Memorandum submitted by The Fair Pint
Campaign
INTRODUCTION
About The Fair Pint Campaign
The Fair Pint Campaign is a membership organisation
that campaigns for the interests of tied tenants. The campaign
has a membership of nearly 1,000 tenants. We are funded entirely
from membership donations.
Fair Pint provided both written and oral evidence
to the Business and Enterprise Select Committee's inquiry on pub
companies. We welcomed the Committee's view that the balance of
risk and reward between pub owning companies and tied tenants
is unfairly skewed towards landlords and the fact that despite
bearing most of the risk, tenants do not receive a fair share
of the benefits.
Fair Pint is a founding member of the Independent
Pub Confederation, which is a united voice for publicans and consumers.
We believe that the IPC will be a very positive influence on the
industry which has for too long being dominated by the property
and brewing interests represented by the BBPA.
We believe that the agreement between the BBPA,
the BII and the FLVA is a totally inadequate response to the problems
highlighted by the Business and Enterprise Select Committee, and
shows unwillingness by the industry to consider change which would
rebalance the relationship between tied tenants and pub owning
companies in any significant way.
The OFT's reasons for their rejection of CAMRA's
super-complaint showed that the Select Committee was correct in
its judgment that the OFT would not be a able to scrutinize the
pub market in a satisfactory way. They have failed to understand
the industry and how the unbalanced relationship between tied
tenants and pubcos highlighted by the Select Committee leads to
clear consumer detriment.
Fair Pint believes that developments in the
industry since the publication of the Business and Enterprise
Select Committee report strengthens the case for Government intervention
in the sector. The major pub owning companies have shown that
they are unwilling to take any steps to significantly alter the
balance of risk and reward between landlords and tied tenants.
We believe that the Committee ought to repeat
its recommendation that Ministers refer the pub sector to the
Competition Commission with a view to freeing up competition in
the market by rebalancing the relationship between tenants and
pub owning companies including action to prevent companies being
able to use supply ties in an exploitive way.
MEMORANDUM
RICS' Pub Industry Forum Report and Recommendations
1. Fair Pint welcomed the criticisms of
the RICS in the Business and Enterprise Select Committee's report
on Pub Companies. Fair Pint agreed with the Select Committee's
conclusion that RICS had failed to take serious action to ensure
that the system of setting rents was not unfairly biased against
lessees.
2. Members of the Fair Pint Campaign made
representations to the RICS Pub Industry Forum, which was established
in light of the criticisms of the organisation by the Select Committee.
We welcome the conclusions of the forum, which made it clear that
change was needed to increase the transparency of the rent setting
process and to reduce conflict in the sector.
3. The conclusion that the correct interpretation
of the RICS valuation guidance should follow the principle that
tied tenants should be no worse off than the non-tied tenant was
particularly welcome. We believe that the neglect of the legal
principle that tied tenants should not be financially worse off
than free of tie tenants has been one of the main causes of the
problems faced by the leased pub sector. It has allowed the tie
to be used as a way to extract more income from tenants than could
be extracted from dry rents alone, leaving tied tenants significantly
worse off than free of tie tenants and forcing thousands of tenants'
out of business every year.
4. The forum also made other clarifications
of RICS guidance which if implemented in full could reduce the
extent of over renting in the sector. It made it clear that the
practice of dividing estimated profits in a 50:50 split between
the landlord and tenant was not based on RICS guidance which sets
down no fixed percentage for the profits split. It went on to
say that the conclusions of the Brooker case, which concluded
that the state of the pub market made a split of 65% of profits
for the tenant and 35% of profits for the landlord was more equitable
split in the current market, provided "timely guidance"
on the setting of rents in the current climate.
5. As the Select Committee stated in their
report, rental calculations are often skewed by an over-estimation
of potential profits from a pub and an underestimation of the
actual costs of running a pub leading to an unrealistic divisable
balance. We therefore welcome the proposal to increase the transparency
in rent calculation, making it clear which items will be rentalised
and to clarify the treatment of tenants' improvements.
6. Transparency will, however, only lead
to more equitable rent calculations if the assumptions of profit
and costs are realistic. We therefore welcome the forum's support
for a new national database of trading information which would
allow benchmarking of costs and allow better analysis of the rental
difference between tied and non-tied tenants.
