Examination of Witnesses (Question Numbers
76-116)
David Rusholme and Garry Mallen
30 June 2011
Q76 Chair:
Good morning, and could I welcome you both? As we did with the
previous panellists, could you just introduce yourselves for voice
transcription purposes?
David Rusholme:
Good morning. I am David Rusholme. I run the valuation professional
group at the RICS.
Garry Mallen: Good
morning. I am Garry Mallen. I am a multiple pub operator with
nine sites. I am a landlord, and I act for multiple tenants in
rent review negotiations with their landlords.
Q77 Chair:
Thank you. Can we kick off quickly? Mr Rusholme, how successful
do you think the RICS working group is?
David Rusholme:
I am very pleased with the outcome of that group. I recall coming
to the predecessor Committee a year and a half ago now, and making
a promise that we would very urgently review our guidance to chartered
surveyors working in the pub sector. We formed a working group
right across the industry, with representatives of all the key
players from the companies, from the tenants' organisations and
from the professional organisations in the sector, which probably
totalled some 15 or so people. With a lot of our guidance, it
takes a little while to produce. With this particular guidance
note, nattily titled The Capital and Rental Valuation of Public
Houses, Bars, Restaurants and Nightclubs in England and Wales—
Chair: It sounds compulsory
reading.
David Rusholme:
I do note we have sent members of the Committee copies, as I am
sure you are aware. The point behind that is the group met six
or seven times over the space of probably seven or eight months,
and robustly dealt with all the issues under the guidance. What
struck me about it was how much common ground there was when you
get under the surface of some of these issues, and on the areas
of difficulty, with some debate and thrashing through, we got
to a position where—to answer your original question of
how successful this was—the measure of success is we had
such a diverse bunch of people sitting around the table, but they
were all able to sign off and endorse the guidance that was ultimately
published.
Q78 Chair:
You sound as if everything in the garden is rosy. You are happy
with the new guidance. Basically what do the lessees feel about
it?
David Rusholme:
Our position with guidance is that it is not something that is
ever set in stone. We are continually open to reviewing guidance
in any area to do with property evaluation or anywhere where RICS
sets standards. You ask whether the lessees are happy with it;
I can only answer for members of the RICS who use the guidance,
and the feedback we have had is that what is written is certainly
clearer, has more depth to it and tackles the more contemporary
issues, more so than what we had before.
Q79 Chair:
Garry, I believe you were involved. Could you give us your view
on this?
Garry Mallen: Yes,
I was involved in the forum and I agree with everything David
said just then. The guidance is much clearer; it is an infinitely
better paper than the previous one. The tenants would be quite
happy with it if it was implemented more. The problem we found
is that the pub companies are not implementing it properly.
Chair: That is very interesting
indeed.
Q80 Dan Jarvis:
Can I ask whether there have been improvements in the way pubs
are being valued as a result of the guidance? Are they all following
it?
David Rusholme:
I think there are two parts to that. Are there improvements?
Yes, because some of the key issues are tackled a lot more headon
than they have done before. Are the pub companies following that?
I think that is partly outside the knowledge of RICS. RICS's
role is to provide guidance primarily for its members who are
out there acting on rent review negotiations or acting for the
parties when they take a lease. Our view is that we would encourage
both the pub companies and prospective tenants to get professional
advice from chartered surveyors who follow this guidance when
they either take a lease or they face a contentious rent review
situation.
The second part of it is that clearly we recognise
that there are those who act in the rent review market who are
not chartered surveyors. Garry, you are one of those people.
We are very open to others using the principles behind our guidance,
which is one of the reasons why we made this guidance a lot more
widely available than we do for our normal guidance, which is
more confined to the membership.
Q81 Dan Jarvis:
Can I follow that up by asking you whether the principle that
the tied tenants should be no worse off than freeoftie
tenants is being followed by pub valuers?
Q82 David Rusholme:
This is one of the issues that we have put firm guidance in place
over. If you would indulge me in quoting from what it now says
in the guidance, it says, "Comparability between public houses
held on different lease terms and with different supply terms
is problematic, particularly between the tied and non-tied sectors."
