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


Memorandum submitted by David Morgan (Cookseys DMP)

1.0  INTRODUCTION

  1.1  In accordance with the email issued on 3 November in respect of the follow-up session of the Business, Innovation and Skills Committee to be held on 8 December 2009, I have the following report to place before the Committee covering the following four topics:

    — RICS Pub Industry Forum Report and Recommendations;

    — BPPA's Agreement with BII and FLVA to revise its framework Code of Practice on the granting of tenancies and leases;

    — the Independent Pub Rent Review Scheme;

    — the formation of the Independent Pub Confederation.

2.0  RICS PUB INDUSTRY FORUM REPORT AND RECOMMENDATIONS

  2.1  The recently issued RICS Report is welcomed as a significant step in the direction of restoring confidence and credibility in the industry that it serves, from the perspective of the 23,000 supply tied lessees whose leases automatically contain rent review provisions or third party referral obligations, that are the subject of either the involvement of individual RICS members, or the President of the RICS acting through the RICS Dispute Resolution Service in the appointment of arbitrators.

2.2  Trade Related Valuation Group (TVRG)

  2.2.1  The specialist division of the RICS dealing with licensed and leisure property, is known as the "Trade Related Valuation Group" (TVRG). Until the middle of 2008, the TRVG was chaired by Rob May, FRICS, the National Rent Controller of Enterprise Inns. That job title was never openly acknowledged and his four years or so chairmanship of the TVRG referred to his employment as "pub expert" rather than as a direct employee of Enterprise Inns who, with Punch Taverns, are one of the two largest owners of supply tied leasehold public houses.

  2.2.2  The RICS Pub Industry Forum Report has correctly recommended that the composition of the TVRG should be the subject of significant change as a result of the perception of a bias within that all-important advisory group towards the interests of freeholders rather than leaseholders. Furthermore, the existing TVRG is chaired by Martin Willis, FRICS, a Senior Director of Fleurets Chartered Surveyors, who's Company also receives significant fee company from the major Pubcos. Currently, the membership of the TVRG has no representative element that is considered as substantially representing the interests of the 23,000 supply tied lessees. Unless that situation is addressed, it is quite possible that the perception of bias might unfortunately be allowed to continue.

2.3  Conflicts of Interest

  2.3.1  The regulations governing conflicts of interest are currently under review by the RICS and comments and submissions have been invited to which I have contributed. The previous and relatively stringent conflict of interest regulations have now been removed from the RICS Codes of Conduct and as such there is no clarity over what actually constitutes a conflict of interest.

  2.3.2  A recent example involved the appointment of an arbitrator in respect of a supply tied leasehold public house in Devon. The Arbitrator was appointed by the President of the RICS without the lessee being previously advised of the identity of the appointee, or of the detailed items that he raised of connection with the freeholder which he did not consider constituted any form of conflict of interest. That appointment was made, to which my lessee client strenuously objected. Those objections were ignored and the arbitration was to proceed against my Client's strongest wishes. However, a compromise settlement was effected, substantially under the freeholder's initial rental aspirations.

  2.3.3  Another example concerns a central London public house occupied as lessee, by a Pubco. I act for the freeholders. The Dispute Resolution Service of the RICS were intending to appoint a central London Chartered Surveyor whose firm substantially acts for the same company that is the lessee in occupation. My freehold Clients raised strong objection and the intended arbitrator then stood down. A new arbitrator has only recently been appointed. Whilst the original arbitrator may have felt in himself that he could exercise impartiality, the perception was crystal clear that his stature as arbitrator was completely compromised as a result of his firm's detailed involvement with the Pubco lessee in occupation.

  2.3.4  All property leases refer to the President of the RICS as being the source of appointment for either arbitrators or independent experts in respect of a request for third party dispute resolution. The automatic assumption is that a Chartered Surveyor should then be the appointee. In situations requiring substantial accountancy skills as with the profits method of assessing public house rents, there is no specific reason why a senior accountant, being a member of the Institute of Arbitrators should not equally be as capable of acting under the Arbitration Act 1996.

2.4  Effect of the RICS Recommendations on Rent Review Negotiations

  2.4.1  The days of major brewery companies having significant influence over the leased pub sector has long gone. With the demise of those influential players when substantial estates departments were staffed by Chartered Surveyors, virtually all rent review negotiations are now undertaken by non RICS members in the form of either Business Development Managers (BDMs), or Business Relationship Managers (BRMs). The alteration or variation in RICS regulations, will have no effect or influence on non RICS members.

2.5  That the Supply Tied Tenant should be no worse off than the Supply Free Tenant

  2.5.1  The RICS recommendations are that this prime principle should be followed in the course of rent review negotiations. In the seven days prior to the issuance of this document, I have had a number of negotiations with other Chartered Surveyors acting for Pub Companies. None had any conception of the prime principle and even if it was tacitly acknowledged, the method that they considered appropriate, was a simple adjustment of gross profit margins.

  2.5.2  The Chartered Surveyors concerned, all considered that they had in a general sense, taken the prime principle into consideration. They had no comprehension of the balancing of the wholesale discounts foregone for the supply tied tenant, set against the wholesale discounts that would be available to the supply free tenant.

