Examination of Witness (Question Numbers
180-199)
MRS KATE
NICHOLLS, MR
KARL HARRISON,
MR SIMON
CLARKE AND
MR GARRY
MALLEN
8 DECEMBER 2009
Q180 Mr Clapham: We heard about enforceability
from the previous witnesses. Because of the way the code is not
totally accepted by the industry you believe that the BBPA code
just would not be enforceable?
Mr Mallen: No. I think it would
end up in a long drawn-out process where for years it was contested
that in signing the code the pubco had agreed to the terms within
it.
Q181 Mr Clapham: Presumably, the
confederation wishes to see a mandatory code and that would be
the RICS code?
Mr Mallen: Yes.
Q182 Chairman: There are issues in
the BBPA code which RICS would not even touch. The question is:
what advice can you give the Committee about those other issues
that cannot be part of the RICS code which you would like to see
mandated? What recommendation should be made?
Mrs Nicholls: We have to go back
to the 2004 report of the Select Committee on Trade and Industry
which made a clear recommendation about what an adequate code
would cover. We have not seen a copy of the code they are talking
about, so we do not know whether that meets the definition of
what the Committee asked for at that time. But the Select Committee
was quite clear that if the industry did not produce an adequate
code and enforce it there should be a statutory one. The only
way one can deliver true enforceability is to make something legally
binding and bring about real change.
Q183 Chairman: Should we give them
a year or two on the voluntary code or have they already visited
the last chance saloon?
Mrs Nicholls: I take you back
even further to 1989 and the MMC which said that the lack of an
enforceable—they underlined that word—code of practice
meant that brewers could limit the economic independence of tenants
and reinforce their position of economic strength. If you substitute
"pub companies" for "brewers" you are in exactly
the same situation. We have not moved forward since 1989; we have
no enforceable code of practice in this industry.
Q184 Mr Clapham: In terms of scrutiny
you believe that the BII is less than an independent redress mechanism.
Can you add to that?
Mr Harrison: You have to deal
with two things: the ability of the BII to be genuinely independent
in the long term and the perception of it as an independent body.
Both of those are extremely hindered by financial connections
between pub-owning companies and the BII. We are really looking
for an available body to scrutinise a code written by the people
who fund the body that is to scrutinise it. Given the suspicion
that exists and the problems faced by the industry at the moment
that does not seem to be an excellent starting point. We need
something that is mandatory or statutory, almost a licence to
operate tied and tenanted pubs, and in order to do so you have
to sign up to a code which is genuinely enforced with real financial
penalties, not just one organisation's arbitrary understanding
of what constitutes a persistent breach. Individual breaches can
be extremely damaging to tenants; they can put them out of business.
The breaches may not be visible until the tenant has already gone
out of business. This needs to be statutory, mandatory and properly
enforced with financial penalties by a separate organisation.
I realise that that is not what the BBPA want to hear, but that
is needed in order to give confidence in the sector.
Mrs Nicholls: It is the absence
of effective sanctions and penalties that goes to the heart of
it. The evidence is that this year alone there have been 100 cases
in which code complaints have arisen. I have not seen anybody's
accreditation being removed or anybody leaving the BBPA. There
is talk about multiple persistent breaches and then a possible
move towards a sanction. I do not see that there is a truly independent
and effective sanction. I sit on a property codes compliance board
which deals with codes of practice in the residential sector;
it deals with HIP and search providers. It is an entirely independent,
separate board nominated by public interest bodies and consumer
representatives. They are the people who deal with the issues
of compliance, not the industry. The industry cannot sit in judgment
on itself.
Q185 Mr Clapham: I turn to PIRRS
about which you have expressed some concerns. Perhaps you would
take us through them.
Mr Harrison: Perhaps I may deal
with a preliminary point related to the PIRRS website. I am aware
that the chief executive of BII, Neil Robertson, is here today.
He behaved perfectly in dealing with this. We raised a complaint
with Mr Robertson in regard to the declaration of interests of
surveyors who put themselves forward to be members of the panel.
From the website it transpired that a number of those surveyors
had not declared their interest in the way they had been asked
to do by the BII. That website was not taken down for a technical
reason as Mrs Simmonds said; it was taken down by Mr Robertson
for a very sensible and pragmatic reason, namely that as a new
system it was potentially exposed to ridicule at an early stage.