We state, "There is nothing within this guidance that should
result in rents in one sector being set at any advantage or disadvantage
to another." That is now there and it is put into the guidance
note.
Chair: Can I bring Nadhim
Zahawi? I think he wants to pick up the point that was touched
on by Garry.
Q83 Nadhim Zahawi:
Mr Rusholme, you acknowledged to our predecessor Committee, and
indeed just now as well, that people who value pubs are not necessarily
RICS members and therefore do not have to follow your guidance.
We have heard from Mr Mallen just now that many do not follow
your guidance. Can you tell us what you can do about that noncompliance?
David Rusholme:
We take a stance of trying to encourage the guidance to be followed,
firstly by surveyors and secondly by the wider community that
uses it. We continue to try to raise awareness of it. It was
published in December, so we are now six months on. I have just
chaired a series of valuation roadshows around the UK, principally
for the membership and covering a wide range of valuation issues,
but there have been one or two pub valuers who have attended those,
and the feedback I have been getting from talking to them is that
this is well known. It is being seen as a much clearer set of
guidance and the knowledge is spreading out there that there is
something more to hang on to when the rent reviews are being undertaken.
We can probably do more, and the next step we should
do is to try to publicise and work with others in some of the
trade and professional bodies out there to run a campaign that
they should get professional advice in contentious situations
where the stakes are high. Our view—clearly you would say
we would say this—is that you should get the advice and
bring in a professional. If you sign a legal agreement, you will
bring in a lawyer. If you are dealing with a rent review where
thousands and thousands of pounds are at stake, you should bring
in a surveyor to act.
Q84 Nadhim Zahawi:
The IPC has already said that there is systematic non-recognition
of the guidance, and that the free maintainable trade calculations
remain distorted. Is that something you recognise?
David Rusholme:
It is not, but then again it is not something I would. Where
I would come across noncompliance is if there are complaints
to RICS, and RICS runs an arm's-length regulatory side that deals
with such matters. There is not an avalanche—there is not
even a trickle—of complaints coming in about noncompliance
of our members in using the guidance. That is where I see it
from, and I readily see that there is probably a bigger picture
out there that would not feature on the RICS's radar.
Garry Mallen: The
problems that arise are not really problems that the RICS can
resolve. With the pub companies, most of the valuations—not
with all pub companies but certainly with a lot of them—are
being prepared by overworked BDMs, who are trying to look after
upwards of 60 pubs. They are not trained in preparing rent
valuations, and most of the BDMs who I have dealt with recently
know nothing about the RICS guidance and they know nothing about
the ALMR benchmarking for costs.
Nadhim Zahawi: That is
very interesting.
Garry Mallen: I
am not blaming the BDMs. They have shortcomings in other departments,
I am sure, but they are not being trained properly, in my experience,
in preparing rent valuations.
Chair: Surely
that is the issue. It is astonishing that, given the crucial
nature of this, somebody in their position is absolutely unaware.
Q85 Nadhim Zahawi:
You have just raised a number of issues here. One is if the RICS
is doing enough to communicate, because you said many of them
do not know anything about the guidance.
Garry Mallen: Forgive
me, but I do not think that is incumbent on the RICS. They have
no powers to implement.
Q86 Nadhim Zahawi:
It is falling between the cracks then?
Garry Mallen: It
is.
Q87 Chair:
Surely the pub companies should do it?
Garry Mallen: Agreed.
The pub companies ought to make the people who are preparing
the valuations aware of the guidance and make them follow the
guidance. There is nothing wrong with the guidance; the guidance
is fine.
Q88 Nadhim Zahawi:
It may be fine—
Garry Mallen: It
is fine at the moment.
Nadhim Zahawi: —but
if people are just not implementing it or not aware of it or,
for whatever reason, are too busy to be doing anything about it,
something is going wrong here.
Garry Mallen: That
is why I submitted the evidence.
