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.
LICENSEE PROTECTION/BALANCE
OF POWER
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.
COMMERCIAL TERMS
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.
Update
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.
Update
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.
Update
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.
CONFIRMATION AND
CLARIFICATION OF
EXISTING POLICIES
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.
Update
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.
Update
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.
Update
ETI has implemented this commitment in a
letter to all ETI tied tenants and lessees dated 17 August
2009.
RESTRICTIVE COVENANTS
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.
Update
ETI implemented this commitment with immediate
effect from 24 June 2009 and can confirm that, since
then, no restrictive covenants have been imposed.
QUALITY OF
REGIONAL MANAGERS
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.
Update
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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