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

Examination of Witness (Question Numbers 1-19)



  Q1 Chairman: I welcome everyone to this session. I begin by making a number of announcements from the chair. First, according to the timings given the BBPA evidence session is to start at 11.15 and the IPC at 12.00 I anticipate that we shall get through the first part of the evidence session relatively quickly and may be able to bring forward the BBPA from 11.15. They are aware of that because I see the witnesses nodding. We may begin the IPC a little late depending on how the BBPA evidence session goes. The second point is a practical one. As I expected, for this important meeting of the Committee the public gallery is very well attended. Perhaps I may explain some of the rules that govern our meetings. Only individuals who are witnesses may speak or pass comment on the issues at hand. If witnesses have staff to support them, as I think Mr Rusholme does, that support can be provided by way of written notes but staff are not able to speak directly to the Committee. Members of the public who are vocal in responding to either questions or answers may be asked to leave the meeting. Turning to a matter of much greater substance, this morning I received a letter from Kevin Brennan, Minister for Further Education, Skills, Apprenticeships and Consumer Affairs, in relation to our report from which the eagle-eyed will learn that the Government has not yet responded; it is well past its normal response date. I believe the important part of the letter is the following paragraph: "Many of the initiatives being taken forward, including the revision of the guidance and codes, have yet to conclude. I believe, therefore, at this stage it is too early to take a decision on whether government needs to intervene." My interpretation of that is that government is holding out the option of intervention but is waiting to hear what this Committee concludes following its deliberations today. With my full consent the Government has not responded to the report and so the option of intervention remains very much on the table. Against that background, let us get down to business. Mr Rusholme, perhaps you would respond to my first question quite briefly: at what stage is the RICS's Pub Industry Forum Report and Recommendations?

Mr Rusholme: As everyone will be aware, our forum report was published in mid-October. Since that date we have been consulting widely with those involved in the industry to make sure we have been broadly right in our conclusions and also to do a lot of behind-the-scenes work to ensure that the group now set up to put all our work in motion is a right and balanced one for the task. All the recommendations that have been made in the forum report have been endorsed by the RICS and will be acted upon.

  Q2  Chairman: In full?

  Mr Rusholme: Yes.

  Q3  Chairman: Who is sitting on the reappointed trade related valuation group? Will there be representatives of lessees on that group?

  Mr Rusholme: We are still to finalise the exact composition. We are setting up a working group to carry out the revisions to our guidance and the drawing up of our code of practice. We anticipate that from that group will emerge naturally the right people to reinforce participation on our trade group.

  Q4  Chairman: I do not want to anticipate what this Committee may think. I believe that a representative of lessees would be no bad thing at all, and I can think of a few very suitable candidates.

  Mr Rusholme: I will give you a very clear answer to that: yes, there will be representation from the lessees' point of view and it is crucial that that takes place.

  Q5  Chairman: Perhaps I can get to the meat of the single most important issue in connection with the work of RICS in relation to BBPA. The RICS forum report states that the correct interpretation of RICS guidance follows the principle of the tied tenant being no worse off than a non-tied tenant. Is that a principle with which you agree?

  Mr Rusholme: It is a statement with which we agree wholeheartedly. If you allow me to elaborate on what is an important point and explain the meaning behind the use of that phrase in our report, it seems to me we have to search quite widely and look very closely at our own guidance and check there is nothing within it that puts the parties at a disadvantage. If the starting point for the calculation of a rent review is market value then it should reflect what happens in the marketplace. One then moves on to the lease arrangements and the contract between the two parties. In this industry typically lease arrangements will include such things as, very importantly, the price that the lessee pays for the beer. That is a product of the contract; it says what the pricing structure is. In calculating the rent it is wholly right that one takes into account that pricing structure. Therefore, one arrives at a rent that reflects the price the tenant pays for the beer. If there are advantages or disadvantages to the tenant of having a pubco landlord and all that goes with that package then those factors must also be put into the equation.

  Q6  Chairman: The valuation of the pubco's relationship with its lessee is a matter of some controversy in the industry, to say the least.

  Mr Rusholme: We are wholly aware of the controversy surrounding it and it is one of the key areas where we feel our guidance needs to be clearer in identifying and making it absolutely transparent when we publish an update of our information paper.

  Q7  Chairman: There is speculation that on these issues the BBPA has exerted a good deal of pressure on you over the past few months. Is that true?

  Mr Rusholme: I would say there has been a healthy debate about how valuation should take place and that is one reason we want to listen to all parties in the industry.