7. Fair Pint drew the attention of the Business
and Enterprise Select Committee to the membership of the RICS's
Trade Related Valuation Group (Ev 235). The TRVG membership consisted
of Chartered Surveyors who had significant financial links to
pubcos. We welcome the conclusion of the Pub Industry Forum that
the perception of bias in the group ought to be addressed through
new appointments to the group. We believe that new appointments
should include people who represent the interests of tenants.
8. Whilst we welcome the fact that the pub
industry forum responded positively to the criticisms of the Business
and Enterprise Select Committee, the conclusions of the forum
will only begin to make a difference to the practice of valuation
once they are fully reflected in valuation guidance and the makeup
of the Trade Related Valuation Committee. Until the changes are
fully implemented it is too early to say how effective the changes
will be in addressing the concerns raised by the Business and
Enterprise Select Committee about how the system of rent valuations
are skewed against the interests of tenants. We are aware that
the BBPA and some of its members are already seeking to undermine
the content and implementation of the RICS report but we have
received assurance from the RICS Director of Valuation that a
working group is to formed to move ahead with the report's proposals.
9. RICS guidance only binds Chartered Surveyors.
Most rent calculations are undertaken by Pub Company Business
Development Managers who are not Chartered Surveyors. The basis
upon which rents are calculated is often the amount that the pub
owning company can get away with rather than a proper use of available
guidance. In many cases the aspirations of the pub owning company
in relation to rent first ascertained and then the calculation
made to fit around that ambition. Clearly this is the wrong approach.
Changes to the RICS valuation guidance will only make a difference
if they are incorporated into the rent setting practice of pub
companies. We are therefore concerned that the BBPA's agreement
with the BII and the FLVA makes no mention of the conclusions
of the Pub Industry Forum and the central principle that tied
tenants should be no worse off than free of tied tenants.
BBPA's agreement with BII and FLVA to revise its
Framework Code of Practice on the Granting of Tenancies and Leases.
10. The BBPA's agreement with the BII and
the FLVA to revise its Framework Code of Practice is an inadequate
response to the issues raised in the Select Committee's report.
The agreement does little more but to reiterate the current status
quo and in some cases the agreement is suggesting changes which
would reduce the rights of tied tenants. None of the main groups
representing tied tenants accepted the agreement because of the
inadequacy of the agreement in response to the problems in the
market and the conclusions of the Select Committee's report. Attention
needs to be drawn to the fact that both the BII and the FLVA have
significant financial links with the major pub owning companies.
Neither of these organisations have sought to negotiate the terms
of the agreement. They have simply signed the document that was
presented to them by the BBPA as a fait accompli.
Fair Pint has produced a full commentary on
the agreement which is attached as Appendix 1 (not printed
here).
11. Pub owning companies promised to strengthen
self-regulation and codes of practice in response to the 2004 Trade
and Industry Select Committee report. As the Business and Enterprise
Select Committee discovered, those codes of practice have been
totally ineffective in curbing the exploitive behaviour of pub
owning companies.
12. The agreement fails to address the key
recommendations of the Business and Enterprise Select Committee's
report. The issue of supply ties, which was central to the recommendations
of the Business and Enterprise Select Committee, isn't addressed
in the agreement which is limited to the setting of rents and
the administration of leases. As well as failing to address the
main issues raised by the Select Committee's report the agreement
even fails to address many of the recommendations of the Trade
and Industry Select Committee's Report in 2004, for example on
the issue of AWP tie. The current agreement does nothing more
than potentially commit BBPA members to explaining how they will
treat machine income in the rent review process.
13. It is important to note that even if
implemented in full the agreement would only make changes for
those who are signing up to new agreements or negotiating changes
of terms. It will make no difference at all to the problems faced
by existing tenants and the survival prospects of their pub businesses.
14. The agreement contains no detail on
how it will be implemented or any powers of enforcement if companies
choose not to apply the code. The BBPA and not the individual
pub companies are parties to the agreement meaning that companies
can avoid having to abide by the agreement by simply resigning
from the BBPA. For example, Greene King which has recently indicated
its desire to leave the BBPA will not be bound by the agreement.
