Examination of Witness (Question Numbers
80-99)
BBPA
8 DECEMBER 2009
Q80 Chairman: To me the obvious solution
is to make the code a statutory one.
Mrs Simmonds: I have never been
in favour of a statutory versus voluntary code. I think you will
find that a statutory code provides less information and a lower
standard than a voluntary one. We have come up with a voluntary
system that has real teeth in the form of the BII which will be
able to pick up cases where companies do not follow exactly what
is required by their codes.
Q81 Chairman: Mr Darby, you are an
operator of pubs. From your point of view what would be the effect
if you were kicked out of the BBPA?
Mr Darby: If we were outside we
could have a code of conduct, but clearly because the BII and
BBPA are linked we would not have a BII-accredited code. Over
the past few months one of the great outcomes of everything that
has been going on in the industry is that the extent to which
prospective tenants and lessees now investigate whether or not
you are the right pub company to join has absolutely gone up another
gear. Underpinning all of this is that if one is to be a successful
pub company that attracts the best tenants and lessees one will
have to pass muster with those individuals. If Marston's Pub Company
or any other does not have a competitive, fair and transparent
code of practice I am convinced that as time goes on it will be
at a commercial disadvantage. Why would I go to a pub company
that did not have an accredited code of practice and therefore
certainty of protection?
Q82 Chairman: One striking feature
of the survey that informed our report was that the majority of
publicans chose their pub because they wanted to be in that pub
or community; it was not the pubco they chose. Do you suggest
that what has been a driver of the industry will change; if so,
how?
Mr Darby: There must be an absolute
change in the industry. Having been in the industry for only a
year, we must reach a position where people take on pubs because
first and foremost they make a business decision, not an emotional
one. We have a part to play in this; we have been responsible
for appointing these people to pubs and so we are part of the
problem. We are trying to solve that problem going forward. I
do not want somebody to take on a pub for emotional and not business
reasons. All of the evidence is that after the event the relationship
rapidly sours. I do not really care whether somebody who comes
to a pub knows it well and has drunk in it; I want the individual
to look at the prospective P&L, take individual advice and
be trained by the BII to understand what he is letting himself
in for. Then we can talk about whether or not it is still the
right pub for that individual. That is where the mistakes have
arisen. Too many emotional and not enough commercial decisions
have been made.
Q83 Chairman: One view is that some
of the big pubcos are not motivated by those kinds of thoughts
at all. Perhaps the people who owned them intended to flog them
in two or three years and long-term decision-making was not part
of their thought processes; for Marston's and small family breweries
it clearly is. The idea was that they were in it for short-term
gain, the mountain of debt then grew and their business model
failed and we are dealing the consequences of it.
Mr Darby: Whether one views it
as a benefit or disbenefit, the result of the spotlight being
shone on this industry is that the issues that need to be attended
to are absolutely in open forum. If one is a company that is not
being run in a sustainable and effective way that will present
one with all sorts of business risks going forward. I will not
enumerate that any further because it would be inappropriate to
do so, but it is no different from you or me trying to get a mortgage
on the basis of a bad payment record. We will struggle to get
a mortgage. If we are to be trusted by both customers and the
people who back us we must prove that we have long-term, sustainable
businesses.
Q84 Ian Stewart: Critics of the analysis
you outlined earlier about a voluntary versus statutory code would
say that the former approach has not worked up to now. This morning
you have presented to the Committee an analysis which says that
the new system will work. Do you accept that the voluntary nature
of it, even though it may be mandatory, will not carry as much
weight in court as a statutory code which would have a deterrent
effect?
Mrs Simmonds: We have taken advice
on this issue. We are absolutely certain that if those agreements
are signed by both the lessee and pub company they would be effective.
For example, I was responsible for the "Good Practice Guide
on Planning for Tourism". It is not a planning policy
statement as DCLG would understand it but it has been taken into
account in countless appeals because it is there as guidance.
I believe that the same situation would apply here. The fact that
those agreements exist and are signed by both parties would be
clearly taken into account by any court of law or arbitration
panel.
Q85 Chairman: I suggest that following
this session you send us a note about the legal consequences of
the code. We can study that in detail rather than pursue it in
this evidence session. It is a very important point that I want
to hear about in a little more detail.
Mrs Simmonds: Certainly.
Q86 Mr Wright: You have already mentioned
that your members will be signing up to the new RICS code. How
will it be done? Will it be done verbally? Will they sign a document?
Will it be legally binding?
Mrs Simmonds: We need to differentiate
between the industry code and the RICS guidelines on the setting
of rents which is exactly what it is. Perhaps I may explain a
little how the PIRRS scheme works. One has a group of chartered
surveyors who have been recommended by the organisations that
are part of PIRRS, that is, the FLVA, the ALMR and the BII. That
group of people will be available to lessees if they wish to take
up PIRRS. We have already had two examples where that has been
taken up and three cases where the matter has been settled before
it has got that far.
Q87 Chairman: We are not talking
about PIRRS at this stage; we are distinguishing between the BBPA
code and the RICS guidance.