David Rusholme:
I agree. Our position would be that, if landlord organisations
are trying to establish a case for an increase in rent, then there
is no better or more proper way of doing it than getting professional
advice to do so. I think there is a slight twist to this that
I do know, and our members would say, that they are regularly
employed by pub companies and indeed by the tenants to negotiate
rent reviews. There is a healthy population of surveyors acting
out there in the marketplace, and they are appointed; they are
brought in by both landlord and tenant organisations. Perhaps
the problem is that sometimes they are not brought in early enough.
Q89 Mr Binley:
I am amazed that business development managers don't really understand
the machinations of rent review. I don't understand how they
can help in the development of the business if they don't understand
the relationship between that and discounts, and have no idea
of the very basics of the business model of a pub.
Garry Mallen: I
am not suggesting they don't know anything about the formulas,
not all of them at least, of completing a rent review. They know
nothing about the guidance, the new guidance. From what I have
seen, they have a prescribed formula for preparing a rent review.
Without the guidance and without considering the guidance, you
cannot do that properly.
Q90 Mr Binley:
I repeat; I am amazed. I see that you said it is all too common
than a regional manager prepares a valuation without any reference
or consideration to the financial benchmark data that is available.
You said that. I have a quote from you to that effect.
Garry Mallen: Again,
the BDMs that I have seen of late, and certainly within the last
six months, know nothing about the ALMR benchmarking survey.[1]
Q91 Mr Binley:
Perhaps one of the things we can do is to make sure that the pubcos
do exactly that: they make sure their middle managers are trained
properly as well, because therein lies the major contact between
the tenant and the company. Is that so?
Garry Mallen: That
is so, but I think it goes deeper than that.
Q92 Mr Binley:
Tell me how we can do it then.
Garry Mallen: The
pubcos need to appreciate the actual costs of running a pub.
That is not always the case.
Chair: The Chairman, if
I may say so, is equally astonished.
Garry Mallen: To
give you an example, in the latest interim accounts for Enterprise
Inns, they state and show operating costs of 35% in their example,
yet we know from the ALMR survey that operating costs are north
of 40%. Last year, Enterprise carried out their own survey, conducted
by Milestone Accountants—I believe it was a survey of nearly
700 pubs—because they were not absolutely certain of the
validity of the ALMR survey. Their own survey showed costs between
42% and 51%, and yet still within the interim accounts that I
referred to earlier, they are showing costs of 35% in displaying
how a tenant can earn £35,000 a year. They are showing costs
of 35%. If a 7% swing was put on those costs—and I grant
you that is at the upper end—the tenant would not be earning
£35,000; he would be earning £11,000.
Chair: You have partly
anticipated the line of questions that we were going to pursue.
Brian, do you want to come back in?
Q93 Mr Binley:
I do, because this is at the very nub of the business model presented
by pubcos to tenants, on which they make their business decision
to come into the pub, and where so much trouble ensues thereafter,
because they have been misled. Isn't that the case?
Garry Mallen: I
would have to agree, yes.
Q94 Mr Binley:
Thank you. Can we have that properly and fully noted, because
it is right at the centre of this business? Tenants are being
misled when they go into pubs. It is that simple. You have just
given me the evidence to be able to make that remark here and
also outside.
Garry Mallen: Again,
that does nothing for the existing tenants.
Mr Binley: No, it does
not.
Garry Mallen: It
does help the ones coming in, or it could help the ones coming
in, but it does not help the existing tenants.
Q95 Mr Binley:
No, it does not, and I take that point too. You said or at least
gave the impression that there was, across the piece, little understanding
of the RICS guide, as it were. Does that impact more upon one
pubco than another? Is there one you would pick out and say this
particular pubco has ignored it to the detriment of the wellbeing
of tenants?
Garry Mallen: I
am not sure I could pick out one particular pubco.
Q96 Mr Binley:
Are you sure you could not?
Garry Mallen: The
evidence I have submitted refers to seven Enterprise pubs that
I am currently doing rent reviews for, but I am aware that Punch
is allegedly training their BDMs in the guidance. That may be
the case with one or two other pub companies, but I am not aware
of that, so I cannot comment.