15. The lack of any real concession from
the pub companies, or indeed any direct involvement, in this agreement
shows that they are unwilling to voluntarily put their own house
in order or respond fully to the recommendations of the Select
Committee.
16. We are concerned about the protocol
which has been agreed between the BBPA, the BII and the FLVA on
the use of the flow monitoring equipment. We believe that the
protocol totally disregards the concerns expressed by the Business
and Enterprise Select Committee about the accuracy of the equipment
and its inability to distinguish between the flow of beer down
the line compared to water used for cleaning or even gas used
for dispensing drinks or air.
17. Fair Pint have instructed SGS a leading
technical certification company to provide an independent assessment
of the accuracy of Brulines equipment which makes it clear that
the accuracy of the variances recorded by the equipment is questionable
and is open to manipulation.
18. Fair Pint has instructed a leading counsel
to provide an opinion on the legality of Brulines Equipment. The
opinion makes it clear that for the equipment to be used to fine
or otherwise punish tied tenants for alleged breach of contact
the equipment ought to be totally accurate and it is clear that
it is not.
19. The opinion states that the use of Brulines
to fine tied tenants means that it is probable that the equipment
is "used for trade" and therefore falls under the terms
of Section 7 of the Weights and Measures Act 1985
20. Fair Pint have produced a separate submission
which sets out our concerns about the use of Brulines and which
includes the independent assessment from SGS about the accuracy
of the equipment and a summary of the counsel's opinion on the
potential illegality of the equipment.
21. The agreement between the BBPA, the
BII and FLVA seems to totally ignore the fact that tenants have
legal rights to challenge accusations made by pub owning companies
about buying out of the tie and that questions of breach of contract
or forfeiture of leases should properly be decided by the courts
not by pub companies applying rules that they have written.
22. Given the clear inaccuracy of the equipment,
we believe that Brulines cannot be relied on to police the contractual
obligations of tied tenants. We believe that action needs to be
taken to prevent the use of Brulines information to fine or otherwise
punish tenants for breach of contract unless the equipment is
certified under the terms of the Weights and Measures Act 1985.
The Independent Pub Rent Review Scheme (PIRRS)
23. The fact that the majority of the lessees
earn very little income from their pubs means that in most cases
they are unable to bear the costs of taking legal action against
their landlords or engaging a chartered surveyor or a solicitor
to act for them in rent disputes. This means that in most cases
pubcos do not face significant challenge from their tenants when
setting levels of rent. This is not a healthy state of affairs
and does not result in an efficient rental market in the pub sector.
Indeed it has been seen that pub owning companies have not retreated
from using the potential cost of arbitration as a threat to dissuade
tenants from challenging higher rents at review. Fair Pint have
therefore welcomed the attempt to reduce the expense of resolving
disputes over rental valuations.
24. It is clear however that the new scheme
will only apply to disputes over rent valuations and will not
provide a solution to the number of other disagreements which
tied tenants have with pub owning companies, for example over
the operation of supply ties and the prices charged to tied tenants
for products and services.
25. We are concerned that the establishment
of the register of appropriately qualified Chartered Surveyors
led to number of Chartered Surveyors appearing on the register
stating that they have no conflicts of interest despite the fact
that they work for major firms who frequently act for pub owning
companies. We understand that the scheme has now been withdrawn
whilst the register is reviewed in light of our concerns We are
now of the view that this problem will have weakened confidence
in the PIRRS scheme amongst tenants. It is unfortunate that the
PIRRS scheme cannot be genuinely independent. It is partly sponsored
and paid for by the BBPA and its members. Given their track record
it seems unlikely that they will resist seeking to influence the
register of surveyors or the methodology used.
26. Even though the PIRRS may reduce the
cost of disputing a rent review, unless the tenant has the expertise
to represent themselves they will still have to engage professional
advisers, meaning that despite establishment of the PIRRS most
tied tenants will not be able to afford to challenge unfair rent
reviews.
27. It is too early to judge how effective
the body will be in increasing the ability of tenants to challenge
their landlords at rent review. In the event that the RICS properly
implements the findings of its recent report so that its guidance
in relation to rental valuation in the pub sector is fair and
lawful then it may be that the current contractual mechanisms
for resolving rent reviews through a third party will suffice
and PIRRS will be less necessary.
