UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 138-iHouse of COMMONSMINUTES OF EVIDENCETAKEN BEFOREBUSINESS, INNOVATION AND SKILLS COMMITTEE
PUB COMPANIES: FOLLOW-UP
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This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
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Transcribed by the Official Shorthand Writers to the Houses of Parliament: W B Gurney & Sons LLP, Hope House, Telephone Number: 020 7233 1935 |
Oral Evidence
Taken before the Business, Innovation and Skills Committee
on
Members present
Peter Luff, in the Chair
Mr Michael Clapham
Mr Lindsay Hoyle
Miss Julie Kirkbride
Lembit Öpik
Ian Stewart
Mr Anthony Wright
________________
Witness: Mr David Rusholme FRICS, Director, RICS Valuation Professional Group, Royal Institution of Chartered Surveyors, gave evidence.
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 individual 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 a 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 that as the most controversial area 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.
Q20 Chairman: Perhaps you can correspond with the Committee on that point.
Mr Rusholme: I will.
Q21 Chairman: I have seen some very different presentations of rentals from pubcos certainly to their tenants or lessees: some are exemplary and others are, frankly, shocking.
Mr Rusholme: Would you mind if I draw a distinction here? There is a distinction to be made between rental proposals by chartered surveyors who have been engaged to carry out this work and business development managers or representatives of landlords who are doing this without any reference to chartered surveyors. As to the latter category I agree that there is much concern about what information has been provided.
Q22 Chairman: That is also my view. Without going into the details of it, how important is the Brooker case for rent review purposes in dealing with the issue of divisible balance?
Mr Rusholme: I believe that from time to time in all areas commercial valuation cases come along which have particular significance and the Brooker case is one of those.
Q23 Chairman: Therefore, is the figure of 35% a new benchmark?
Mr Rusholme: What I like about the Brooker case is that it has helped to dispel the myth that RICS or any other body sets in stone that there should be any particular split of divisible balance, be it 50-50 or whatever. Within Brooker there is a lot of discussion about risk and how one encapsulates it ultimately in the amount of money the tenant will pay. That is a very healthy discussion to have and an area where our guidance will provide a lot more support in terms of exactly where risks and rewards are taken into account.
Q24 Miss Kirkbride: One of the recommendations in the report of the Select Committee on Trade and Industry in 2004 was the establishment of a national register of rents to make things much more transparent. It appears you have suggested a national database of trading information as a better alternative. Can you explain how that would work and why you think it is a better proposal than our original one?
Mr Rusholme: We recognise that for a long time there have been calls for a national register of rents. Various groups including ourselves have looked at the practicalities of achieving that. There are lots of difficulties related to data protection issues and gaining the co‑operation of the industry to make that happen. We came up with a better idea in the forum report. We looked at a number of other industries which had a trading element, for example hotels. There is a good deal of benchmarking information provided in that industry which is very helpful in getting the parties to come together in negotiations. That is one part of it. The other part is that chartered surveyors who act in that sector have their own databases of information and it is part of their skill and job to put together that information. One needs a whole range of information sources to make the process easier. We believe that benchmarking will do that job and that is achievable because there is an averaging of data from different sources; it is not just identifiable to one particular public house, for example. By averaging and making trading information slightly more discrete one is better able to get the whole industry to start to make more of that data available. We believe there is a lot of mileage in pursuing a benchmarking scheme and at the moment our efforts are devoted to trying to make that happen.
Q25 Miss Kirkbride: Are you getting both landlords and tenants to co-operate on this idea?
Mr Rusholme: At the moment there is a very good basis in that the ALMR runs a benchmarking scheme which takes information from a lot of tenants and lessees in this sector. We are looking at that and have a very healthy dialogue with that organisation on whether or not that is the place on which we should build. We are talking to a number of commercial providers of such databases in the marketplace. In addition our working group will be conducting a lot of work on the type of variables in a benchmarking system which will be useful to the industry and in the course of the next few months we will be able to pull the whole thing together and recommend the right direction in which it should go.
Q26 Miss Kirkbride: You said you were obtaining information from tenants and lessees. Did you mention landlords?
Mr Rusholme: Most of the existing information provided to the ALMR system comes from tenants. What we would like to see is the development of a benchmarking system which works on the basis of all the industry including the operators and pubcos being able to feed into that as well. That is vitally important.
Q27 Miss Kirkbride: Have the pubcos and landlords refused to co-operate so far?
Mr Rusholme: We have not reached that stage in our investigations.
Q28 Miss Kirkbride: Is that because you have not asked them or they have just ignored you?
Mr Rusholme: We have not asked them directly. What we want to demonstrate first is that there is a system which will comply with data protection and give comfort to all sides that if they provide information to the benchmarking system it will be secure and useful. We would encourage all pubcos and owners to co-operate on that.
Q29 Miss Kirkbride: Who will maintain and update it?
Mr Rusholme: It is still to be decided whether it is the ALMR, an outside commercial body or whether the RICS has the capacity to take that on.
Q30 Miss Kirkbride: Who would be allowed to access it?
Mr Rusholme: It should be open to both lessors and lessees in the sector. The one in the hotel industry works on the basis of subscription; the one currently run by the ALMR does not work on the basis of a charge so it is pretty much open to all involved.
Q31 Miss Kirkbride: The Independent Pub Confederation has put forward the argument that in the cost basis of a rental calculation allowance should be made for time spent on pub business by the lessee. Is that something you are thinking of including in the database?
Mr Rusholme: Certainly, it is a variable that can be captured in a database. Yes, one can identify those costs by running a database or benchmarking system.
Q32 Miss Kirkbride: Are you going to include it or are you thinking of doing so?
Mr Rusholme: There are perhaps two separate issues here. First, the question is whether it is information that can be captured in a benchmarking system. Clearly, it can be. I suspect that the second part to the IPC's argument is whether in rental calculations allowance should be made for a manager's cost or a salary cost. I think that is a little more difficult. If it is included the consequences may be a little more than we wish because it goes back to the basis of valuation which is to establish what someone would pay in the market. What variables you put into the hypothetical calculation are only a way of getting to that answer. I am unsure whether it will add a great deal to that process.
Q33 Mr Clapham: Obviously, the code of practice will be enormously important. You referred earlier to the rent analysis statement being a very important aspect of the code. Are we likely to see in the code a reference to the types of variables that will be in the rent analysis statement?
Mr Rusholme: Very simply, yes; that is very much the direction we are looking to take with this.
Q34 Mr Clapham: In developing the code have you had discussions with the BBPA? Are you working together to avoid the possibility of two codes? If there were two valuation codes operated in the industry they would present a challenge.
Mr Rusholme: I agree with the comment that this seems to be an industry with quite a lot of codes.
Q35 Chairman: It would help if they followed them occasionally.
Mr Rusholme: As to an RICS and BBPA code I am aware of the latter which is being developed. It has not been published but we have had some sight of the direction that it is taking and we are very encouraged that it seeks to cover quite a number of issues we have recommended in our pubco report. As to whether we should join with that code or provide our own, our thinking is that we should provide a free-standing RICS code covering the issues that pertain purely to property and rent setting. It is stronger if it is free standing. I recognise that perhaps there are issues of enforceability of the code. If it is free standing it is clear that for our members it is mandatory and they should follow it.
Q36 Mr Clapham: That is an important statement. If there are too many codes it just makes for difficulties. If we have a RICS code it will be one that is acceptable throughout the industry; it will make things much easier when it comes to working out rent issues. Will you be pressing for that to happen rather than that there should be two or three codes? We now have the BBPA talking in terms of a code which you say is encouraging. Is it not possible for the two of you to come together and introduce one code that will be important for valuation?
Mr Rusholme: It is our intention to develop a free-standing RICS code.
Q37 Chairman: The important objective must be that nothing in the BBPA code, which deals with issues much wider than valuation, should conflict with the RICS code.
Mr Rusholme: I think so. If ours is only part of that code which deals with a wider range of issues there is a risk that it may become somewhat diluted and there will be confusion as to where authority and enforceability lie.
Q38 Mr Clapham: When are we likely to see the code? When will it be implemented?
Mr Rusholme: Our thinking is that it should be in place by the spring of next year.
Q39 Chairman: For politicians spring can be a rather flexible feast. What do you mean by "spring"?
Mr Rusholme: Our working group is to have its first session in January and perhaps it can come to its conclusions in six or seven weeks. I am mindful that there must be proper process; it must be got right, and to rush into something would be the worst kind of advice. Like this Committee, we consult on guidance that we publish. A consultation period would be built into that, hence it will probably be April or early May before it is published.
Q40 Mr Clapham: You referred earlier to enforceability. Do you expect the RICS code to be enforceable on anybody who values the rent aspect of a public house? For example, pub companies have development managers. Are we likely to see the RICS code being enforceable on them?
Mr Rusholme: The strict answer is that we can develop only a code by which our members abide. We would certainly call for everyone else in the industry to use that code and abide by it.
Q41 Mr Clapham: What kind of response have you had from the industry? Does the industry see the importance of a code that is enforceable across it and therefore are you encouraged?
Mr Rusholme: I am optimistic and encouraged that that can happen.
Q42 Mr Clapham: Where there is a code that is not adhered to normally there are sanctions. What kind of sanctions do you envisage being imposed if people deviate from the code or refuse to accept it?
Mr Rusholme: There are a great many sanctions within the armoury of the RICS as a professional organisation from arm's length regulation to a full range of disciplinary powers.
Q43 Mr Clapham: Has it been made plain to the pubcos that this is something you are looking at and there will be sanctions if people do not adhere to the codes?