Mrs Simmonds: We need to distinguish
between the two. The RICS guidance is for chartered surveyors
wherever they deal with the matter; the industry code is for pub
companies.
Q88 Mr Wright: The previous witness
gave evidence about the RICS national benchmarking scheme. In
your submission you make clear that it is not part of the pub
company's role to disclose commercial information. Does it mean
that you will not work with RICS on its benchmarking scheme?
Mrs Simmonds: The pub companies
are absolutely committed to provide the right information. Whether
it is the ALMR benchmarking or, as the RICS said, some other system
we will provide the information to make sure they have the best
information on which to base the rent setting.
Q89 Mr Wright: That would be so even
if you determined that it was commercially sensitive? That has
always been a get-out for other industries; it is said that the
information is commercially sensitive and so it cannot be provided.
Mr Darby: You touch on the key
point here. Like other members of the BBPA we would be willing
participants in a benchmarking survey as long as the information
was clearly ring-fenced and kept confidential. For those of us
who are publicly-listed companies margin performance is a critical
part of the perception of our business. If we are to input market-sensitive
information we should have the confidence that it will be protected
and kept confidential. There are all sorts of other ways in which
we contribute data. For example, we contribute market data to
the BBPA in a way that is ring-fenced and secure so that nobody
can see individual data. If that kind of protection is provided
there will be no issue about participating.
Q90 Mr Wright: I go on to the question
of upward-only rent reviews that have been abolished since 2005.
Existing lessees are entitled to comfort letters. What status
would they have in court? There is a degree of scepticism that
they will not be binding in terms of any past contractual obligations.
Will these comfort letters bear the test of time?
Mrs Simmonds: Again, we have taken
legal advice on it and I am happy to share that with the Committee.
We are absolutely clear that side letters are legally binding.
At the end of the day the lessee also has the choice of having
a deed of variation but both would be applicable and are available.
Q91 Mr Wright: Why not just change
the terms of the contract at the lessee's or lessor's expense
so it is clear and unambiguous that upward rents are a thing of
the past?
Mrs Simmonds: Upward rent reviews
have been a thing of the past since 2005. It must be made absolutely
clear that even if you have an RPI lease your rent can go down
as well as up obviously depending on the market. If one is concerned
that the rent has been set incorrectly that is where the PIRRS
comes in.
Q92 Mr Hoyle: Mr Darby, you appear
to be the man who has come to cleanse the industry; you are telling
us that you are the good guy on the scene.
Mr Darby: I try to be.
Q93 Mr Hoyle: Mrs Simmonds, what
do you think you are? Are you the bad part of the industry or
will you be part of the good side of it?
Mrs Simmonds: I hope I shall be
part of the good side in encouraging all my members to work with
the scheme.
Q94 Mr Hoyle: Do you agree with the
RICS forum report that in principle the tied tenant should be
no worse off than a non-tied tenant?
Mrs Simmonds: I think we need
to look a little at where this originated. That form of words
was used by the European block exemption and was dropped in 1988
as being inappropriate. It was designed to talk about the market
as a whole, not individual premises. The important part is that
the rent arrived at must reflect the price you pay for the beer
and the benefits arising from that particular agreement. Therefore,
if the pub company offers marketing and security—whatever
funding it requires—all of that is put into the mix.
Q95 Mr Hoyle: Is that a "yes"
or "no"?
Mrs Simmonds: The answer is that
we will completely abide by the RICS guidance when it comes out,
so it is "yes".
Q96 Mr Hoyle: Mr Darby?
Mr Darby: The BBPA code makes
very clear that in terms of rent-setting it will abide by the
guidelines set by the independent organisation which at the moment
is RICS. Therefore, if RICS in its latest guidelines in the industry
forum next year comes up with a methodology for the calculation
of tied versus non-tied benefit, which is a complex issue, we
will be bound by the code to follow those guidelines.
Q97 Mr Hoyle: If you are the new
BBPA person on the block why are you trying to get RICS to change
its mind?
Mrs Simmonds: We are not trying
to get them to change their mind.
Q98 Mr Hoyle: You have not put any
pressure on them?
Mrs Simmonds: We have had some
discussion with them, but as the BBPA we have put absolutely no
pressure on the RICS on anything that is to be put in its code.
We will work with RICS to help them to understand our sector better
but we have not put any pressure on them.
Q99 Chairman: Perhaps I may quote
something sent to me a few days ago on this issue: "The pubcos
are hopping mad and are trying to wriggle out with the usual old
`countervailing benefits' routine, but as RICS said if there are
any beneficial or onerous terms in the relationship they are only
taken at valuation if they are agreed between the parties and
explicitly included in the lease." Apart from "wriggle
out", which is a pejorative term, the conclusion seems to
be absolutely sound intellectually.
Mrs Simmonds: The independence
of RICS is absolutely vital to this process. We will abide by
whatever they come up with in their guidance. I can promise you
that we have put no pressure on RICS.
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