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

Memorandum submitted by The Fair Pint Campaign


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.


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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