Mr Rusholme: The sanctions will apply to chartered surveyors operating in this area.
Q44 Chairman: But not to businesses?
Mr Rusholme: Unfortunately, I do not have the power to make that happen.
Q45 Mr Hoyle: You have summed it up, have you not? You can put some meat on the bone only as far as your own organisation is concerned and that is the weakness of it. We come back to enforceability. The truth of the matter is that you can enforce it only against chartered surveyors and without that it is a toothless tiger. Are you not asking that this be mandatory across the whole industry?
Mr Rusholme: There is great merit in taking that route if others can make that happen.
Q46 Mr Hoyle: The only way it can make a difference and make things happen is if everybody signs up to it.
Mr Rusholme: Certainly, the stick of making that happen is an attractive one and perhaps the carrot is to come up with well thought-out advice in the code which has the industry behind it. If we can carry those involved along with us in preparing the code there must be a greater chance that people will stick to it once it is published.
Q47 Mr Hoyle: Whom do you believe will be the fly in the ointment in coming up with a mandatory code?
Mr Rusholme: I would not single out any particular organisation.
Q48 Mr Hoyle: Is it your belief that this morning everybody will be happy; it will all be done and dusted and they will be with you all the way and will sign up to it?
Mr Rusholme: If we can carry everyone along in the process there is a good chance of people adhering to it.
Q49 Mr Hoyle: I think they are in danger of falling out of bed, waking up and facing reality. Is the truth of the matter that there are certain people from whom we will be hearing evidence who will not be quite as enthusiastic as yourself?
Mr Rusholme: I agree that it must be a combination of the two. If there are some mandatory ways to make this happen we would very much welcome it, as we would any support in achieving that.
Mr Hoyle: That is very fair of you; at least you are honest enough to say that a mandatory code is the way forward in reaching a solution. Let us hope everybody listens to you.
Q50 Mr Wright: If we turn back to the question of valuation, is there any element of it that takes into account the wage or salary of the publican?
Mr Rusholme: As I understand the profits method at the moment there is no specific allowance for the salary of the lessee himself. You make allowances for those you employ. Where that is reflected in the calculation is in the split of the balance that is apportioned at the end of the process. There is no one line in the calculation that deals with a wage to the lessee.
Q51 Mr Wright: Do you not think that should be included? We have heard all sorts of stories from various publicans who have significant incomes but the salaries and wages they draw are not commensurate with sales of £400,000 or £500,000 and salaries of perhaps £15,000 or £16,000. Do you not think there should be a standard within the valuation which says one should not go below a certain wage level?
Mr Rusholme: I agree that it is a very important element and it would be ridiculous to set rents that did not make an allowance in the split of profit for making a living or profit out of the business. As to where it is reflected in the calculation is something on which we would like the new guidance to focus specifically. At the moment it is to do with how one apportions the balance of profit at the end. Of course there must be a commonsense check that it provides a decent living and return to anyone operating the business.
Q52 Mr Wright: The figures indicate that 65% receive less than £15,000 a year. For the hours put in that does not appear to be commensurate with an attractive option for those who want to come into the industry.
Mr Rusholme: It is only right that our rent guidance reflects a fair reward at the end of the day for the operator. It comes back to what people are prepared to pay in the market. If potential lessees are making high bids for rents in the first place it is very difficult to argue that rent levels should not follow those levels. A lot of things are changing now; for very obvious reasons rents are falling and rents at review should also fall. You also have to counterbalance that in the equation.
Q53 Chairman: Those are all the questions we want to ask you. Is there anything you particularly want to say that we have not covered?
Mr Rusholme: I do not believe so.
Q54 Chairman: The message of this Committee is: stick to your guns. We are encouraged by the progress RICS is making but it needs to stick to that and not slip back.
Mr Rusholme: That is recognised.
Chairman: Thank you very much.
Memorandum submitted by the British Beer & Pub Association
Examination of Witnesses
Witnesses: Mrs Brigid Simmonds OBE, Chief Executive, and Mr Alistair Darby, Managing Director, Marston's Pub Company, British Beer & Pub Association, gave evidence.
Chairman: Welcome. We all know who
you are so we can dispense with the usual formality of introductions. When your
colleagues representing the pubcos appeared here last time the trade press
described it as a Spanish inquisition. That was not our intention. We are after
the truth. Although Mr Darby is one of my constituents I am afraid that will
not prevent me being a dogged searcher after the truth today. The Committee is
disappointed that the industry did not respond more fully to the 2004 report
and that we have to have these evidence sessions at all. I agree with the
industry that there are other very important questions facing the future of
British beer and pubs that need to be addressed, but this issue just will not
go away; it simply has not addressed it. Almost the central question for us
today as a committee is one that may provoke a titter in the public gallery,
namely: can we trust you? I do not feel that we can and you need to persuade us
otherwise. The reason is that the reaction by your industry to our May report
was so bitterly disappointing. Let me quote what a few people have said.
Enterprise Inns only recently described the Committee as being ill-informed and
said the report was based upon hearsay rather than evidence. I reject that
absolutely. Shortly after the report came out on 13 May
Mr Hoyle: Chairman, I think the witnesses ought to reply to what you have just put.
Q55 Chairman: Mr Hoyle is absolutely right in his comment, but my first question gives them precisely that opportunity. No major improvements were made following our 2004 report. Why should we not believe that that will be the case again after all I have said to you.
Mrs Simmonds: Thank you for that introduction. In sitting here the British Beer & Pub Association is not in any way complacent; we take the criticisms of this Committee very seriously. We have worked extremely hard in the past few months to come up with a new industry code that we believe gives greater detailed financial information to both prospective and actual tenants when rent is reviewed. It provides accredited training for both business development managers and prospective tenants and above all we have PIRRS which will allow lessees and tenants to take concerns about their rents to that independent scheme which is already up and running. We are not in the slightest bit complacent. We genuinely believe that there is a sea change and hope that during the next hour we will have the opportunity to talk about any concerns you have and how we will tackle them.
Q56 Chairman: Your answer to my fundamental question which overhangs the whole session - why we should believe the same thing will not happen again - is what? Members of the industry including quite senior people within the BBPA said to me they had not realised the codes were not being followed and they were shocked by many aspects of the report. I have had some very encouraging and helpful discussions in private with many senior figures in the industry. That is why I take the comments I have just quoted so badly. I believe that most people in the industry think we have put our finger on some important issues. How can we trust you this time?
Mrs Simmonds: The overriding and important part of this is transparency. We must be open and honest with our tenants; they have to understand how the system will work in future and must have a low-cost process by which they can take action if they believe that the rent set is not the right one.
Q57 Chairman: Do you believe that the kind of response given to our report last time round by some high profile people in the industry is a helpful way to engage in public debate?
Mrs Simmonds: I do not think it is in the slightest way helpful. At the end of the day we have to come up with something that will work better. We need a system whereby everyone can understand how it works and an industry code - we have sent a draft to the Committee - to which all our members are committed in terms of its implementation and new company codes which will be accredited by BII. I am aware that the British Institute of Innkeeping has written to you separately on exactly how that will work and I am very happy to discuss that in due course today.
Q58 Chairman: I have seen the code and I agree that it is a great improvement on what has gone before; it has many things in it that I welcome. When do you expect it to come into force? It has not been approved yet by the BBPA; it awaits formal approval?
Mrs Simmonds: It has not been approved by the BBPA, and it must also be approved by the FLVA and BII who are co-signatories. We hope to have that done by the end of the year. We will then go through the process of bringing all the individual company codes into alignment with the overarching industry code. All of those codes will have to be implemented. We have said we expect to have the majority of those codes fully implemented by June of next year. We may need additional time particularly for some of the tenanted individual company codes to be taken in.
Q59 Chairman: I have talked to some of the small regional brewers who are
concerned about the compliance costs of the code for which I have some
sympathy. It is easy for
Mrs Simmonds: We have to make sure that the code is applicable to a brewery tenancy and a fully leased pub. If you have a full repairing lease that is very different from a three-year tenancy. It is a matter of making sure that your practice is one that is reflected in the company code.
Mr Darby: Having chaired the BBPA working party in response to your report I
should like to give a little background. I have been Marston's Pub Company's
managing director for only a year. Prior to that I was in charge of our beer
company and therefore operating in the free trade, so I have had experience
dealing with free trade customers for six years: supermarkets and effectively
non-tied customers. I come from an arena where you win business only if you do
a good job for your customer. When I took over as managing director of Marston's
Pub Company it was striking that the then existing industry relationships
highlighted by the BESC report were simply not sustainable. It does not make
good business to have unhappy relationships with your tenants. We as a business
do care about the tie. We own five breweries and we have a lot of people
employed in them and ensure we have successful, viable businesses with people
employed in breweries and in delivering beer and so forth. But we recognise
that you have to earn the tie. In the working party that I chaired there were a
number of people including me who were new to the industry, for example
Roger Whiteside at Punch. Here is a group of people on the working party
who recognise that some very serious concerns are raised by the BESC report and
they have to do a substantially better job this time than it did post the TISC
report. Do not forget that the working party included not only
Q60 Chairman: Obviously, I am encouraged to hear you say that; it is what I want
you to say, but the fact remains that on 29 September our report was described
by
Mr Darby: I understand that. Equally, I ask you to understand that in
response I have had some fairly strong words with my colleagues at
Q61 Ian
Stewart: For 20 years I was regional
secretary of the Transport & General Workers
Mr Darby: As you would expect I disagree with that.
Q62 Chairman: Are you talking about from your personal perspective or Marston's?
Mr Darby: I was going to ask whether you wanted me to respond in terms of Marston's Pub Company or as an industry?
