Memorandum submitted by Fuller, Smith
& Turner Plc
I write as the Chairman of Fuller, Smith &
Turner Plc, a brewery in Chiswick with 365 pubs. The Company
was founded in 1845, and is sadly the last long established brewery
left in London.
I would remind you that I wrote to you on 30 January
2009 as we had heard that your inquiry into the outcome of
the TISC inquiry had moved into the territory of questioning the
Tie. I received a charming response assuring me that you were
sympathetic to the position of Independent Family Brewers such
as ours.
In the event the outcome of the BEC Report has,
as you will be aware, affected the operation of the Tie for all
members of the British Beer and Pub Association (BBPA) through
the mediation process that was undertaken. Each member, regardless
of whether they have historically had a good relationship with
their Tenants or not, have had to engage in a process that makes
changes that are solely to the benefit of Tenants.
I understand the issues that your Committee
has faced, but would point out that any remedies to perceived
imperfections to the way Ties have been operated in certain instances
will inevitably be blunt instruments that affect all companies
that operate Tied tenancies, regardless of how satisfied their
Tenants may be.
There is no doubt that in the current economic
climate, there are many businesses both large and small that are
finding life extremely hard, and many pub landlords are in this
category, but the idea that this is due to the Tie without reference
to the 20% increase in Beer Duty since March 2008 or the
smoking ban, or the economic meltdown of last year and consequent
shortage of lending from the banks is unrealistic. But if one
reads the comments from opponents of the Tie one would be lead
to the conclusion that the Tie is the evil relationship that is
sinking the pub, rather than the very successful relationship
that allows entrepreneurs with limited funds to start their own
business.
Opponents of the Tie have mounted a very high
profile and concerted campaign both in the media and through local
MPs, but as you are aware the issues are complicated. The BBPA
has been trying to direct its efforts to finding constructive
responses and solutions to the BEC Committee Report, and to let
the OFT make its own decision on the Super Complaint, but please
don't under estimate the cost to companies that all of this extra
work by very senior members of management has caused. I am pleased
to say that Fuller's has a team strong enough to deal with the
distractions that this causes to running the business, but smaller
companies can ill afford the complications caused at times like
these.
The current financial turmoil has put enormous
strain on the tenants of all leases, regardless of which industry
they are in, and wherever possible individuals and companies are
doing everything in their power to renegotiate their rents, and
this is understandable, but it is important to realise what the
actual causes of such tensions really are.
In other organisations I am involved with, tenants
of property landlords are negotiating for reduced rents claiming
that the economic outlook has changed dramatically. These tenants
are not in our industry, and wouldn't even know what a Tie was.
We have a list of 22 Pub Companies that
have gone into administration since January 2008 headed by
Laurel Pub Company (460 pubs) and Orchid (287 pubs).
These companies collectively have over 1,500 pubs, and the
interesting thing is that none of those pubs were Tied to anyone.
They have gone bust because the pressures of the current economic
environment, the Duty rises that are being piled onto the industry,
the increasing pressure from additional legislation, the smoking
ban, and the rents they pay to their landlords have combined to
make their businesses unviable.
Fuller's itself has a number of toxic leases
which we entered into in better times with our eyes open, but
now that times have changed these landlords (all of which are
unconnected with our industry) are deaf to our pleas to reduce
the rent. The result is that we have several sites in which we
are losing money, and we would like to cease trading in, but we
cannot. For the avoidance of doubt, none of these leases are tied.
The issues between landlord and Tenant are inevitable
in any industry, but in our industry the problems are all being
blamed on the Tie, and that is not appropriate. The parties to
the recent industry mediation saw an opportunity to reduce their
rents, and understandably they have pursued that line relentlessly,
and are continuing to do so, as this may be their only opportunity
to avoid bankruptcy, but I would contend that it is not appropriate
to consider the landlord Tenant relationship in the pub industry
in isolation from the landlord Tenant relationship in other property
transactions.