Very sensibly, he took it down and took forward that matter. To
make one quick comment on PIRRS, if Mr Rusholme and the RICS deliver
their report properly and address that very seriously—the
RICS is capable of behaving in this sector truly independently,
which we would argue it has not been—PIRRS ought not to
be required at all because the system that should be in operation
in most of those contracts ought to run properly. Some people
in the BII would agree that that is probably the case and their
attempt to come up with an alternative system has also been very
useful as part of the RICS consideration. Maybe the RICS have
said that somebody else is stepping onto their turf, if you like.
I believe that has been very helpful.
Mrs Nicholls: PIRRS undoubtedly
has the potential but it is limited and deals only with rents.
The matter we urge you to dig away at again is that there are
other forms of complaint where there is no method of independent
redress. PIRRS does not deal with it.
Mr Clarke: As to PIRRS, as Mr
Harrison rightly stated there was obviously concern about the
independence of some of the surveyors who nominated themselves
for the role of independent adjudicator. PIRRS is in its infancy
and I am sure there will be various tweaks and consideration will
be given to its development as time goes on, but the problem still
faced by BII is that it must depend on the disclosure given by
the surveyor. For example, Fleurets are still on that independent
body. As we speak they have 150 pubco pubs on the market of which
70 are Punch. I cannot see how that can be considered to be independent.
Q186 Mr Clapham: Looking at some
of the evidence we were given, the Federation of Small Businesses
told us that PIRRS excluded the involvement of RICS. We heard
that that was not correct. Is it your view that RICS is excluded?
Mr Clarke: I do not think RICS
is excluded; nine times out of 10 it will be a RICS man who will
be the independent adjudicator. They might have been referring
to the fact that PIRRS is not necessarily bound by the RICS code
of conduct. Essentially, even if the RICS has come up with a code
of conduct that is suitable for the industry it will bind only
chartered surveyors. As touched on earlier, BDMs and area managers,
who nine times out of 10 are the negotiators on rent reviews,
are not chartered surveyors and they will not be bound by that
code. As far as I know, PIRRS is to be based on chartered surveyors
operating the system and using the same formula and valuation
guidance as the RICS guidance that is about to be revised.
Q187 Mr Clapham: What do you believe
needs to be done to make your members feel confident that the
pubcos are working with you to create an industry that has a prosperous
future?
Mrs Nicholls: I think we must
go back to the Committee's recommendations in its May report.
Your analysis and recommendations are right. The only way forward
is to work in partnership on freedom of choice, flexibility and
fairness. That is what the IPC stands for and we are happy to
have dialogue with any stakeholder who shares those aspirations
and wants to work with us to deliver them. Ultimately, we come
back to the Committee's recommendation that it will not happen
on a voluntary basis and the Government now needs to intervene
to ensure there is a legal framework and the competition issues
are investigated thoroughly.
Q188 Mr Hoyle: I turn to the very
important area of the beer tie. What is the Confederation's collective
view on the beer tie? What changes could be made to the tie to
satisfy your members and make it workable for them?
Mrs Nicholls: I make clear that
here I speak on behalf of the IPC collectively, so I give the
common position and consensus. Our position on the tie is very
simple. We support a model that offers fairness, flexibility and
freedom of choice and therefore we concur wholeheartedly with
your recommendation that the way forward is for lessees and tied
tenants to be given that choice. If it works it will be to their
benefit; if not, they will remain tied, but that choice can be
offered only in the context of the proposed revisions to the RICS
rent valuation model based on the prime principle that the tied
tenant should be no worse off than if he was free of tie. We fully
support the recommendation you made and cannot see that good operators
and landlords have anything to fear from offering people a choice.
Q189 Mr Hoyle: That is interesting
because CAMRA says the tie should be kept and the FLVA say it
should be abolished, so where does that leave you?
Mrs Nicholls: We are not here
to replace the views of our members who hold disparate views.
Q190 Mr Hoyle: I did ask for the
collective view.
Mrs Nicholls: The collective view
where we do have commonality is support and endorsement of the
Committee's recommendation because that allows both sides to keep
saying the same things. Your recommendation is a very clever one
because it says that if tie is of such great benefit lessees and
tied tenants in particular will choose not to exercise their choice.
Our position is all about fairness, flexibility and freedom of
choice.
Q191 Chairman: Would you extend that
choice to every brewery and pubco or would you put a limit above
or below a certain size?