Q63 Ian Stewart: Both.
Mr Darby: As an industry I would make the point that fundamentally we will have successful pub businesses in the long term if tenants and lessees can make a decent living out of pubs. You know as well as I do that if tenant or lessees across the business cannot make an acceptable living there will be business failures, churn and dissatisfied relationships and also in the short and medium term the business will under-perform. That is not good business. It is no different from when I dealt with Sainsbury, Morrison and Waitrose. I knew that if they were not happy with the terms provided when I was with the beer company sooner rather than later there would be a problem.
Ian Stewart: Do you not accept that in the relationship you describe customers of Sainsbury and Waitrose have more power than publicans?
Q64 Chairman: For me the crucial issue here is the revelation of the power exercised by big businesses in relation to small ones.
Mrs Simmonds: This independent review system, which has clear accreditation by BII which will go out and seek the views of licensees and name and shame companies and eventually take away the accreditation of those company codes if they are not followed, gives much more information and power to the individual lessee to take it up with the BII if it is believed the code is not being followed.
Q65 Mr Hoyle: Pub beer used to be twice as expensive as supermarket beer. The fact is that now it is four and a half times as expensive in pubs as in supermarkets. That tells me that the supermarkets have the power over you at the same time that you have power over the publicans and that is what has gone wrong in the industry.
Mr Darby: I could probably speak for hours on end about what is going on with alcohol in supermarkets. I have worked in this trade and we are not comparing apples with applies. In particular in the case of supermarkets alcohol is one of the few product groups that can be promoted in a store to build traffic. A shopper will change his or her decision as to which supermarket to use, so there is a different dynamic going on in supermarkets. The point I am trying to make - forgive me if I did not get to it quicker - is that if our tenants and lessees cannot make a long-term sustainable good living from their pubs, they know how to from the start because they are given a very clear explanation of what we think the pub is capable of doing.
Q66 Chairman: That has not been so in the past.
Mr Darby: Absolutely. The whole point about the BBPA revised code is that it will be an absolute obligation for us to make that information clear; indeed, we will recognise it as a success if a prospective tenant or lessee with a particular interest in running a pub that is local to him - perhaps he has drunk in it in his youth - sees the figures and says it is not a business he wishes to run. If he walks away then the code will have worked admirably. We must get to a situation - this code does it - where a new tenant or lessee coming into the industry never says after the event that he did not know what he was signing up to. I appreciate that that has been an issue and it underpins a lot of the trouble we have had over the past year or two.
Q67 Chairman: Perhaps I may deal in parenthesis with assignments of leases.
Mrs Simmonds: There will be a requirement on the assignor to have as much information as is provided to the lessee. That information must be provided and the pub company must be satisfied that whoever the lease is assigned to has that information. There is no doubt that that has created problems up to now. Just as negative equity occurred in housing a lot of people have bought leases at prices which are different from what they are now worth.
Q68 Chairman: Enforceability is really the key. What happens if the pub company breaks the code? The old code was broken or ignored by pub companies. What happens now?
Mrs Simmonds: If the pub company breaks its code the BII will be undertaking telephone and online surveys so that complaints can be registered. Those complainants will remain confidential. A summary of the information will be reported to the individual pub company and feedback will be given. If there is a persistent code breach it will result in the removal of accreditation.
Q69 Chairman: What is "persistent"?
Mrs Simmonds: Measurement will be by repetition of a particular non-compliant practice or a cumulative picture, so it is up to the BII and the board, which has on it representatives of lessees as well as members of the BII, to deal with it. They will be able to pick it up eventually and take it away. There is absolutely no doubt that these codes will be dealt with by a court of law.
Q70 Chairman: This is a very important point. Explain that to me at greater length.
Mrs Simmonds: The individual agreement will be signed by both the pub company and lessee. If the pub company then breaks the code and it ultimately goes to the court there is absolutely no doubt that the court will take into account the fact that the agreement was signed by both parties. As far as we are concerned in any dispute it is absolutely essential that a breach of the code is taken into account by a court of law.
Q71 Chairman: Because the code becomes part of the contract between the landlord and lessee it is actionable in civil law?
Mrs Simmonds: Yes.
Miss Kirkbride: That we welcome. On the other hand, why not consider having a scheme whereby there is a code under which when there is a disagreement the BII has its own body to adjudicate upon it and decide who is right and who is wrong? One of the problems facing lessees is the cost of going to court and the difficulty it creates with the landlord, whereas with an inhouse mandatory process the decision is one that sticks.
Q72 Chairman: But mediation did break down in this area.
Mrs Simmonds: Yes. That is exactly how the new scheme works. For the lessees themselves there would be a cost; it is £1,000 to £1,500 depending on where it is. That will take one to the arbitration system to deal with rent review which is run by BII.
Q73 Chairman: That is purely to do with rents?
Mrs Simmonds: Yes.
Q74 Chairman: We will deal with PIRRS later. We are talking about a broader range of issues.
Mr Darby: The code also mandates any BBPA member in their own individual company code to make absolutely crystal clear what their dispute resolution process is effectively at no cost. There should be a process where nobody incurs fees to confront a dispute and therefore there should be an escalation process that must be explained in each company's code of conduct. That should be designed to ensure that both parties can resolve any disputes as far as possible without incurring any costs by following a very clear dispute code. That is no different from an employee grievance process, for example, that all companies would have.
Q75 Miss Kirkbride: Why do you say "as far as possible"? If adjudication of the code is a mandatory part of the process why should it ever end up in court? What is the endgame that means it ends up in court if there is a mandatory process that falls short of court?
Mrs Simmonds: There are two sides to the BII: first, there is PIRRS which deals with rent reviews; second, BII is also responsible for accrediting the codes, full stop. It has a system whereby it will be able to remove accreditation. It is not just to do with rent; it covers all the issues encompassed in the code.
Q76 Chairman: But BII is in part funded by the pubcos and some lessees become uncomfortable with that arrangement.
Mrs Simmonds: We are very lucky in our industry that we have a professional body in BII. We should make greater use of it. We are one of the few industries with a professional institute that is so interested in raising standards. As far as I am concerned it would be considered to be independent by all parts of the industry. Indeed, the individuals on the board that is to be set up will not members of pubcos; they will be individual licensees and other representatives.
Q77 Chairman: Enterprise Inns has said it is in favour of an independent body to provide "business advice, legal support and representation" and apparently is willing to provide financial support for such a body. Why has that idea not been taken forward?
Mrs Simmonds: It made that offer to the FLVA. We consider that the FLVA and BII between them represent about 9,000 licensees. They would be happy to provide more funding for that mechanism through those two bodies.
Mr Darby: In order that we do not effectively have the same problem again it is important that any such body is created arguably without the impetus of the pub companies. The danger is that if we are involved in the creation of an independent body that reviews disputes we shall be accused of again being the paymasters of that organisation. The key to the point made by Enterprise is that if an organisation came forward with such an arbitration process, such as the FLVA or others, it would be keen to support it as I am sure would other organisations in the BBPA, but for that arbitration process to be considered independent of the pub companies it must be those organisations that come forward with the proposal; otherwise, we will come back in the same loop.
Mrs Simmonds: Just as we make the point that we have many codes of practice we do not need yet another organisation. We have lots of organisations. I believe that FLVA and BII adequately represent them.
Mr Clapham: RICS stated that it was encouraged by the work you were doing. If we are to have a mandatory code it must be one that is acceptable right across the industry. To a large degree RICS is independent but at the same time I recognise the connection. It seems to me that the mandatory code ought to come from the independent input. From what we hear perhaps there is now an opportunity to introduce a code that really can be mandatory.
Q78 Chairman: That is the theme of the questions Mr Wright intends to put later, so perhaps that can be banked because we will return to it. If there is a great threat of being chucked out of the BBPA, Greene King is walking out of it but it does not appear to have suffered any damage to its reputation and it believes it is better off outside. We shall be meeting Greene King later to discuss the background to its position in greater detail. Therefore, the great sanction you have is one that is being willingly embraced. Is Wetherspoons a member of the BBPA?
Mrs Simmonds: Wetherspoons operates only managed sites. Greene King continues to be a member of the BBPA for the next year. It has announced its intention to leave the BBPA in September next year. It has assured us - I am sure it will also assure you later - that it has every intention of having its code accredited and will make its contributions to PIRRS because it is industry-funded and it will abide by any sanctions.
Q79 Chairman: I appreciate that Wetherspoons does not have lessees but it feels it does not need the imprimatur of BBPA to be a reputable pub operator. If a pub company is not happy with an adjudication it can just give a year's notice and leave BBPA.
Mrs Simmonds: To be fair, I have been the chief executive of BBPA for only three months. I would hope to have a good conversation with both Wetherspoons and other potential members of the BBPA out there and encourage them to become members. I believe this will set a standard. This is about raising standards of training, the information that is made available to everybody and transparency.
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 in Planning for Tourism. It is not a planning policy guidance 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.
Q100 Mr Hoyle: You have not asked them to change anything; you have not said you disagree with that. Are you really telling us this?
Mrs Simmonds: First, we have not got to the stage of negotiation.
Q101 Mr Hoyle: In fairness to RICS, they did say that there had been some strong negotiations.
Mrs Simmonds: They said there had been healthy dialogue.
Q102 Mr Hoyle: That means strong negotiations, does it not? Do you want us to get RICS back and ask them what they mean?
Mrs Simmonds: We had not got to the stage of negotiations. Clearly, the witness sat here this morning and said RICS was at a very early stage of working up the code. We shall work with RICS in any way they wish, but we have certainly not put any pressure on them and see their independence as absolutely fundamental to the way this goes forward.