  2.5.3  A similar situation has existed in recent arbitration awards wherein the arbitrators roundly dismissed any relevance of the prime principle in assessing rent calculations.

2.6  Transparency

  2.6.1  The much welcomed RICS Forum Recommendations will not alter the basic issue of transparency in rent review negotiations. It is my considered view that comparable evidence will continue to be cherry-picked to suit the arguments advanced by the freeholders who in any event, have the availability of a comprehensive database of other public houses in the general area of the subject premises and which are never in totality revealed to the lessee or the lessee's representative. Applications for Discovery under the rules of arbitration or even in court procedures, are strongly resisted on the basis that they are but "fishing trips". Rent review negotiations never reveal the existence of other similar premises in the general area that have had rent reduction.

3.0  BPPA'S AGREEMENT TO REVISE ITS FRAMEWORK CODE OF PRACTICE

  3.1  The current Codes of Practice that were formulated after the TISC 2004 recommendations, have in the main, been largely ignored at foot soldier level. It may well be that the Board members of the companies concerned, stoutly defend the existence of Codes of Practice and ensure that they are widely published. However, there are many examples of Code of Practice abuses that if discovered and aired publicly are dismissed as being perpetrated by "rogue elements" and the individuals concerned are either subsequently sacked or transferred.

  3.2  A detailed critique has been made available by the Fair Pint Group, of which I am a founder member of the Steering Group, which has analysed as at the date of issuance of this Report, the objectives of the BPPA framework Code of Practice. Suffice it to say that I endorse the observations and comments made.

4.0  THE INDEPENDENT PUB RENT REVIEW SCHEME (PIRRS)

  4.1  It has been acknowledged for some considerable time that the existing Dispute Resolution Service either by independent expert or arbitrator, under the aegis of the RICS, tends to be very expensive. Indeed, so prohibitively expensive, that a prime avenue for forcing settlement by the Pubcos, has been the threat to lessees of associated expenditure which almost always dissuades lessees with grievances that would either be resolved by third party resolution, from pursuing that objective.

  4.2  PIRRS is a very welcome attempt to resolve the expense of third party dispute resolution. At the core of the system is the appointment of a panel of independent expert Chartered Surveyors who are deemed as having sufficient knowledge and expertise and can act on a fixed fee scale, given agreed referral by both parties.

  4.3  It is understood that the initial attempt to establish the register of appropriately qualified Chartered Surveyors, has not been successful as a result of a number of selected individuals declaring on the BII website for PIRRS (now partially suspended) that they had no conflict of interest. The individuals concerned are either directors or partners of major firms of Chartered Surveyors who are in receipt of large volume instructions from the various Pubcos. The observations as above, in respect of RICS conflicts of interest apply. Although the individuals concerned may have it in their own minds that they cannot perceive conflicts of interest, it is more than likely that the supply tied lessees will perceive a strong potential area of bias by association. This is neither acceptable nor satisfactory.

4.4  Lease Deed of Variation

  4.4.1  All existing leases have an automatic third party dispute resolution system that is ultimately controlled by the President of the RICS. The election of a PIRRS referral is a voluntary action between lessor and lessee. It can only occur with those companies that are signed up to the BII PIRRS initiative. It is an aspiration of the BII that leases will be changed by Deed of Variation to incorporate the PIRRS dispute resolution system.

  4.4.2  I do not share the belief that that aspiration will be achieved. The underlying reason is that the banks and bondholders of the Pubcos would in my view, not easily accept a far simpler and cheaper method of challenging existing rents, thereby endangering the rent structure that underpins the asset values upon which share values are based. Without a specific industry-wide deed of variation, the general availability of PIRRS in a practical sense, will not be achieved.

4.5  Costs and Representation

  4.5.1  Unless the supply tied lessee is capable of self-representation, the individual will still have to engage a professional to represent and stand against the aspirations of the freeholder. It is almost a certainty that the freeholder will either utilise their own in-house Chartered Surveyors, or engage an independent firm to act for them. This creates a severe imbalance against the individual licensee, should he or she care to not engage representation.

  4.5.2  The PIRRS has been sold on the basis of providing a cost-effective alternative to arbitration. In reality, the only area that a saving is made, which in itself is thoroughly welcomed, is in respect of the independent expert's fees.

4.6  Overview

  4.6.1  At the heart of the PIRRS is the panel of independent Chartered Surveyors. It is accepted that a large number have firms that achieve significant fee income from Pubcos. Therein lies the major of problem of the perception of bias and the declaration of genuine conflicts of interest. Unless this core factor can be resolved, the PIRRS will have great difficulty in achieving industry-wide support and recognition.

5.0  FORMATION OF THE INDEPENDENT PUB CONFEDERATION

  5.1  Fair Pint, of which I am a founder member of the Steering Group, is a member of the IPC. This umbrella organisation which includes a large number of other tenant based groups, is effectively spearheaded by the ALMR and Fair Pint. It would appear that there is no other organisation, even in a general sense, that actively represents lessees' interests and its continued activity and strength of purpose must be encouraged to give an alternate voice to that of the Pubco/Brewer's representative body in the form of the BPPA.

6.0  GENERAL CONCLUSION

  6.1  To further expand on the observations and views as outlined above, I would be quite prepared to appear before the Committee and give evidence and further explanations as required.

16 November 2009






 
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