Examination of Witness (Question Numbers
1-19)
RICS
8 DECEMBER 2009
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.
| 