Q103 Mr Hoyle: What is your definition of "healthy negotiation"?
Mrs Simmonds: We have had a couple of meetings with RICS. I have met the representatives.
Q104 Mr Hoyle: I am sure that is not what it means.
Mrs Simmonds: I know the chief executive, but it has been no more than a conversation. Members of my staff have had a meeting with RICS but we have put them under no pressure at all; nor would we consider doing so.
Mr Darby: My definition of "healthy debate" is just the kind of debate we are having here. It is a frank exchange of views and a general, healthy discussion of the issues in the industry.
Q105 Mr Hoyle: That is how I look at it. Mrs Simmonds sees it slightly differently. It appears to be a cup of tea, a biscuit and a bit of sympathy. That appears to be what she is expressing to me at the moment. You can reassure us that there have been no disagreements and pressure and you absolutely accept what RICS propose?
Mrs Simmonds: Absolutely.
Q106 Mr Hoyle: No doubt that will unravel in future. If the tie is beneficial to the lessee why is it being recommended that lessees should be offered the choice of being free of tie? If it is so open why not give them the benefit?
Mrs Simmonds: I know that the Committee has received a good deal of information particularly from family brewers about the importance of the tie to the distribution of beer. That has been absolutely clear. It is also hugely important that we understand the support that pub companies and breweries can give to individual tenants particularly in this very difficult economic time. My colleague has just returned from Cockermouth with all the problems it has experienced. It is absolutely clear that individual businesses are struggling there. Where one has the support of a company to help open up the business as quickly as possible that takes place. I think your report made clear that the breaking of ties would end up raising rents in individual premises which probably would not move us forward. BBPA is very supportive of keeping the tie; it does not believe it should be broken. Therefore, to go completely free of tie was not an option we were prepared to discuss even in mediation, although we were absolutely clear that we would discuss the operation at the time. That is what we are here to do today.
Q107 Mr Hoyle: That is the real failure, is it not? If you were good, honest brokers and were given a really good deal you should be saying that you are so transparent, above board and reputable that you would allow people to choose whether or not they wanted the tie. Surely, there is nothing wrong with that?
Mrs Simmonds: You would be changing the way that market worked in a fundamental way.
Q108 Mr Hoyle: You are saying that you can screw them into the ground and you do not want the screws taken off?
Mrs Simmonds: Not at all. As my colleague has made absolutely clear, up to now it is absolutely vital to us that we have tenants who are doing well in business and have the opportunities which we believe they will have through the new code to take up the issues so we do not have a David and Goliath-type situation emerging from it. Therefore, there is more transparency in the system and greater equality in the way it is negotiated. We do not believe that the ties should be broken. If you want to be free of tie you operate a different type of premises. One of the ways the tied model has worked and the problem it has got into is that it gives people an early opportunity to go into something where they can make some money, particularly on assignment. One of the problems we have is that those assignments now are not worth what they would have been a year or so ago.
Q109 Mr Hoyle: You are saying that you use that profitable instrument and you do not want fairness for anybody in the system. That is the way you can make profit; you can hide behind it and it is the way you see it going in future. Am I right that last time the tax increase because of zero inflation was about 2%?
Mrs Simmonds: In terms of excise duty on beer it has been 20% since the March Budget.
Q110 Mr Hoyle: No; it went up 2% last time.
Mrs Simmonds: It went up 2% in March and a further 8% when VAT went down.
Mr Hoyle: When VAT decreased it went up more?
Chairman: I do not want to go too far into these other issues. They are important questions but not for today.
Q111 Mr Hoyle: It is a key point, Chairman. The tax went up 2% and yet you put up the price by 7% to those people who were tied under the beer orders. Mr Darby will confirm it if Mrs Simmonds does not understand her own industry.
Mrs Simmonds: It is not only the 2%. When VAT went down excise duty was put up by 8%, and we very much hope that the chancellor will remove that when we have the Pre-Budget Statement tomorrow. I know that we are not here to discuss that situation.
Q112 Mr Hoyle: Mrs Simmonds, you can hide all day. I have given you the facts. Mr Darby will not deny it because he knows I am absolutely correct on that.
Mr Darby: Forgive me; you have not given me an opportunity to answer the question.
Q113 Mr Hoyle: To put it another way, the government is taking 70p a pint and the pubcos are taking 95p a pint.
Mr Darby: This is an absolutely crucial and complex issue. Having visited 400
of our pubs plus those of competitors in the year that I have been in charge of
this pub company - I have conducted business reviews with tenants and lessees
in many of those pubs - I absolutely agree that the fundamental issue when
sitting before a lessee is not the tie but the price he is paying for beer.
That has been accelerated by the fact that during a recession big managed house
pub companies with large square footage pubs have used price as a means to
attract more and more customers. There has been a lot of pricing activity in
the market and we are the first to acknowledge that. In my discussions with
tenants they do not say they are unhappy about the range of beers they get;
they are unhappy about their ability to compete. We have to address that. First,
the new code makes it very clear that before anybody enters a pub the terms on
which they buy beer must be made very clear. Second, already in the market with
existing tenants and lessees there is an enormous amount of evolution and
support going in on pricing in the trade. We alone have given £2 million
worth of concessions to tenants in the form of reduced prices, but at the
present time we are trialling two agreements. The first is our retail agreement
which means that the price of beer ceases to be an issue because effectively we
run a business which we refurbish. The operator takes 20% of the take and we
take responsibility for everything else, so you remove pricing and rent as an
issue. The other agreement we are trialling is one which admittedly continues
to be tied because we have five breweries and we care about our beers sold in
our pubs. We have been in business brewing and selling beer for 175 years. We
have offered 60 tenants an agreement to permit them access to what we consider
to be free trade pricing. The reason we say it is free trade pricing is that we
have a free trade business against which we can compare it, so we know what the
prevailing rates are. Of those 60 tenants and lessees to whom we offered that
agreement as a side letter, which means they get extra discounts in return for
a higher payment but not a complete transfer of the discounts for that payment
- the deal is arranged so that in the first instance they are at least £5,000
better off - half of them have chosen not to take the side agreement, the
fundamental reason being that they do not wish to take on additional fixed cost
in their business. They say they are happy with the way it works and recognise
that rent is variable through beer pricing and that if trade goes up they
benefit; if it goes down they suffer. That is the attraction. If you look at
the pubs in Cockermouth that have been flooded, The Bush is effectively the
brewery tap in the high street. The Bush sells 10% of
Q114 Mr
Hoyle: I welcome what you have done in
Cockermouth which is in the
Mrs Simmonds: I am aware that at least one of our members has mentioned that. Wellington Pub Company did go free of tie. The information made available is that it is suffering as much as those who are tied pubs.
Q115 Mr
Hoyle: Is
Mr Darby: Yes.
Q116 Mr
Hoyle: But has any pub company offered that
to lessees other than
Mr Darby: I think you know the answer to this question which is that at the moment there is still a preponderance of tie.
Q117 Mr Hoyle: So, the answer is no?
Mr Darby: No.
Q118 Mr Hoyle: Is it "yes"? You cannot have it both ways.
Mr Darby: Perhaps I may finish the answer. In this industry evolution was already going on, but there has been an absolute acceleration of the evolution of agreements. You will see that fundamentally to be commercially successful one of the things a pub company wants to offer in its armoury of agreement is free of tie. That will increase in number and you have to let time take its toll. But clearly a business like Marston's, Greene King, Fullers and Everards which care about the link between their brewing operations and pubs will not be queuing up to start releasing their pubs of tie because it is fundamentally part of their DNA.
Q119 Chairman: It is different for
Mrs Simmonds: But the market will move over a period of time because if they are not attractive to tenants in that marketplace it will not work as a model going forward.
Mr Darby: I speak from experience of free trade. I am convinced that there
will be evolution. If somebody goes to Punch or
Q120 Mr Hoyle: I did not quite hear an apology for the way the industry treated the Chairman and the way he had been intimidated. I know the witnesses have said they do not quite agree with some of those comments, but I think it would have been nice, Mrs Simmonds, if you had apologised on behalf of the BBPA for the treatment dished out to the Chairman. He should not have had to put up with that. I hope that will be taken back by you and will be recognised.
Mrs Simmonds: I do recognise that. Having met the Chairman I certainly was not intimidating; I would not be capable of intimidating anyone.
Q121 Mr Hoyle: Is that an apology?
Mrs Simmonds: It is a complete apology for what has happened. We are here today to talk about how we move forward. I certainly apologise if we have in any way brought Parliament into disrepute.
Q122 Chairman: I am unused to being unable to comment on my own reports for fear of litigation.
Mr Darby: One must make a judgment as to whether or not to trust the industry and I am sure that judgment will be made in discussion in the fullness of time.
Q123 Mr Hoyle: It leaves us with a bad taste.
Mr Darby: I understand that. Having taken the role as chairman of the working party I saw it as my job to bring together a diverse group of people to stand by a harder, tougher code which will result in greater transparency in the conduct of business. I am absolutely committed to that. I believe that is commercially right and proper. One of the baleful consequences of this process, which is one reason why we are so keen to get it resolved urgently, is that it detracts from the time taken to visit pubs. All I can say is that if I have managed to visit 400 pubs in a year despite having spent two to three months in committees, writing reports and so on, I could have visited 700.
Q124 Mr
Hoyle: I look forward to seeing you at the
Euxton Mills in
Mr Darby: I have been there; it is a very good pub.