The Formation of the Independent Pub Confederation
28. The lack of a strong representative
voice for publicans has had a negative effect on the industry.
The fact that the structure of the industry and the operation
of supply ties has resisted challenge for so many years is due
to the fact that the for many years the public face of the whole
sector has been presented by the BBPA which is the trade association
representing brewers and pub owners not pub operators.
29. Fair Pint was set up to give tenants
who lacked a voice in the debate over the future of the industry
the ability to draw attention to the damage being done to their
businesses through the operation of supply ties and to press for
change.
30. We are a founding member of the Independent
Pub Confederation. We believe that the development of the IPC
umbrella group which has drawn together groups representing publicans,
small brewers, and consumers is a very positive development, which
will help to strengthen the say that operators have over the future
of the industry.
Fair Pint fully agrees with the IPC's list of
areas in which we would like to see Government intervention:
— The repeal of the Land Agreements Exclusion
Order
— A reference to the Competition Commission
for the pub sector
— Government intervention into the market
to give tied lessees the ability to chose to change their agreement
to free of tie ones either at their next rent review or when leases
are renewed and to allow tied tenants to buy a guest beer free
of tie
— The limitation of ties, so if beer is
tied wines and spirits and other ancillary products and services
can't be.
— The removal of the AWP tie
— The extension of the terms of the Unfair
Contract Terms Regulations to small businesses
— The removal of upward only rent reviews
from leases via a deed of variation
— The consideration of a statutory code
of practice on the industry
— Steps to ensure the calculation of rents
using the profits method includes an income for the tenant or
a manager as a normal cost of running a pub
The OFT's Response to the CAMRA Super-Complaint
31. We believe that the nature of the OFT's
response CAMRA's super-complaint shows that the body has failed
to understand the operation of the pub sector and supports the
view expressed by the Business and Enterprise Select Committee
that the OFT would not be an appropriate body to investigate the
pub sector.
32. It is difficult to see how the OFT can
judge that the market is operating in a healthy and competitive
way when demand is falling but prices are rising.
33. The OFT's response seems to accept without
question the assertions of pub owning companies on issues such
as the value of countervailing benefits available to tied tenants
and the real value of their support for tenants who are facing
financial difficulties.
34. The OFT's view that the operation of
the system of valuation and rent setting doesn't impact on consumers
is extraordinary given the real problems in the current system,
highlighted by the select committee. As the report pointed out,
rent calculations are skewed against the interest of tenants leading
to an significant amount of over-renting, which reduces tied tenants'
profitability which has to be made up either through increased
prices to consumers or a reduction of investment which will affect
consumer amenity.
35. Price differentials between the actual
price of beer on the open wholesale market, compared to the price
which tied tenants are obliged to buy beer at can be over 100%.
It is extraordinary that the OFT judged that these huge price
differences do not lead to higher prices in pubs.
36. The OFT did state that there is a price
differential of about 8p a pint for a typical pint of larger between
the tied and untied sector. It is concerning that the OFT did
not consider that this price differential has an impact on consumers.
It claimed that consumers are compensated for this price differential
by the extra amenity often provided by tied pubs. As the Select
Committee highlighted the reality is that most tied pubs are struggling
financially and have very little money for investment, which means
that the OFT's assertion that tied pubs are able to offer significantly
better surroundings is bizarre.
37. The estimate that the price differential
between tied and untied pubs is only 8p is significantly skewed
by the fact that the OFT decided to leave large managed chains
such as the J.D.Wetherspoon, Mitchells & Butlers chains out
of the comparison. There justification for doing this is far from
clear although the OFT seems to believe that these companies operate
in a different market. This would come as a surprise to anyone
familiar with the pub sector, not least those managed chains themselves.
The real difference in price between the tied and the united sector
is therefore significantly higher that the OFT's estimate and
up to 80p per pint or more.
38. We believe that the weakness of the
OFT's report shows that the organisation was more concerned with
justifying its previous refusals to investigate the market rather
than serving the needs of consumers. We find it difficult to understand
how the OFT arrived at such far reaching conclusions as it did
without carrying out a market study.
19 November 2009
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