Mr Binley: I have had
evidence that Punch is training and making an effort. I have
no evidence whatsoever that the very famed Enterprise Inns, led
by the very famed Mr Tuppen, has embarked on that particular process.
If he is listening, I would like to know whether that is the
case or not. I think this Select Committee would like to know
too, because it is a very serious matter that goes to the heart
of this whole business. Perhaps if there is anybody here from
Enterprise Inns, they could come back with an answer for us.
I think we would like it from other pubcos too, just to assure
us that they are taking note of your particular publication, because
it is central to the issues that we are talking about. Thank
you, Mr Chairman.
Chair: I was going to
ask you to ask about the division of profits in the Brooker case.
Q97 Mr Binley:
I am more than happy to do so, and I am grateful, because we referred
to this, Mr Rusholme, and I think I am the only survivor from
the previous Committee, which says a lot about my career prospects
in this place, but never mind. We talked last time about the
decisions of the Brooker case. Have the pub companies been recognising
and taking that result into account?
David Rusholme:
The way our guidance is structured and the way that chartered
surveyors interpret rent reviews, court decisions and precedents
stand for a lot, and they should be taken into account. Again,
I have no evidence of noncompliance. Garry may be closer
to the market on this, but frankly I would be amazed if anybody
could successfully run an argument or get through an arbitration
case, and try to argue against something that is put there in
black and white. It just wouldn't stack up in the end.
Q98 Mr Binley:
I would be too. It is not in your experience because you don't
have that information, but you would think it would be remarkable
if the pubcos did not take that finding into account. They would
be very disadvantaged in any process thereafter, wouldn't they,
if that were the case?
David Rusholme:
That would be absolutely correct, yes.
Q99 Paul Blomfield:
On a specific point, following on from the issues being raised
by Mr Binley, is it correct that the National Rent Controller
for Enterprise Inns who, as the Chairman has explained unfortunately
cannot be here today, is a member of the RICS?
David Rusholme:
Yes, he is.
Q100 Paul Blomfield:
Therefore, in your opinion, is he accountable for the rents that
his business development manager negotiates? If he is, should
he be ensuring that all of them abide by the RICS guidance?
David Rusholme:
As you note, it is a shame he cannot answer that question directly.
The RICS's position is if any member in a supervisory capacity,
looking at the work of others, is supervising work that de facto
should be following professional standards and in all but name
is the work of someone else, then yes, the guidance should be
followed. I am not completely au fait with the workings of the
systems within that particular company and the relationship between
business development managers and the surveyors employed, but
the job title of National Rent Controller rather implies that
you are controlling the rents that are set nationally, so I can
well see the connection there.
Paul Blomfield: I understand
the care with which you answer the question, but I think that
is a fairly clear answer, so thank you.
Chair: Can we go on now
to the RICS national database?
Q101 Simon Kirby:
We have mentioned some of this already, but can I kick off by
asking what has happened or is happening to the national database?
David Rusholme:
The term "national database" has been loosely used in
a number of predecessor Committees and a number of inquiries over
the years, but it comes back to one principle, and that is having
more information available to those setting the rents, so that
they can get to a better or more accurate answer. To put it into
a bit of context, a national database or what we prefer to call
"benchmarking"—because it is simply having data
from a number of pubs available, so you can make a better comparison—is
part of a picture.
We have done a number of things. For the first time,
we have acknowledged in our guidance that benchmarking is something
you should attach weight to, because of the nature of the pub
industry and the difficulties of getting decent information and
comparable information. I was very struck by the discussions
earlier on about the numbers of different arrangements, discounts
and types of leases. It is very difficult to look at two pubs,
say in the same town or the same village, maybe across the road
from each other, because of the comparability of the different
agreements. We have always supported the view that good benchmarking
in the industry is something that is going to get to better results
in setting rents.
You are asking what has happened since the time before.
We undertook that we would engage with whomever we could find
out there who would try to deliver a good benchmarking service
for the industry. We spent a substantial amount of time with
one of the leading property consultancy businesses and data providers,
and, I must say, with the full cooperation of the pub companies,
to try to encourage them to launch a fairly wideranging
benchmarking service. I will say very openly that that attempt
has failed on the grounds of the commercial cost of putting it
together and some of the difficulties around the confidentiality
of information.