Q125 Chairman: Our ambition as a committee is to make sure the industry can get on with fighting its ordinary commercial battles by rebalancing the power between the small companies which we believe are being abused and the big companies that abuse them. One aspect of abuse is enforcement of the tie by flow monitoring equipment. This was a moment of spectacular inaccuracy in our evidence session with Mr Thorley. I am encouraged by some of the things the new code says about it, but I put some specific questions. Your agreement with the BII and FLVA calls for a protocol which would cover minimum standards for its operation and application. Will that protocol be enforced by you or the individual pubs?
Mrs Simmonds: It is part of the BBPA code and therefore how that protocol is written is up to the individual company but it must be accredited by BII. It has to be transparent and above board.
Q126 Chairman: The practice of assessing data, which is an art and not a science, and the arbitrary use of direct debits to take money out of lessees' bank accounts will end?
Mrs Simmonds: I was not aware that that was practised, but if that is the case I am absolutely certain that will be the case.
Q127 Chairman: It was a fairly widespread practice.
Mrs Simmonds: I have talked to Brulines and Trading Standards have considered that their equipment should not be prescribed under the weights and measures regulations, which is probably one of the matters about which you intended to ask me. But they have had their system tested and set up a protocol with Trading Standards so it can be tested in the future, which I believe is important.
Q128 Chairman: Frankly, I do not think that is enough, and there is also a dispute about this within the local authority sector. In June of this year I received a letter from a trading standards officer in which he said: "I am able to say that the equipment shown to me is definitely not legal for trade use. In addition, by your own admission since about 2003 following initial verification no further testing of the equipment has taken place. I have 40 years' experience as a weights and measures inspector and in my opinion such a long period of use without testing or verification of equipment is unacceptable to claim confidence in its accuracy." There are big questions about the accuracy of flow monitoring equipment.
Mrs Simmonds: I do not know how recent is the information I have from Brulines about the discussion with Trading Standards. They have been told by Trading Standards that their equipment is not required to be approved for the purposes of trade.
Q129 Chairman: That is a legal definition but not a politically acceptable one. I accept that legally that is the correct position, but the issue is about customer protection rather than small business protection.
Mrs Simmonds: The other important aspect on which my colleague may be able to comment is how pub companies deal with that data. What you would not want - and is important in terms of the new code - is for the Brulines equipment to be the only way to deal with it.
Q130 Chairman: There are two issues: the accuracy of the raw data and the interpretation of that data, which is the crucial point because at the moment one cannot distinguish between beer and water, though we were told one could. The question then is: is that sufficient evidence for buying outside the tie? Here you say that additional prima facie evidence must be provided. What is the nature of the additional evidence that will be required?
Mrs Simmonds: In the annex we talk about the nature of some of the evidence required which would be third-party information as well as other considerations, for example being absolutely honest as to whether there are other kegs and casks available from another brewery. There is a whole range of things put forward in the annex to be taken into account, not only the Brulines equipment.
Q131 Chairman: I am concerned by what you said earlier in answer to one of my questions, namely that you were unaware of the practice of direct debiting as instantaneous fines or punishments. It has been happening. Many thousands of pounds have been taken from lessees' bank accounts on the basis of just an interpretation of Brulines' data.
Mrs Simmonds: I shall be honest and say I am probably too new to the industry.
Chairman: I would appreciate receiving an assurance in writing following this meeting that the practice of automatic direct debiting will end immediately. That is unacceptable.
Q132 Mr Clapham: I take you to PIRRS. Mrs Simmonds, earlier you began to explain how the scheme worked. I understand that this is an initiative across the industry.
Mrs Simmonds: Yes.
Q133 Mr Clapham: Where there is a dispute between the landlord and tenant there is an agreement to go to PIRRS and the tenant is able to choose a valuer from the scheme's list.
Mrs Simmonds: Yes.
Q134 Mr Clapham: On the face of it, it appears that that scheme would work independently, but a note received from Justice for Licensees reveals that it believes the scheme has to some degree already been tainted. They say that pressure has been applied and the integrity of the scheme has been influenced by pubcos. I am aware that PIRRS had a website which was then removed. Did that happen because pressure was exerted?
Mrs Simmonds: No; it was just a technical reason. That website has been live in the past week. Two cases are in process and three went forward but settled before proceeding. Under the scheme nominations to be a surveyor on the group are received by the whole body. This includes the ALMR, the FLVA, the GMV and the BII. The lessee chooses one of those surveyors to hear the case. The pub company has absolutely no say in who is chosen.
Q135 Mr Clapham: It is one issue that takes us back to the discussion about independence and the way in which we may see the code of practice operating. In this example of PIRRS a mandatory scheme may well be a great help in deciding how to move forward. But when we get to that point does the licensee need representation? If so, obviously a cost is involved. Are there any ideas in the industry about how that cost will be met?
Mrs Simmonds: Most of the work is done by correspondence although it is possible to have a hearing where they have 20 minutes. We do not anticipate that there is any cost whatsoever in having professional representation in the scheme. It is not looked at in that way; it is done in writing and, if necessary, by a meeting. If the system does not work we can review it, but that is how it is envisaged it will work at the moment.
Q136 Mr Clapham: Initially it is dealt with in correspondence but should there be a need for a face-to-face meeting that can take place?
Mrs Simmonds: Absolutely.
Q137 Mr Clapham: I understand that this kicked off in December.
Mrs Simmonds: It began a few days ago.
Q138 Mr Clapham: Does it appear to be working?
Mrs Simmonds: I think the fact that three of the cases were settled before they even got to that stage means it has worked. I see no reason why it should not work. It is something we must all support. Every member of the BBPA, plus anyone outside its membership, will be paying for the cost of doing it. It is an industry scheme and involves the individual in low cost, and that is the way we wish it to work.
Q139 Chairman: The BII told us that the scheme was legally binding in the same way as the code; it becomes part of the contract between the pubco and lessee?
Mr Darby: It is captured within the revised BBPA code that we will fully support and we will abide by PIRRS. I am aware that we have to confirm the legal basis of the BBPA code in separate submission, but PIRRS is captured within the code.
Q140 Chairman: The legally binding nature of PIRRS depends on the legally binding nature of the wider BBPA code?
Mrs Simmonds: The BBPA code is legally binding on our members.
Q141 Chairman: It is not legally binding, is it? It is done by agreement.
Mrs Simmonds: It is a requirement of membership of the BBPA that members abide by the code, but the individual company codes are legally binding because they are signed by both the company and the lessee.
Q142 Chairman: And PIRRS is also part of it and so is legally binding?
Mrs Simmonds: Exactly.
Mr Darby: It is caught in that net.
Q143 Chairman: Because of our doubts about the good intentions of your industry born out of bitter experience these questions of enforceability are not marginal but central to our consideration. If on reflection you want to flesh out or reconfirm that answer subsequently we shall be delighted to have it.
Mrs Simmonds: I would like to write to you about it.
Q144 Chairman: Make sure you get it right so we get it correctly on the record.
Mrs Simmonds: Absolutely.
Q145 Chairman: There are many things we would like to talk about, but I take just one: the AWP tie. I have met AWP providers in my constituency and as a result I know a little more about the industry, more than I ever expected or wanted to know. Can you tell me why pub companies are so keen to keep the AWP tie in principle?
Mrs Simmonds: The important part of the new code is that the AWP tie will be dealt with below the divisible balance; in other words, it means that income is shared only once.
Q146 Chairman: That should not ever have been the case; it is wrong, and you have to make that plain?
Mrs Simmonds: That is absolutely important.
Q147 Chairman: I would have a lot of sympathy for the argument if the share of income was correct and appropriate. I share with you some information that intrigues me. The average AWP stays in a pubco pub for 12 weeks before it is changed to maximise income and a much longer period is typical in the free sector. There is some prima facie evidence to suggest that they are better managed, not that I approve of these machines at all - that is a different matter - but I have heard only one side of the argument.
Mr Darby: The important thing to have in mind in regard to gaming machines is that they are successful in a pub only if they appeal to game machine players and often they represent a very small group of people. Therefore, the currency of the machine and the fact it is refreshed on a regular basis and, as a statement of the obvious, is operating - in some cases it will not be - is absolutely crucial. A gaming machine player will swap between pubs if the machine offered in one becomes jaded. That is the reason we are so committed to the gaming machine tie, albeit also committed to an absolutely fair sharing of the income. Again, we apologise that this was one of the key recommendations of the previous Committee to which we did not respond. That was a failure on our part and for the record we are trying to address it in the revised code. What the tie enables us to do as a pub company is use our buying and negotiating power with gaming machine companies and provide internal expertise to ensure that the machines in our pubs are as far as possible of the highest quality. Just recently we have experimented with a tracker agreement, of which we now have 100, whereby we retain the machine tie, that is, we keep the relationship with the gaming machine manufacturers, but 100% of the income post rent and excise duties goes to the tenant of those pubs as a means of providing income. We try to maximise the income for the tenant but also guarantee the quality of the machine for consumers. Effectively, we do not draw any income from the machines in the tracker pubs. The net effect of it is that to make it work we depend on the gaming machine company to make sure that decent quality machines are in the pubs. Effectively, the working relationship ceases to be between the pub company and gaming machine company; it is between the tenant and gaming machine company. In those tracker pubs we have already seen a rapid divergence of takings from machines in those pubs where we are actively managing the offer and the tenant is or is not actively managing the offer. The net effect is that there is now a divergence in average takings of about £40 a week between our company average and the tracker average; the tracker is taking less. The gaming machine companies now say to us that the takings of the machines are reaching a de minimis level and they do not want to service them any longer because they take too little. A tenant on average will seek to reduce the rent of the machine by agreeing to less frequent servicing and emptying, a lower quality machine and so on, the net effect being that the tenant and company are worse off and the consumers stop using the pub because the machine is aged and not interesting to play. There is a loss of income for everybody as well as a loss of appeal to the consumer. We are absolutely convinced that the tie brings value. The key is that the income must be shared transparently and fairly.
