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

Memorandum submitted by Enterprise Inns Plc

  I am pleased to respond to the invitation by the Business Innovation and Skills Committee (the "Committee") to submit a report, in advance of the oral evidence session due to take place on 8 December 2009, identifying the progress that has been made since the publication of the Committee's report on Pub Companies (the "Report") in May.

Enterprise Inns plc ("ETI") notes that the Report highlighted areas of concern which required clarification and made a number of other observations. ETI recognises that more can be done in order to further demonstrate ETI's commitment to fairness, sustainability and mutually beneficial business relationships with its licensees and welcomes the opportunity to address these concerns in a constructive manner.

  Following publication of the Committee's Report, ETI wrote to the Secretary of State, Lord Mandelson, on 24 June 2009, providing detailed commitments which seek to address the concerns raised by the Committee and setting out indicative timescales over which these commitments would be delivered.

  Furthermore, as a member of the British Beer and Pub Association ("BBPA"), ETI fully endorses the response provided to Lord Mandelson by the BBPA on 9 July 2009 on behalf of its members and is committed to the implementation of the proposals made.

  ETI supported the participation of the BBPA, on its behalf, in dialogue with a wide range of representative groups throughout the summer of 2009. In addition, ETI underwrote a significant proportion of the costs associated with the industry mediation process during September 2009.

  ETI was disappointed that all the parties to the mediation process were unable to find mutual agreement on the wide-ranging initiatives, protections and standards under discussion. However ETI is fully committed to the implementation of the Industry Agreement (the "Agreement") that was reached between the BBPA, the Federation of Licensed Victuallers' Association ("FLVA") and the British Institute of Innkeeping ("BII") and to the further development of the industry framework Code of Practice (the "Code") which is proposed by the Agreement.

  ETI is committed, by virtue of its membership of BBPA, to the implementation of all aspects of the Code and expects to achieve or exceed all of the standards required well within the proposed timeframe.

  ETI is pleased to provide an update in respect of the following commitments made to Lord Mandelson on 24 June 2009, modified as appropriate to reflect the developments that have occurred in the meantime.


  1.  ETI believes that individual tenants and lessees would benefit from the existence and availability of a national, independent, professional body to provide business advice, legal support and representation in relation to commercial dealings between individual tenants and landlords, local authorities and enforcement agencies. Such an organisation might be similar in constitution and capability to the FLVA and the BII. Update: ETI has offered to provide financial support to facilitate the establishment and ongoing operation of a national, independent body to offer this essential service to licensees. More than ever, ETI believes that the lack of such professional advice has exacerbated the perception of unfairness between landlords and lessees. This offer of financial support therefore remains available.

2.  ETI recognises that clarity and transparency of the assumptions on which profit assessments are based is essential. Therefore ETI will review and expand its existing level of disclosure, in order to meet or exceed any minimum industry disclosure standards that might be agreed in the future. Update: ETI already provides summary data and assumptions at the time of letting or rent review, but will launch an entirely new and enhanced standard of disclosure no later than the 31 March 2010.

  3.  ETI already insists that, where possible, licensees take independent legal and financial advice before entering into any substantive agreement with the Company. To provide additional licensee protection, ETI will in future ensure that all licensees, whether upon new let or at assignment, will be unable to enter into a binding lease or tenancy agreement (excluding tenancies-at-will) without a business plan which has been formally signed-off by the licensee and a qualified trade accountant (on behalf of the licensee). There will be no exceptions and no waiver to this condition. Update: The standards and necessary documentation associated with this commitment are being developed in conjunction with a panel of established trade accountants, such that this enhanced standard of mandatory protection will be in place for all new lettings and assignments no later than the 31 March 2010.

  4.  ETI has always accepted that arbitration may be prohibitively expensive for some licensees and has therefore been a longstanding supporter of the principle of a low cost, independent, binding resolution mechanism in the event of dispute at the time of rent review. ETI has reaffirmed its commitment to utilise the low cost mechanism being developed by the three trade organisations the BII, the Association of Licensed Multiple Retailers (ALMR) and the BBPA. Update: ETI remains totally committed to this principle, has provided advice and support towards the establishment of the Pub Independent Rent Review Scheme ("PIRRS") and is making this facility available to all ETI tied licensees, with immediate effect.

  5.  ETI is currently reviewing and updating its Code of Practice for the Operation of Tied Tenancies and Leases, which governs the manner in which all aspects of the Company's activities are carried out, the expectations that ETI has of its business partners and the expectations that they should have of ETI. When this review is completed, ETI will submit the revised Code of Practice to annual revalidation under the BII accreditation scheme, to include an evidence-based audit of compliance with the commitments made. Update: ETI's revision of its own Code of Practice will now encompass all aspects of the industry framework Code and will be completed, implemented and submitted for accreditation by the BII within the proposed timeframe. ETI's revised Code of Practice will be issued not only with all new agreements, but also to all existing agreement holders and will clearly set out the commitments which will be binding upon both parties.


