of the Committee and since publication have joined the Fair Pint Campaign and represented their interests on many occasions, most recently the industry mediation and All Party Parliamentary Beer Group meeting earlier this month.

  I believe I am the only surveyor to have been called to give two presentations to the RICS during their in-house Pubco Forum, prompted by the criticism they received in the BESC report. I was pleased to find the subsequent RICS report reflected and addressed many issues raised during my presentations, although I consider I may not have been the only party to raise these issues.

FACTUAL INFORMATION

  The Committee will receive copious presentations from parties regarding the "progress" of the industry since the publication of the BESC report in January 2009. I considered it may be helpful to the Committee members to have a summary of the initiatives and developments and my opinions of their consequence and effects.

    Mediation—At the invitation of the Association of Licensed Multiple Retailers (ALMR), industry representatives gathered to mediate terms that would prove the industry has the ability to reform itself without government intervention. The mediations failed to agree a mediated document and therefore overall was a failure. The BBPA produced a 'post' mediation agreement which was only endorsed by the British Institute of Innkeepers (BII), as the agreement addressed the tertiary issues of transparency and codes of practice, and the Federation of Licensed Victuallers Associations (FLVA). The FLVA has been the subject of considerable criticism over perceived conflicts of interest Martin Caffrey, former Enterprise Inns regional manager, is now operations director and Dennis Griffiths (President), and Alan Jane (executive committee member) have recently launched a new company running failing pubs for Punch and Scottish & Newcastle Pub Enterprises.

  Mediation had some helpful consequences but its primary aim, to reach a settlement, that would show the industry is capable of self regulation, failed.

  This was not a pubco initiative.

    Independent Pub Confederation (IPC)—The BESC indicated they were surprised that there was no one body representing the interests of tenants. There are many groups representing tenants interests but no particular one can match the power and resources of the pubco and BBPA.

  Following the industry mediation attempts it became clear that no agreement would be reached between the parties that truly represented tenants and those representing the pub owning companies. The only real success of the mediation was the identification of common ground and consolidation of views of the tenants bodies and the ultimate formation of the IPC which now represents around 25,000 licensees and 100,000 consumers.

  The parties within the IPC have found common ground on many issues and have issued their "manifesto" for the Committee's consideration. Whilst there may be differing views on the future of the tie, there is a unanimous consensus and agreement with the BESC recommendation that "…the tying of beers, other drinks and ancillary products should be severely limited to ensure competition in the retail market is restored".

  You will note the IPC manifesto addresses significant issues which were highlighted by the BESC whole hearted support for the recommendation that "…the pubcos should offer lessees a choice between a free of tie lease and a tied one". The IPC have called for this offer to be made on new lettings, rent reviews and lease renewals.

  Whilst, the formation of the IPC will hopefully fill a much needed void in the industry and offer a voice to all tenants be they free or tied, it only serves to fulfil one of the many BESC recommendations and is a tenants initiative driven by the pubcos failure to offer or agree any significant terms at mediation.

  This was not a pubco initiative.

    The Royal Institution of Chartered Surveyors (RICS) report—I am assuming the report has been seen by Committee members and will be submitted as evidence in the forthcoming meeting on the 8 December 2009.

  To summarise:

    (A) The report indicates the RICS plan to set up their own code of practice (although there may be some difficulty in enforcing this against non members).

    (B) A database of trading information which will help provide benchmarking and guidance for rental valuation increasing transparency.

    (C) Rewording of the guidance to restrict further misinterpretation by parties for their own ends.

    (D) An acknowledgement that, rightly or wrongly, there may be a perception of bias within the TRVG, some surveyors being seen to have a bias towards pubco landlords' interests, a proposal to make new appointments being recommended.

    (E) Perhaps most significant and reassuring to tenants is the report's statement that with the correct interpretation of the RICS guidelines all the lease terms should be considered and with the appropriate correct treatment of wet rent (tie) the tied tenant should be no worse off than if they were free of tie.