Q148 Mr Hoyle: You have told us that this is an experiment but different pubs also have different appeals. Is it across the whole range of pubs, or did you experiment with certain types of pub? Some people do not want to see gaming machines in pubs and certain pubs benefit from not having them. On the other hand, gaming machines are on the decline anyhow; people have shied away from them during the recession.
Mr Darby: There has been a recent upturn in gaming machines because digital machines that are kept up to date operate on a more frequent basis. Because they break down less often there has been a significant upturn in gaming machine performance. In our managed estate our gaming machines are now back in growth.
Q149 Mr Hoyle: In your managed estate where you have the tie?
Mr Darby: No - where we control the machine offer. There has been a long decline in gaming machine take but recently there has been an upsurge because new technology and better payout, £70, has made them more interesting to players. The problem is that if those machines are not available in a tenanted pub because the tenant makes the choice to go for a lower quality machine for consumers the machine holds less appeal.
Q150 Chairman: On the question of the fair split of income from the machines, have you estimated what the difference will be as a result of the divisible balance being split differently?
Mr Darby: In our advance agreement we are changing the divisible balance. The arrangement for the divisible balance in the advance agreement is that the income post duty and rent is shared 50/50, but we set a gaming machine target at 90% of the past 12 weeks of take. We then say to the tenant/lessee that he receives 75% of any income he makes above the 90% target. Therefore, it is three-quarters rather than half.
Q151 Chairman: That is Marston's?
Mr Darby: Yes. We are not unique in changing the relationship with the machines. It comes back to a general point I made earlier about commercial success. The most likely way to maximise income from a gaming machine is to have a partnership between the pub company and tenant/lessee. Whatever way you look at it, if the tenant/lessee is incentivised to drive the machine, which historically he might not have been because he did not get a fair share, there is a better gaming machine performance. At the moment we seek to have a significantly more attractive relationship on gaming machines. The net effect of it is that the tenant/lessee makes more money and so do we. You see that evolution already in pub companies.
Q152 Mr Clapham: Mrs Simmonds is to reply in writing to the questions on PIRRS. Can she tell us in that reply why it is that the Royal Institution of Chartered Surveyors is excluded from the list?
Mrs Simmonds: The RICS is the body. The individual chartered surveyors are able to go on that list; there is no problem about that, but I am very happy to reply in writing to make that absolutely clear.
Q153 Mr Hoyle: Mr Darby, you said that if tenants went above the bar they received an extra take. What happens if they go below it?
Mr Darby: We share the pain; it is 50-50.
Q154 Mr Hoyle: Therefore, you do not have a guaranteed income; you share the pain 50-50 and the incentive is on the publican to go above the bar?
Mr Darby: Yes. It is no different from the situation at the moment. We are on record as giving £3 million worth of support to struggling tenants and lessees to try to help them. We are happy to have discussions with them about reducing rent and providing more discount support, but equally when times are good outside the normal rent review cycle we would not dream of going to a successful tenant, saying that he has a successful business and is making lots of money and asking for a higher rent.
Q155 Chairman: The trouble is that companies have done that in the past.
Mr Darby: I am saying that in between the five-year review and outside the cycle we are now abating and conceding on rents, machine income and so forth.
Q156 Chairman: I accept that you, Marston's, are doing it, but the picture I have of the industry as a whole and the response to our report and to these changes by individual pubcos is a very varied one. Some respond magnificently and others grudgingly. I heard that in the case of one pubco BDMs and area managers were uncertain what they were supposed to do as a result of what they had been told and were sacked for doing these things 18 months earlier. Do they really mean it? Is it a culture change or a temporary face-saving exercise just to see them through to the other side while we consider our recommendations? This is the challenge. You, Mr Darby, have told us of the good things you are doing. We need to be confident that the industry as a whole is doing these things.
Mrs Simmonds: We need time to make these agreements work in the industry. We are happy to come back before this Committee and explain exactly how they are working on the ground, but we need to ensure that everyone is on a level playing field that Marston's have described to you in their answers today. We need to make sure that all of the new system will work properly because it is in the interests of tenants and individual companies that it does work and you are not dissatisfied. I do not want to hear again the accusations you made at the beginning.
Mr Hoyle: It has taken us five years to get to this point. How much more time do you want?
Q157 Chairman: The last question is: when do we next make our judgment of you?
Mrs Simmonds: I believe we need at least a couple of years to make this work. We have already talked about June of next year as the time to get the bigger companies through with a little extra time, so we will have the full system in force next year. I suggest we come back in a year - I am happy to come back earlier if that is what you would like - to discuss how the system is working.
Mr Hoyle: Tomorrow never comes, does it?
Chairman: We shall reflect on that offer, but two years is pushing it a bit. Mrs Simmonds and Mr Darby, thank you very much indeed.
Memorandum submitted by the Independent Pub Confederation
Examination of Witnesses
Witnesses: Mrs Kate Nicholls, IPC Secretary, Mr Karl Harrison, Member of the Fair Pint Campaign, Mr Simon Clarke, publican and member of RICS, and Mr Garry Mullen, publican and member of ALMR council, gave evidence.
Q158 Chairman: Thank you for being so patient. We are a little late coming to you but I think it was important to take our time with the previous witnesses. Frankly, there are further questions I would have liked to ask but there is never enough time. Although I have not done so with the previous witness because they were few in number, I ask you to begin by introducing yourselves and your roles.
Mrs Nicholls: My name is Kate Nicholls, head of communication at the Association of Licensed Multiple Retailers and I also act as secretary to the newly-formed Independent Pub Confederation. We are very pleased to be here today to assist you in your deliberations. We have pulled together a team of people who have not only direct operational experience but are also intimately involved in all of the negotiations at the RICS, in mediation and before this Committee. We are the people who have had the dialogue on a day-to-day basis and hope to be able to answer your questions fully and factually.
Q159 Chairman: I also ought to say we are very pleased that you are here as a single group; it makes our life a great deal easier.
Mr Harrison: I am Karl Harrison and I am a publican with four pubs in
Mr Clarke: My name is Simon Clarke and I am a publican and member of the RICS. You may recall that in 2008 I made a presentation to this Committee. I have represented Fair Pint at the mediation and attended the RICS forums. I spend over 60 hours a week in my own pub, The Eagle Ale House, so you could say that I am here to represent the frontline of the industry.
Q160 Chairman: Have you had any approaches yet from RICS to be on the trade related valuation group?
Mr Clarke: Not yet.
Q161 Chairman: They could do much worse.
Mr Mallen: My name is Garry Mallen. I am a council member of the ALMR. I was part of the ALMR team of mediation and also attended the RICS forum.
Q162 Chairman: I want to ask some brief factual questions. Your confederation is made up of a large number of organisations with quite a variety of views on some of the key issues. How easy is it to provide a unified voice? When we take evidence again in however many months from now on this subject what are the chances that you will still be together as a confederation?
Mrs Nicholls: The key point is that we are a confederation. We are not a new trade body but an umbrella grouping that seeks to bring together the national trade bodies that represent publicans and we are a unified voice for them. We believe that there is a very real democratic deficit in vocalising the views of publicans and we speak where we can on common points of interest with consensus. As an umbrella we work alongside our component organisations in support of them; we do not replace them. Each of them retains its own distinct voice. We are a very broad church. You will appreciate that our component members hold distinct positions. We do not try to hammer home one position that must be held by all; we speak where we can with a consensus and common position where we reach agreement. Therefore, today we are presenting to you where we have reached agreement. We will continue to present on all issues focusing on publicans where we have reached agreement, not just on the tie and the issues before the Committee today.
Q163 Chairman: You are not driven by the need to reach a consensus on every issue, so you are not an organisation that tries to find the lowest common denominator. You speak only where you can genuinely agree?
Mrs Nicholls: When we came together and felt there was a role for us to play we very much wanted to avoid the allegation that we would be the lowest common denominator. We want to speak where we can with a common voice and allow our member organisations to speak freely on other issues where they have distinct positions.
Q164 Chairman: You are not the only ones who have been slagged off by the pubcos. I think Punch said that you represented only a handful of licensees. How do you respond to that allegation?
Mrs Nicholls: We bring together all the national trade bodies currently
representing the interests of publicans: the Association of Licensed Multiple
Retailers; the Guild of Master Victuallers; campaigning groups such as Justice
for Licensees, Fair Pint and Unite; the Federation of Small Businesses, which
has over 4,000 individual publican members, and CAMRA and CIVA[?]. We are also
supported in our work by the BII. Therefore, between us as national trade
bodies, leaving aside the campaign groups who have many thousands of
supporters, we alone directly represent 25,000 publicans or just under half of
all pubs in
Q165 Chairman: It is a pretty large handful, certainly. The FSB has said in relation to the concern we pursued in our previous evidence session with the BBPA: "There has been much activity by the pub companies but little delivery of meaningful change." I would like to hear your observations on that.
Mr Harrison: I was quite disappointed by what I heard a short while ago in terms of what is supposed to have happened since the Committee's previous report. Our experience on the ground is that there has been little movement certainly in the main pubcos which control many thousands of pubs. Initially, there was criticism of your report and some legal threats; there has been continuing pressure on tenants and churn in the large pubco estates; there have been heavy-handed evictions, closures and breaches of codes as confirmed by the BII; and there has been a denial of problems in the sector generally in its formal reporting and in the media. There has been some window-dressing. I give just one piece of information that relates to Punch Taverns and their existing code of practice. I refer to a court case that took place as recently as 17 November.