In any group of rental agreements, you will
always get some properties being over-rented, in the same way
as you will always get some being under-rented. The market is
not perfect, and you will get wrinkles in the system however carefully
both sides approach a negotiation, but the recent mediation has
come up with some sensible improvements to the BBPA code that
both the FVLA and the BII have signed up to, and the RICS have
also clarified their method of calculating rents. There is a low
cost rent review system (PIRRS), there is greater transparency
in the rental calculations, and there are better procedures on
assignment (where so many problems have occurred), and the BEC
Committee recommendations have been addressed by the BBPA to the
extent that we can without transgressing the fearsome Competition
Commission rules. There are better operating procedures, and practices
criticised by the BEC report have been removed. None of this is
without cost and represents a considerable transfer of value from
the Brewery/Pub Company to the Tenant, and some of the more established
pub operators have only signed up to this under sufferance as
their Tenants in the main are happy with their rents, but any
further transfer of value would, I fear, cause the voluntary agreement
to fall apart.
There have been suggestions that all pub companies
should offer Tie free leases, and the Wellington pub company has
been used as an example, but I am sure that you are aware that
they have been quoted as not considering any rent reductions in
the current climate, even though every Tied pub company that I
am aware of has been happy to review rents with a view to reducing
them if there are extenuating circumstances, and I am aware that
most of them are already reducing rents at reviews if the RPI
is negative.
Criterion Asset Management which runs the estate
on behalf of the Wellington Pub Company have been quoted as "indicating
that the amounts provisioned for bad debts have substantially
increased, as have costs linked with recoveries of unpaid debt,
repossessions and void properties". "Wellington continues
to experience a shortage of experienced and financially-strong
Tenants looking to enter substantive agreements for pubs, and
as a result around 7% of the estate is not currently let on long
leaseholds". This does not suggest that freeing pubs from
the Tie is the solution.
As you noted in your report the Tie allows Tenants
to pay less rent where their beer sales drop and it is thus a
very appropriate model for the economic downturn, which is not
how the critics portray it. However if lessees wish to have a
Free of Tie pub, there has never been a better opportunity for
them to purchase a pub for themselves, and to operate it Free
of Tie. There are literally thousands of pubs for sale, and as
we have seen, Punch have been happy to sell almost any of their
pubs to their Tenants.
You have heard a great deal about the less successful
Tenants who (like the less successful businessmen in other industries)
are having an extremely difficult time and many are going out
of business, but as has been pointed out this affects both Tied
and Free of Tie licensees.
At Fuller's we also have some pubs that are
losing money but even in these difficult times 46% of our Tenants
are not only increasing their cash sales, but even their volume
of beers sales are ahead too. There are two sides to every story,
and the IPC are only talking about the unsuccessful licensees.
There will always be poor sites, and there will
always be poor retailers, and whilst the outcome for such operators
is bleak in such an economic environment, it is the same in any
industry, and it is not the result of the Tie which is actually
a much more flexible relationship than that which operates in
other industries.
Some opponents of the Tie point out that Tenanted
pub prices are higher than those in large managed house chains
like Wetherspoon, and that this should have been taken into account
when assessing the OFT submission, but that is like comparing
a single shop to the prices available in ASDA. You may want them
to be the same, but the reality of business is that the economies
of scale mean they never will be.
SUMMARY
In a market that changes as fast as ours there
will always be imperfections in any system, but the market will
eliminate them over time. The BEC Committee Report has speeded
that process up significantly, but it is not possible to eliminate
all imperfections by legislation, and I would appeal to you now
to let the industry get on with implementing the very significant
changes to the new code and with dealing with the major threats
facing it rather than spending more time on the Tie which has
been the backbone of our industry for several centuries, and has
served companies, Tenants and the public so well over that time.
The British pub is the envy of the world, and
it now needs everyone's support.
13 November 2009
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