  The BBPA, pubcos and their representative surveyors have demonstrated their dissatisfaction with the final statement above, (E), and have refused to incorporate the principle, that the tied tenant should be no worse off than if they were free of tie, in their post mediation agreement or their revised code of practice, despite it being considered as universally accepted by the TISC 2004 and the foundation of EU and domestic law. There is a great deal of concern that the pubco will use every effort to persuade the RICS to reverse or confuse this statement in order to enable "business as usual" and continue charging excessive unrealistic rents to service their debt burden.

  This report has yet to be put into effect but should go some way to resolving some of the issues of transparency and hopefully rental valuation. It should be added the RICS have undertaken this exercise following the BESC criticism and should be commended for their efforts thus far, the implementation of their report's findings needs to be undertaken as a matter of urgency.

  This was not a pubco initiative.

    BBPA post mediation agreement—the "pub code" got off to a bad start. The code, intending to offer greater clarity and transparency, was presented to the All Party Parliamentary Beer Group (APPBG) in secrecy, behind closed doors. Representatives of the IPC were not permitted entry and whilst the IPC accepted the invitation by Greg Mulholland MP to an open debate of the issues affecting the industry the BBPA refused. The BBPA failed to publish their agreement, however one of the signatories, the BII, considered the industry should be allowed the opportunity to consider its contents and published it on their website.

  Whilst apparently lengthy and comprehensive, the document does little to address the real issues and recommendations raised by the BESC. If the contents of the agreement could be enforced then they may be helpful but since members of the BBPA can simply resign their membership, like Greene King have done recently, it forms nothing more than good practice guidelines and is seen by the tenant groups to address nothing more than the low hanging fruit. There is no mention of reform of the tie and moreover an implication that the, so-called, "countervailing benefits" can be incorporated in rental valuations. These "benefits" are purely discretionary, can be withdrawn at any time and are not legally enforceable terms of lease contracts and as such, in accordance with the RICS guidance and the law, not capable of valuation.

  Whilst a pubco initiative, as a tenant I have no reassurance from the BBPA agreement and see it as little more than an attempt to avoid the scrutiny of a full and proper Competition Commission investigation.

  The BBPA document is seen by tenant groups to be a demonstration of clear and present danger rather than a clear and transparent future.

    Enterprise Inns recent announcement to offer free of tie to new and existing tenants—I believe this is a last minute effort to show willing to the BISC and draw fire from the criticism of the companies accounts announced the same day.

  Importantly, despite the headline, the offer is only to release wines, spirits and minerals from the tie, many tenants are not tied on these products anyway. The average British pub turns over around 200 barrels and around 70% of the entire turnover will be on beer products. Release from any tie should be encouraged but Enterprise Inns have neglected to mention that the release comes at the price of additional rent.

  Any change in contractual terms should be accompanied by a rent review to "open market rental value" not a mandatory increase determined by the pubco.

COMMITTEE RECOMMENDATIONS TO CONSIDER

  There have been some positive outcomes since the BESC report was published, the only ones of consequence initiated by parties other than the pubcos. I hope the Committee can see through the smoke and mirrors of the BBPA agreement and appreciate little has changed that will halt the accelerating pub closure and tied tenant business failure rate. The collective initiatives should be seen as a buoyancy aide but even the combination of them all can not be considered as a rescue package.

  Many factors affect the pub industry but the operation of tie agreements remains the fundamental influential factor contributing to business failure. The BESC 2009 heard evidence demonstrating that tied products are in many cases around twice as much as the same product free of tie. The MMC 1969 report demonstrates clearly that historically there was practically no difference between tied and free of tie prices. The purpose of the tie was to ensure the distribution of a brewers particular product, not as a source of additional revenue, the reverse now applies.

  The RICS can resolve the misinterpretation of their rental valuation guidance but there remains no control whatsoever over the price that pubcos can dictate on tied products, what they lose on the roundabouts they will gain on the swings.

  I respectfully ask the Committee to refer the entire matter of the relationship between the pubcos and brewers and their tenants to a body who have no vested interest in defending their earlier position, I consider the Competition Commission remain the appropriate body to consider such a matter as the OFT have demonstrated they remain reluctant to address the real issues.

18 November 2009






 
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