Q166 Chairman: Is it a court case that has concluded?
Mr Harrison: Yes. Their barrister pointed out in strident terms - I can send you a copy of it - that their retail charter was not binding in law and the tenant ought not to seek to rely on it; furthermore, their commitment to upward and downward rent reviews also was not appropriate and the court could not rely on that either. That was said as recently as 17 November by those who otherwise hold themselves out as having taken big strides.
Q167 Chairman: To what extent does that conflict with the evidence we have just heard from BBPA about the legal enforceability of the codes? If you cannot answer that question now perhaps you can think about it and drop me a note.
Mr Harrison: Yes.
Q168 Chairman: Enforceability lies at the heart of the debate.
Mr Harrison: In relation to the strides supposedly made on the codes we have seen what we believe to be some ill-considered codes certainly in terms of enforceability. All of it seems to have been hashed together at the last moment in advance of this Committee's inquiry. Letters have arrived with you from the BII and other people turn up. We have not seen a draft code. I would have thought that if a great deal of collaboration was going on we would have seen it but we have not; and we have not been asked to comment on it. We do know from the heads of terms that the code proposed is not independent and binding. As of today it does not seem to be enforceable. There appear to be no effective sanctions apart from forcing somebody out of the BBPA possibly at the cost of a six-figure sum to that organisation. That does not seem to me to be a sanction. ALMR as a member of the IPC initiated the mediation process. Only one pubco turned up to it. We formed the new confederation. It is great to see it because no longer do we have to put up with the BBPA claiming it represents publicans: you now have before you people who do. We have been working with the RICS and have been instrumental in encouraging them to report as they did. We have all been working together with the ALMR on benchmarking and also with the BII to look towards the future in terms of training.
Q169 Chairman: We shall go into detailed questions about rents and so on in a minute or two, but that is a helpful general picture. Mr Clarke, do you want to add anything?
Mr Clarke: The code we have just heard about has been offered up as a solution to a multitude of previous sins. It is almost as if there was never any code before and this will now be the code. I remind the Committee that there was a code before the TISC in 2004 and a code before the BESC in 2008 and one after the BESC in 2008. This one really cannot be any different in that it is not mandatory, not regulated and independent.
Mr Mallen: There is further evidence of this. Pubcos have stated that their code is non-contractual and all deals done under the code are concessionary and wholly discretionary. I received such correspondence in September.
Q170 Chairman: With one particular pubco?
Mr Mallen: Yes.
Chairman: That makes the answers we are to get from BBPA on that issue all the more important. I am sure they are listening to this.
Q171 Mr Clapham: Mrs Nicholls, the confederation has welcomed the RICS forum report. Can you confirm whether or not the confederation will sign up to it? We would also like to know whether you will provide information to the benchmarking register following the RICS code of practice in providing information for rent reviews et cetera.
Mrs Nicholls: I take those in two parts. First, we very much welcome the RICS report which entirely concurs with the analysis and some of the recommendations of this Committee. It is a welcome recognition by an independent third party of the problems that face the industry and our members.
Q172 Chairman: Initially, they were not quite so inclined to change but there is more joy in heaven over one sinner who repenteth.
Mrs Nicholls: Absolutely. I see the role of a Select Committee as making observations on an industry and for an industry to listen and respond positively where it can. Undoubtedly RICS have done that and you have heard from them today. We have worked collaboratively with them; both Mr Clarke and Mr Mallen made presentations to the forum. We held meetings with them subsequently about inputting into the trade related valuation working group guidelines and their code, which incidentally we agree with entirely. There are too many industry codes; there should be one that is independent and RICS should have primacy. If we are invited to do so we shall be very happy to work with them and endorse it. Benchmarking falls entirely within my area of responsibility at ALMR; I am the person who runs the survey that we carry out at present. We shall be very happy to work with them. We have already had meetings with them about how we can take that forward. We have not been sitting still and waiting to have a follow-up session or for somebody to come to us. As lessee groups we have worked to refine the benchmarking study so that now we split it out from multiples to lessees. RICS have said that at present the study is limited by a lack of pan-industry co‑operation and that has been proved in spades when we have gone out into the marketplace to ask people to input. Previously it was limited to ALMR members; it has now been extended to anybody in the industry who wants to participate in that study. We have had lots and lots of responses from individual lessee groups but not from the landlord groups. Landlords who previously participated in the survey have pulled out.
Q173 Mr Clapham: Why do you think that is?
Mrs Nicholls: I do not have to guess; I have been told that it is because of ALMR's participation in the IPC and before this Committee.
Q174 Mr Clapham: You expressed some concerns about how and when the RICS code would be implemented. We heard from RICS that it would happen in spring of next year but we know that spring might turn into summer and summer into autumn. Are you helped by what you have heard from RICS?
Mrs Nicholls: Yes.
Mr Mallen: I am very much encouraged by the RICS report and the speed with which they have dealt with it. They seem to have taken on board the comments in the Committee's report earlier this year, dealt with it quickly and issued their report promptly. I believe they have acted in the interests of the industry. I and I am sure the IPC share their desire to see somebody make the code mandatory because in that way it is enforceable and we shall not end up with the same problems we had in 2004, 2008 and today.
Q175 Mr Clapham: Is there anything missing from the RICS report that you feel ought to be included?
Mr Clarke: We are delighted to hear that they intend to enshrine the recommendations of the report in their revised guidance, particularly the issue of the tie tenant being no worse off than the free of tie tenant that is a principle for which all of us have been fighting for some time.
Q176 Chairman: You heard the earlier discussion in this room. Are you happy about the way that crucial issue was met?
Mr Clarke: That is exactly what I am about to touch upon. We must be sure that the guidance will be absolutely clear. Even the RICS would be the first to admit that the misinterpretation of the guidance has been used to the benefit of some surveyors. We must ensure that there is now no muddying of the water. As to the issue of advantages and disadvantages being valued I believe that is a perfectly valid comment. If those benefits or onerous terms are contractual and are in the terms of the lease they should be included in the valuation. If they are discretionary - some would describe them as onerous - there is no way that effectively they should be quantified and included in the rental valuation.
Q177 Mr Clapham: Were you encouraged by what was said this morning by RICS in relation to the Brooker case and the ways in which they see it providing some flexibility?
Mr Harrison: To put it in a wider context, since the RICS report came out there has not been a rush to accept its findings. Earlier Mr Hoyle asked whether any pressure had been brought to bear. We know that there are plenty of surveyors working within the RICS and trade related valuation group on behalf of the pubcos who will no doubt be lobbying in relation to that report. The report has not been universally accepted. We have seen correspondences to tenants of companies such as Greene King. I know that the Chairman is meeting them later to raise with them why they are writing to tenants denying what that report means or perhaps suggesting that the Brooker case does not have significance. I use that word because that was how Mr Rusholme described it earlier in his evidence. Therefore, we are not seeing as we have been told by the BBPA a rush to embrace this report. That is not our experience at the moment. Brooker has been put in context by BBPA members and large pubcos as being specific to that particular case but it is not at all. That is why Mr Rusholme describes it as significant. The judge in that case, Ian Hughes QC, was very specific about making two general points. First, he conferred some credibility on valuation information paper no.2, which is the guidance that Mr Rusholme is looking to revise; second, he went on to include a set of issues that hypothetical tenants could consider in rent reviews, such as the general economy and the fact that a tied lease is likely to be more onerous than a free of tie lease et cetera. Therefore, in some ways he was already embracing the prime principle in that judgment. I believe that is why the RICS and their solicitors are interested in a general and not specific set of principles. It has wider implications. We are in the process of taking leading counsel's advice on that at the moment and perhaps in due course we can come back to the Committee on that.
Q178 Mr Clapham: Mr Mullen, you are not as encouraged by the BBPA's code of practice as you are by some of the recommendations that RICS make in relation to their code of practice. Is it that you are not happy with the implementation of the BBPA code or what is contained in that code of practice?
Mr Mallen: I am sure I could bore you for hours on the things in the code that do and do not suit the industry. In one word the issue is enforceability. As long as it is not possible to enforce it it is an issue. I do not see the sanction of being thrown out of the BBPA as a matter of great concern. The BBPA does not even represent all the landlords in the country in any event, so if they are not members they do not have to abide by it.
Q179 Mr Clapham: One point made earlier by the previous witnesses was that the codes of practice established a kind of contract and it might be possible to enforce it, but you tend to disagree with that.
Mr Mallen: The evidence I have in front of me is that a senior executive of one pubco says that they are wholly discretionary. I believe that the lease is the contract and a court would see it that way.
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 markets 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
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.
Q200 Mr Hoyle: And the equipment is questionable?
Mr Clarke: I had Brulines' calibration two weeks ago in my pub, The Eagle. Obviously, you have had plenty of evidence about my pub before. It was a Brulines technician who undertook the calibration test. He dispensed 14 pints from eight of our pumps, I believe, and all the time it was going on the proceedings were live with HQ and an analyst sat in front of a screen and said that, yes, he had just pulled half a pint through a particular pump. When we got the final report three days later the system failed to record five of the 14 pints they had pulled. Bear in mind that this was when the pub was closed and other than us there was nobody else to interfere with the dispensing or anything like that. Their own technician and analyst were totally unhindered; we gave them free rein to do what they considered to be their job. The result was a 33% or 40% inaccuracy.
Q201 Chairman: That is why you have so much beer in your cellar?