Q102 Simon Kirby:
Can I interrupt you there? I don't understand why it is such
a costly exercise when the pub companies hold that very information
themselves. It is clearly available in reams; the costs and the
turnover sides are available. I don't accept—and I should
be clear on that—the argument for failure is a financial
one. Can you try again, please?
David Rusholme:
I concede that one. In the negotiations in trying to put this
together, that was something that was very much in our minds:
that this is not rocket science and it is a fairly easy thing
to do. The troubles lie around the fact that, if you are asking
a lot of organisations to freely give information, they want to
do so in a way that preserves the commercial confidentiality.
I would say that that is not something that is unique to the
pub sector and that is a valid ground. When you do that, you
then have to start devising fairly complicated systems so that
maybe you can find information by general postcodes or locations,
so you can get a flavour of an area or a different type of property
without identifying particular properties. I think that is a
valid concern.
Q103 Chair:
In your very circumspect way, what you are saying is that basically
the pub companies are not cooperating.
David Rusholme:
No, the pub companies are cooperating.
Chair: Well, why can you
not get the information?
Q104 Simon Kirby:
The problem I have, and I shall be clear on this because we are
near the end, is there are pubs up and down the country going
out of business, as we speak, every day, week in, week out, and
it is getting worse, not better. That is a direct result of the
rents being charged and the rentalisation of any discount that
is available. It is quite a clear equation. It is not complicated;
"it is not rocket science" I think was an expression
used. I don't understand, when we have spoken in 2004, 2009 and
2010, why we cannot have a database. We can call it "benchmarking";
we can call it whatever you like. At the end of the day, when
it comes to rent reviews, clear information that is comparable
up and down the country with other operators must surely be the
way forward. I have to say I am very disappointed in your failure,
because you undertook to provide this a year ago, in not moving
it forward. Can I ask you for a third time: why do we not have
this benchmarking information?
David Rusholme:
Can I take a leap forward, because we have jumped a little? There
is a little bit more to the picture. There are a number of things
that are now going on. Outside the RICS, the ALMR survey has
come on in leaps and bounds over the last two or three years.
The quality of the information there, for benchmarking purposes,
in infinitely better than it was before. There was mention earlier
of a Milestone survey undertaken by an accountancy company, courtesy
of the pubcos, which seems to be publishing information that is
not necessarily helpful to their cause. RICS's position now is
that we have undertaken some preliminary discussions, again with
some of the leading pub companies direct; we have got the support
of the BII; and we are also bringing on board RICS's in-house
research team. If nobody else is stepping up to the plate, we
will do so and we have now put a team together to actually undertake
that and bring that forward, having tried to support outside efforts,
which clearly are going nowhere. We will do it ourselves and
we will do it quickly.
Q105 Simon Kirby:
When do you think would be a reasonable timeframe for delivering
not the aspiration but the actual end product?
David Rusholme:
We have only recently put everyone together on this, and I think
it would be foolish to make promises. I do take seriously the
need to do this urgently, and we will do so as urgently as we
possibly can.
Q106 Mr Binley: May
I come in with a supplementary? Mr Rusholme, you know this business
pretty well. Am I right in believing that the pubcos themselves
could not run their business model without this information?
David Rusholme:
They have all this information.
Q107 Mr Binley:
Of course they have the information. We are not talking about
the difficulty of collating the information; it is already there.
We are talking about pubcos not wanting to give it up. Is that
the fact of the matter? I know you are a professional; I know
you will be immensely careful. Can we read between your words
and understand that that is the case?
David Rusholme:
I do not think it is as straightforward as that.
Mr Binley: I do.
David Rusholme:
I think it is a reasonable argument that any commercial organisation
should not be forced to give the full trading information on one
property.
Mr Binley: I understand
about commercial protection.
David Rusholme:
But it is not impossible.
Q108 Mr Binley: Can
I then ask you whether it would be impossible for the pubcos to
band those and not give individual cases? You do not need individual
cases to give the guidance that the tenants want, but you could
band those without impacting upon commercial sensitivity.