  6.  ETI already provides discounts on the supply of tied beers and ciders to approximately two thirds of its tenants and lessees. In future, ETI will offer a range of discounts, up to £150 per barrel, on all tied beer and cider purchases for every new agreement and will instigate a rolling programme whereby all licensees may, at their discretion, opt for a new agreement on these terms at the time of their next rent review.


ETI will implement this development for all new agreements by the end of March 2010, and will then commence a rolling programme whereby all licensees may, at their discretion, opt for a new agreement on these terms at the time of their next rent review.

  7.  The majority of the ETI estate is already free-of-tie for the supply of wines, spirits and minerals and ETI already offers a free-of-tie option on all new agreements. In addition, ETI will instigate a rolling programme whereby existing agreement holders may, at their discretion, opt for new free-of-tie wines, spirits and minerals terms not later than the time of their next rent review.


  ETI has already implemented this development for all new agreements and is on target to instigate the rolling programme for all existing agreement holders by the end of March 2010.

  8.  Although over 1,700 ETI lessees are already free-of-tie for gaming machines, it is ETI's belief (supported by the conclusion of TISC 2004) that the tie for the supply of gaming machines enhances quality for the consumer and increases earnings from machines. It is therefore ETI's intention to continue to offer new agreements with a full tie for gaming machines. ETI already offers "royalty-free" AWP machine-share options in all new agreements and will also instigate a rolling programme whereby all existing agreement holders may, at their option, opt for a new agreement on these "royalty-free" terms at the time of their next rent review.


  ETI is currently reviewing this area in light of the Industry Agreement in relation to gaming machines and is committed to the implementation of these recommendations not later than March 2010.


  9.  In relation to insurance matters, ETI already provides, upon annual renewal, a summary of cover to every agreement holder against which a competitive quote may be sought. ETI will maintain its existing guarantee to reduce the insurance recharge to any agreement holder who can secure equivalent cover at a lower cost.


No further action required.

  10.  In relation to Upward Only Rent Review ("UORR") clauses, notwithstanding ETI's policy to ignore such clauses, ETI has already committed to remove, at a tied licensee's request and cost, any UORR clauses by Deed of Variation. In addition, ETI will issue a side letter to every tied agreement holder (at no cost and to be appended to the lease) confirming its policy to ignore UORR clauses for as long as all other terms and conditions of the lease remain in place and for as long as ETI (or any ETI group company) continues as a party to the lease.


  ETI has implemented this commitment in a letter to all ETI tied tenants and lessees dated 17 August 2009.

  11.  In accordance with its current practice, all ETI tied agreements that are subject to RPI indexation of rent are adjusted on an upwards or downwards basis regardless of the terminology of existing lease clauses. To provide additional reassurance to lessees, ETI will issue a side letter to every tied agreement holder (to be appended to the lease) confirming that, where such indexation applies and notwithstanding the terminology of existing lease clauses, all RPI adjustments may be upwards or downwards.


  ETI has implemented this commitment in a letter to all ETI tied tenants and lessees dated 17 August 2009.


  12.  In relation to disposals of pubs to other parties, ETI will not impose restrictive covenants preventing the continuing use of the premises for licensed purposes.


ETI implemented this commitment with immediate effect from 24 June 2009 and can confirm that, since then, no restrictive covenants have been imposed.


  13.  ETI is committed to having a team of highly trained, committed Regional Managers ("RM"), who are the key interface with licensees and already invests significant sums into training. To provide further confidence in this area, ETI will support a BII initiative to create a range of relevant qualifications and accreditations for RMs and will ensure that every ETI RM has achieved a minimum qualification standard.


ETI has worked extensively with the BII in pursuit of this objective and expects the BII to instigate the relevant training and qualification regime during 2010.

  Since making these firm commitments to Lord Mandelson and as a direct result of concerns raised by the Committee, ETI has recognised that further clarification would be beneficial in relation to the treatment of "tenants' improvements" at the time of rent review. Following consultation with the Royal Institute of Chartered Surveyors ("RICS"), ETI will publish its policy in respect of the treatment of "tenants' improvements" and will provide this guidance to every new and existing agreement holder such that there can be no doubt about the application of this policy at the time of rent review.

  In line with its commitment to mutually beneficial relationships, ETI has already instigated a programme of consultation with representative groups of licensees to ensure that all of the above commitments and developments satisfy the company's commitment to fairness.

  In conclusion, I regard these developments as significant commercial changes which are relevant to the ongoing success of ETI and its licensees. I believe that this series of commitments will address many of the concerns of the Committee and will far exceed the standards and expectations proposed within the framework industry Code of Practice. Furthermore, I believe that these developments clearly demonstrate the flexible, competitive and constantly evolving nature of ETI's business model within the leased and tenanted pub sector.

18 November 2009

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