Mrs Nicholls: To try to make it
a pragmatic and straightforward solution, as a first step we would
put a limit on it. We suggest that you should adopt the European
Union definition of de minimis and exempt those below a certain
market share.
Q192 Chairman: What would that market
share be?
Mrs Nicholls: One per cent of
the UK pub market.
Q193 Mr Hoyle: You say that some
small landlords have leases that give them the choice of being
free of the tie. How has this been taken up?
Mr Clarke: The important point
to note is that you can be offered the option of free of tie or
flexibility of tie. Mr Darby referred to Marston's proposal. I
do not know the details of that proposal but I have seen other
ones. Nine times out of 10 the opportunity to go free of tie is
accompanied by a rental increase which is determined by the landlord
who offers that opportunity. I would argue that if you are to
be offered freedom from the tie or any flexibility at all which
alters the terms of the lease that should be accompanied by a
rent review based on open market rental value, not something that
is dictated, namely that the tenant can have this but in
exchange the pubco wants that.
Q194 Mr Hoyle: Do you suggest that
it is a pub that does not sell a lot of beer anyhow and so they
would be quite happy to give up the tie because they could derive
income from, say, food and the brewery could get a bigger take
by putting up rent due to the volume of beer going through the
pumps?
Mr Clarke: I suppose there is
that possibility, but the nature of the profits valuation is that
those other income streams would be valued anyway on a cash flow
basis. Therefore, there would be gross profits allocated to tie
and free of tie products. They are all encompassed in the rental
value as it is. The point is that if the lease is changed in any
shape or form it is accompanied by an open market rent review.
Q195 Mr Hoyle: The BBPA has said
that pub companies should develop a protocol on the operation
of flow monitoring equipment. What would you like to see in such
a protocol?
Mr Harrison: First, we have been
doing some work on this with regard to Brulines which is pretty
well the only flow monitoring device that is installed in the
vast majority of tenanted estates. We have commissioned a report,
which we have submitted to the Committee, from SGS which is the
world's leading expert in verification instrumentation and certification.
In its detailed report it concluded that the system was not fit
for purpose, inaccurate and ought not to be put to the use that
it is being put. Second, it is not true that LACORS and Trading
Standards have approved this system.
Q196 Chairman: It is said they do
not need to.
Mr Harrison: LACORS do not say
that at all but that in their view—we have a letter from
Ms Wendy Martin, their policy director—the system is likely
to be in use in trade. We have taken leading counsel's advice,
which we have also submitted to the Committee, that it is also
in use in trade and as such probably falls under weights and measures
legislation. LACORS have also suggested that Brulines ought voluntarily
to submit their system for testing in government labs. That has
not been volunteered yet and we believe that is because it is
not accurate and does not work. What we do know about it is that
it is inaccurate; it is possibly unlawful and we have been advised
that it perhaps also falls foul of the Misleading Marketing Regulations
2008. We know that it is used largely for the intimidation of
tenants; that is what happens on the ground and it continues to
be the case. Mrs Simmonds did know about direct debits which were
used to take money directly out of people's bank accounts because
I told her personally when I met her some weeks ago. I spent about
15 minutes talking about Brulines and not much of it seemed to
sink in, to be frank, but that is the case. We have done some
work on it, so our view is that it is inaccurate; it is possibly
unlawful; and it is used for intimidation.
Q197 Mr Hoyle: The BBPA suggest that
evidence in addition to flow monitoring equipment is required
by pub companies before accusing a lessee of buying out of tie.
What evidence do you suggest is necessary to do this?
Mr Harrison: It would be for the
court to decide, would it not?
Q198 Mr Hoyle: But is there anything
else to add?
Mr Clarke: Corroborating evidence
would be necessary for any sort of action to be taken. The discovery
of foreign barrels in a cellar is perfectly good evidence, but
nine times out of 10 the corroborating evidence that is used to
back the Brulines' evidence is a confession by the tenant which
is usually obtained by using Brulines' evidence. It is a self-fulfilling
process. You could go to court with all this evidence about singing
and dancing and nicely coloured graphs. Here is also a confession
by the tenant. When faced with that information at the outset
the tenant would consider that a nominal fine and confession would
probably be better than the forfeiture of the lease which is what
he is being threatened with.
Q199 Mr Hoyle: It is as draconian
as that?
Mr Clarke: Absolutely.
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