  Q8  Lembit Öpik: Do you think you will be able formally to codify the value of that relationship, and is it your intention to do so, so there would not be any speculation; it would be almost formulaic?

  Mr Rusholme: We are beginning to undertake two principal pieces of work. One is a review of the guidance itself and the second part of that is to come up with a code of practice for the parties, principally at rent review, and that is to cover such issues as better disclosure of comparable information, going back to the initial letting issues such as providing a breakdown of how the rent is calculated and using that as the basis of the rent calculation at review. The idea behind our code and revised guidance is that if we can take as much conflict out of the process as possible it will make it a lot easier for the two sides to come together and reach sensible agreements without having to move on to arbitration or any other resort.

  Q9  Lembit Öpik: In that case are you looking for some kind of formula?

  Mr Rusholme: I would not put it as a formula. One thing that became very clear from the forum report and also a review of the transcripts of previous meetings of the Committee is that there appears to be overwhelming support for the concept of the profits method as a way to calculate the rent for rent review and setting rents. We need to do a lot more to flesh out guidance on how that is calculated so that the parties understand a whole set of very complex variables in greater detail. If we can put more behind that it will develop a code and better valuation guidance which has certainly been lacking up to now.

  Q10  Mr Hoyle: You referred to "a healthy debate" which I find an interesting expression. Do you mean there has been a pleasant exchange or an arm lock has been placed on you by those who say they have given you work and they want you to listen to them a little more and accept what they say?

  Mr Rusholme: I would still use the words "healthy debate".

  Q11  Mr Hoyle: You do not deny that that happened?

  Mr Rusholme: I do not deny that there has been a healthy debate.

  Q12  Mr Hoyle: Have bully boy tactics and an arm lock been employed on the basis that they give you a lot of work?

  Mr Rusholme: Not at all. My role at the RICS is as head of valuation standards. I do not practise as a surveyor. One of the principal purposes of the RICS is to be independent and act in the public interest. We set valuation standards for the whole industry and we will not bow to influence by one particular party for its own good.

  Q13  Mr Hoyle: There were no threats or intimidation?

  Mr Rusholme: Absolutely not.

  Q14  Mr Hoyle: It was a nice, gentle chat?

  Mr Rusholme: We have had discussions between professional bodies and interested parties as well.

  Q15  Chairman: That clarifies the matter. Obviously, we shall also push the BBPA on those issues later because it is important to hear their perspective on the "no worse off" principle. What is your definition of a reasonably efficient operator?

  Mr Rusholme: I would have to look up the exact technical definition. Maybe it would help if I told you where the phrase originated. Our RICS valuation standards follow international ones. International valuation standards are set on a global level by the accounting professional bodies. The phrase "reasonably efficient operator" comes from international valuation standard definitions and was adopted by the RICS and is a broad term to describe part of the process of calculating the value of an asset. Would you like me to be a little more specific about the definition?

  Q16  Chairman: That can probably be the subject of a written exchange. Another important expression, which I suspect is more a term of art, is "goodwill". The treatment of this is a particularly difficult one to define. Do you propose changes in your guidelines about the definition of "goodwill" to clarify the position?

  Mr Rusholme: Goodwill has always been an area of controversy not just in setting rents in the pub sector but in all commercial property sectors. There is already quite extensive guidance within our information papers and guidance notes on the treatment of goodwill, in particular the separation of goodwill which is personal to the individual who holds the lease from the goodwill that runs with the property. I have detected that in the pub sector there is more we can do in our guidance to provide greater explanation about that term. Again, that is something we are looking to do.

  Q17  Chairman: You will be doing that?

  Mr Rusholme: We will.

  Q18  Chairman: I put a factual question to which I suppose I should know the answer. When a RICS member values a pub does he just give an overall figure or is there a requirement to give a complete breakdown to explain how the figure is calculated?

  Mr Rusholme: That is probably best answered in the context of preparing a rental valuation at rent review because I detect this is one of the most controversial areas in the whole process. If a chartered surveyor is engaged, say, by the lessor or owner of the pub to negotiate a rent review it is good practice to pass on as much information as possible to the person one is trying to persuade to accept that rent. Giving a full breakdown of the rental calculation is absolutely fundamental to that process and should happen in all cases.

  Q19  Chairman: It should happen as good practice but it is not a requirement?

  Mr Rusholme: I agree it is good practice. I believe that all chartered surveyors would operate on that basis. I cannot tell you off the top of my head where it is written down.

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