David Rusholme:
That is exactly what we are talking about.
Q109 Mr Binley:
That is the point. It exists. All it needs for them is to band
it. That is not an expensive exercise, is it?
David Rusholme:
No.
Mr Binley: Thank you very
much.
Q110 Chair:
Just before I come back to Simon, Garry, can you tell us if the
BBPA is working with the ALMR on the benchmark survey?
Garry Mallen: I
had better check that. No, there are certainly no meaningful
discussions on it. Referring to this national database, I am
not sure how much assistance the database would be in terms of
the headline rents because, as Phil said earlier and as David
has alluded to there, the nature of the pubcos is that there are
so many leases out there, with so many different variables concerning
their particular deal with that particular lease. The national
database for operating costs I think would be extremely helpful,
and would limit the ability for some people to manipulate those
costs within the rental model. The stronger the database, the
bigger the survey, the more realistic the results will be. That
is where it would be most helpful.
Q111 Mr Binley:
Surely it is not beyond the wit of the pubcos, without too much
effort, because they already have a view of what a pub should
be worth; they already have that information. The banding can
be on three factors. It can be on the type of pub; it can be
on the region; and it can be on the money. If you had that down
to a reasonably sensible level, that would be immensely helpful
to new tenants, wouldn't it?
Garry Mallen: Yes,
it would, and if it includes something like the FMT for various
units, then that would also be immensely helpful.
Mr Binley: So it is possible,
they could do it, and it would not be that difficult, because
most of that information is in place anyway.
Q112 Simon Kirby:
Following on from Brian's point, without that information, if
today I leave this room and I go to sign my lease, how can I establish
whether the rent that is on offer is reasonable and whether the
costs that are contained within the rent and the trade that is
implied by the rent are reasonable or not?
Garry Mallen: Get
professional advice. You need to get professional advice.
Q113 Simon Kirby:
The professional advice will be based on what?
Garry Mallen: Presumably
on a RICSqualified surveyor telling you it is an acceptable
rent.
Q114 Simon Kirby:
Will he try to benchmark that rent?
Garry Mallen: If
he uses the guidance properly, then yes.
Q115 Simon Kirby:
How will he do that? I am following the logical chain here, because
I am saying, without the information available, all is lost, surely.
Garry Mallen: If
he is a member of RICS or trained properly to use the RICS guidance,
then he would use the guidance to come up with the correct rent.
Q116 Simon Kirby:
I am going to demonstrate some ignorance here. The guidance is
that benchmarking is an important element or an element—"important"
is my word—in the determination of what is a fair rent.
If there is no concrete data to work on, then that is an aspiration,
isn't it? It is not an exact science. I am a mathematician;
I like exactitude.
Garry Mallen: People
can get access to the ALMR survey, and so they can see the costs
of running the premises.
David Rusholme:
Can I add to that? Putting myself in the shoes of the good surveyor
giving the advice, he would say he is in the marketplace. He
has firsthand knowledge of transactions himself, because he has
been involved in transactions. He has firsthand knowledge of
rent reviews, because he has undertaken lots of rent reviews and
he builds up that knowledge. I take the point that Mr Binley
made earlier on about the usefulness of benchmarking to incoming
tenants, but there is a distinction to be drawn there. For the
surveyor, benchmarking in the survey or the collated information
term is one of those small parts of the jigsaw that help build
up that picture. There is a whole heap of other reasons why you
should bring a surveyor in to give the advice in the first place,
because of the market knowledge in a broader sense.
Simon Kirby: Final point,
Chair: I did not have Brian's pleasure of being here in the last
session, but I have a worry that we hear the same thing year in,
year out, and that that remains an aspiration rather than a commitment.
I have listened to what you have said and I take some comfort
in it.
Chair: I believe this
is the fourth inquiry that the Committee has done on this. I
fervently hope that, arising from our conclusions, report and
the implementation, it will be the last. Thank you, gentlemen,
and I do appreciate your contribution.
1 See supplementary written evidence submitted by Garry
Mallen Back
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