Mr Clarke: We still have 2,000 gallons sloshing around in the cellar.
Q202 Mr Hoyle: Is it fair to say there is absolutely no faith in the Brulines equipment and you have proved it has been totally discredited?
Mr Clarke: As far as I am concerned it is an utter joke.
Chairman: I should warn Mr Hoyle that Brulines is as litigious as Ted Tuppen.
Q203 Mr Hoyle: But we are only repeating the evidence we have received. There is something wrong here. Surely, even Brulines would hold up their hands and say they ought to look at it because there is something seriously amiss.
Mr Clarke: We have put evidence to the Committee. We have had anomalies in our records. I have queried them and at the flick of a switch they convert what they have down as a water allowance into beer and what they have had down as beer is possibly some gas in the pipe that has turned round the meter and therefore it has registered a half-pint.
Mr Harrison: In relation to Brulines the argument is that something is needed to police the beer tie. If there was flexibility, fairness and freedom of choice as IPC advocate then as in the free of tie sector the need to police the system might not exist. Having said that, if you are to police any system in a time when we are used to things being extremely accurate - all of us have satnavs in our cars that can place us to within a metre of any point on the globe - a 40% degree of inaccuracy on the part of a company that makes millions of pounds in profits a year is completely unacceptable. If they want to put it on the market they should make proper investment in it to make it work.
Q204 Mr Hoyle: Let me put the reverse of that: is there any benefit to you of having the flow monitoring equipment?
Mr Clarke: There is no benefit to me whatsoever. I suppose they would use the argument if I had a number of pubs that I could oversee dispensing, but in my case I am behind the bar for 35 to 40 hours a week. I know when I am busy; I do not need them to tell me that a week later. It is of no benefit to me whatsoever. Only two weeks ago I was in a Punch-managed pub, of which there are 1,000. They do not have this system fitted in that managed pub. It might be in some but not that one.
Q205 Mr Hoyle: Therefore, the flow monitoring equipment is about as effective as European fish quotas, in which case we are looking for a new system. Consideration has been given to installing video cameras on every fishing boat so everything is recorded and can be viewed at any time. Do you think that may be a way forward for everyone?
Mr Clarke: I suppose it is an option.
Q206 Mr Hoyle: I presume it is better than the one you have now?
Mr Clarke: I do not believe that is an option. As Mr Harrison put it very eloquently, if there were no tie there would be no necessity to try to police it.
Q207 Miss Kirkbride: Although I am aware this point was made in our report, I just want to satisfy my own mind why it is fair to insist that pubcos offer choice of tie or free of tie. I completely sympathise with you about the way pubcos have behaved badly in that you cannot properly enforce your leases and all the stuff we have just been hearing. I suppose that in terms of being obliged to offer a choice their argument would be that this is their business and their property; they have a business model in which they offer these services in return to landlords and it undermines that business model if they do not achieve the scale over all their properties; further, we do not go after other people's private business practices. In a way it looks slightly vindictive - I understand why given the way they have behaved in the past - to say that not only should they have more enforceable leases but they should also be required to change their business in a way that could undermine it. Tell me why it is fair and then I will be happier.
Mrs Nicholls: First, we are not asking them to change their business model. If one did that one would be saying that it was no longer legal for them to tie. You are not saying that; we are not saying that. We say that if you want a tie it confers on you a duty of care to ensure fairness to the people on whom you impose the restriction. If you genuinely offer benefits and the tie is of value those lessees will not exercise that choice.
Q208 Miss Kirkbride: But on the basis that they properly did what you have just said why is it fair and right to go further and say that they must also offer this alternative business? If they do what you have just said why do we have to go further and strip them of the right to insist on having the tie?
Mrs Nicholls: Because there are people who do not offer fairness, flexibility and freedom of choice; they impose onerous conditions and arguably the tie does not work in that model or on those premises. Therefore, the lessee should be given the choice. They would still have a business model; they would still own the property and get dry rent. The balance of risk would change.
Miss Kirkbride: But if they dealt with the first bit they would not have to deal with the second bit?
Chairman: This is the old Irish question: we should not be starting from here.
Q209 Ian Stewart: I have been asked to press you on the AWP tie. On behalf of the BBPA we heard Alistair Darby give what appeared to be compelling evidence that the AWP tie benefits publicans. The Committee has been concerned about the abuse of that system. Can you say how the AWP tie can be made fairer? Does the suggestion by the BBPA go far enough?
Mrs Nicholls: The Select Committee's recommendation in 2004 was very clear. The benefits of the tie are not outweighed by the restrictions imposed as a result of it. The BBPA suggestion does not go far enough because it does not meet the fundamental recommendation that the AWP tie should go. Whatever one thinks of the OFT's recent report on CAMRA's complaint, it found that lessees were £3,000 a year worse off as a result of the AWP tie. That is the answer to whether or not it benefits a lessee. The OFT says the lessee is £3,000 worse off.
Mr Mallen: In 2004 there was a request that it be removed; in 2008-09 that request was repeated. As Mr Harrison said yesterday, this was mooted as low-hanging fruit. It appears to have risen to the top of the tree. The BBPA appear to suggest that the lessee can operate his business but he is not capable of managing his own machines. Perhaps if they provided managers we would all be better off; we could sit back and take a share of the profit. In my view and presumably that of the IPC the publican should be entitled to manage his own business. For years they have taken upfront access payments; they have refused to allow machine operators onto their list unless they pay their weekly rents; they have taken a disproportionate amount of the machine income over four years. I do not believe we can leave the BBPA to manage these machines on our behalf.
Q210 Ian Stewart: Do the other witnesses take that view?
Mr Clarke: I do not have machines because I do not recognise any value in them.
Mr Harrison: I listened carefully to what Mr Darby said, but his theory that one's income falls if one manages the machine oneself means that one needs 200% income once one has given him the 50% split in order to stand still. I have information here from one of the major pubcos. We are told that this is becoming fairer and fairer, but let me read it to you: "On AWP terms, if the net take is insufficient to pay the rental this is deducted from the tenant's share. If the tenant's share reduces to zero any outstanding balance is paid by Enterprise Inns." Therefore, in that particular case the tenant has to lose all his money from the failure of the machine which is in the management of the pubco before the latter chips in and pays anything towards it. That is not our experience; we do not see it becoming fairer. It is a lucrative form of income for the pubco.
Ian Stewart: What about the 33⅓-33⅓-33⅓ system?
Q211 Chairman: The machine owner, the pubco and the publican each get a third?
Mr Harrison: It comes back to choice, does it not? Why can we not be offered a range of choices? Some publicans will feel more comfortable perhaps with that arrangement; others will want to manage their own machines because they are very good at it, but at the moment the choice is not there.
Q212 Chairman: I want to rattle through a few questions before we end. I refer to the repeal of the Competition Act 1998 (Land Agreements Exclusion and Revocation) Order 2004 and the EU block exemption. It sounds immensely technical - one almost falls asleep at the mention of it - but it is probably rather important, is it not?
Mrs Nicholls: I would not want to overstate its importance, but it is a sensible
and pragmatic step forward. If you will pardon the pun, it is a hangover from
the previous competition regime and basically is used to exempt vertical
agreements and leasing agreements from the provisions of the Competition Act
1998. Basically, it creates an anomaly between European and
Q213 Chairman: As to the EU block exemption the de minimis level would again be the idea, would it not?
Mrs Nicholls: Exactly. At the present those levels are set far too high, particularly where there is a network of parallel agreements.
Q214 Chairman: Is it right that the EU block exemption is 5%?
Mrs Nicholls: Yes. Both of them are important issues but they do not obviate the need for a market investigation as per the Committee's recommendation.
Q215 Chairman: It is useful but not world-changing?
Mrs Nicholls: Yes.
Q216 Chairman: The last question is about restrictive covenants. There is some
speculation that Punch,
Mrs Nicholls: We have no particular information about that. I am aware that warm intentions have been expressed. It is not an issue on which the IPC is currently focusing. It is an issue for our member CAMRA and they are pursuing it independently.
Q217 Chairman: Should we stick to our call for a ban on all restrictive covenants in the future use of pubs or should we say instead that consultation with local communities and local authorities before covenants are imposed would be acceptable?
Mr Clarke: The important point is that overall the IPC does not have a common voice on that. If you want to know what the individual parties think then we can safely say that Fair Point very much backs that recommendation and certainly CAMRA's initiative.
Q218 Chairman: The reason I think it is important - I do not know whether the Committee agrees with me - is that it is just another manifestation of the way the market is not being allowed to speak in your sector. Recently I was asked by a brewer about my vision of the industry in 20 years' time. I said that it was one in which the market operated freely and fairly, nothing more than that, and we must strive to reach that position. I was interested by your suggestion that pressure might be applied by the BBPA and others. Does the BBPA talk to you individually and collectively? What is your relationship?
Mrs Nicholls: BBPA talks to us individually. There is a dialogue between ALMR and BBPA as recognised national trade bodies. I have not been put under pressure by the BBPA but references have been made by individual member companies to ALMR. There is no dialogue at all between the BBPA and IPC.
Q219 Chairman: To ask a silly question, would it be a good thing to have such a dialogue?
Mrs Nicholls: Absolutely. We are more than willing to have a dialogue. When ALMR first said back in June that we ought to have mediation to try to sort it out ourselves that was the whole purpose of it. We are willing to talk to anybody at any time in order to pursue the objectives we have outlined.
Q220 Chairman: To jaw-jaw is better than war-war?
Mrs Nicholls: Absolutely.
Chairman: I hope we can reach nirvana. Thank you very much. Happy Christmas, and sell lots of beer!