Examination of Witnesses (Question Numbers
236-298)
Kate Nicholls, Mike Benner, Simon Clarke and Karl
Harrison
7 July 2011
Q236 Chair: Can I
welcome you to this session? I apologise for being a little late,
but I am sure you will appreciate that it was very necessary to
cover all the areas that we did. I will repeat what I have said
to other panels: if we ask a question and you feel that it has
been adequately answered by the person who first steps in, please
do not feel obliged to repeat it because we obviously have time
constraints. Obviously if you feel you need to add something
or you need to contradict something, then we would welcome that
participation. Can I just start for transcription purposes by
inviting you to introduce yourselves and the organisation you
represent?
Karl Harrison:
My name is Karl Harrison. I am a publican in London with three
premises, two of which are free of tie and one of which is tied
to Enterprise Inns. I am a member of the Fair Pint campaign,
and also a member of the BIIBAS accreditation committee.
Kate Nicholls:
My name is Kate Nicholls. I act as secretary to the Independent
Pub Confederation, which is an umbrella grouping that brings together
the thousands of small businesses, microbrewers, individual lessees
and consumers who are directly affected by the Committee's deliberations.
Simon Clarke: My
name is Simon Clarke. I am a member of the Fair Pint Campaign.
I sit on the IPC steering committee. I am a publican of a tied
house and a chartered surveyor. I sat on the RICS panel that
was involved in rewriting the rental guidance. I have sat in
on a mediation with the BII. I offered oral evidence to the two
previous Committees, and I am grateful to be offered the opportunity
again today.
Mike Benner: I
am Mike Benner, Chief Executive of CAMRA, the Campaign for Real
Ale. We are a not-for-profit independent consumer group with
125,000 members and growing, and we are a founder member of the
IPC.
Q237 Chair: Thanks
very much. I will start off. Are the new codes an improvement
on the old ones? Who would like to lead on that?
Kate Nicholls:
I can take that and lead off on that one. I think if they were
being fully implemented and complied with then they would be a
step towards improving levels of transparency and clarity of information
for new entrants, but if we are asking whether they deliver meaningful
reform of the commercial relationship, then no they do not. The
code should be a means to an end; it is not an end in itself.
I think I was quite heartened to hear Alistair say that the acid
test of a code is if a lessee never again says after the event
that they did not know what they were signing up to, and I think
that is a direct quote of what he also said to your predecessor
Committee. We are not there yet. We have 20% of new entrants
still signing an agreement when they have not received a shadow
P&L, 50% of existing lessees making commercial decisions without
a shadow P&L and 24% of new entrants to the industry not understanding
the terms of the lease. That is no improvement on the survey
that you had from Morgan Stanley in 2004.
Q238 Chair: In summary,
and I do not wish to put words into your mouth, would you say
that the code has not been very effective?
Kate Nicholls:
If it had been fully implemented and complied with it could have
been effective, but without full implementation and effective
compliance, then no.
Q239 Chair: You made
great play about the importance of the code being statutory.
There are downsides to most things—the socalled unintended
consequences. Do you see any potential ones in a code being made
statutory?
Karl Harrison:
We have had some stark examples this week of the failure of selfregulation
in other sectors, and selfregulation in the pub sector at
the moment is not working. At the moment we have a weak code
of practice written by the people that the code is meant to apply
to and enforced in a weak way, and as we have heard today from
Ms Simmonds and others, there really is no sanction. The only
sanction that was offered was maybe you will not be a member of
the BBPA in the future, and, as Simon Longbottom confirmed, that
did not seem to be too much of a problem for Greene King, and
it seems to me to be a very weak sanction indeed. The only way
to really deliver real reform and to create a market that operates
freely and properly, and not the dysfunctional one that we have,
is to get this code independent and on a statutory footing and
with proper enforcement.
Mike Benner: If
I can add to that, I think that regulation is there to protect
people, and we are still at a stage when people need to be protected
from what is going on in this marketplace. We have already heard
how the code is ineffective, how it is not being delivered and
enforced properly, and the only next step now is to put it on
a statutory footing, and that will protect people.
Q240 Chair: Could
I just come back to Karl Harrison's comments? Greene King is
certainly not a member of BBPA, but is not the issue that is damaging
to their reputation whether a company subscribes to a code or
not, rather than membership of the BBPA?
Karl Harrison:
The framework code of practice that is allegedly in operation
was put together by an organisation that a lot of tenants have
never heard of anyway, to be honest. The British Beer and Pub
Association do not represent pubs anyway; it represents property
companies and brewers, largely. A lot of tenants would not have
heard who that is and would not attach a great deal of credibility
to it. Below that there is a whole raft of codes, each code for
each individual company. All we have as a sanction for breaching
that, as we have been told today, is that you can no longer be
a member of an organisation that perhaps does not have the credibility
that it would like to claim it has, and probably is not that well
known outside of, perhaps, the political circles where it lobbies
and its own members. I do not see that as a sanction at all.
These are multi-billion pound companies seeking to generate very
substantial amounts of money. They will do that how they see
fit. We have a code at the moment that does not deliver a regime
that is enforceable, and the BII cannot enforce that at the moment.
Kate Nicholls:
Could I just add to that as well? It may well be a credible sanction
that you will have a reputational risk if your code is not accredited.
That only comes into play if there is the genuine competition
that the previous witnesses claimed was happening in the marketplace,
but the survey that was commissioned jointly by BBPA and the IPC
shows that three-quarters of people taking on a pub are not making
a decision about the pub company and whether the pub company has
an accredited code of practice, whether it has five breaches,
50 breaches, a clean bill of health. They are just making a decision
on the fact that they want that particular pub. There is no competition.
So the threat of having accreditation removed is meaningless
to the person making the decision to go into the pub; they are
choosing that pub.
Q241 Chair: One of
the assertions has been this loss of reputation and refusals of
potential tenants to go to a company. What in effect you are
saying is, because of the lack of comprehension about that and
the status of BBPA, that is effectively not a sanction?
Kate Nicholls:
Yes; the majority of people, three-quarters of people who are
choosing a pub, are choosing the Dog and Duck in the high street.
They are not going out there are choosing Punch, Enterprise,
Greene King, Shepherd Neame or any of the other pub companies.
They are choosing it on the basis that that is the particular
pub they wanted, irrespective of who the landlord is.
Q242 Ian Murray: You
said in your submission to the Committee that relations between
the BBPA and IPC are limited. Can you expand on what you meant
by that?
Kate Nicholls:
They are not as good as I would like them to be. We have had
one formal meeting of the IPC Chairman and the BBPA Chief Executive,
and three followup meetings between me and BBPA officials.
I think we would really like to have a healthy and robust dialogue
with the BBPA, as indeed we have with other bodies—BIIBAS,
BII, RICS; we have all had dialogue with them. I think that dialogue
is beneficial and it delivers not just a better outcome for lessees
but a better outcome for the industry as a whole.
Q243 Ian Murray: In
answers to the Chairman's questions earlier you said that—many
people in the panel have said it—the BBPA is not well known,
therefore why would tenants use that as a barometer of quality,
if you like. One of the organisations I think within the industry
that is well known is the BII. I think everyone would recognise
that as a more public-facing body that people would recognise.
Do you think they have done enough of policing the industry?
Mike Benner: I
think there are two points here. The first one is that policing
is a strong word. In order to be effective in policing you need
to have a code that is strong enough, robust enough and effective
enough in the first place. We have not got that, so the job of
policing it is a bit difficult in terms of dealing with the meaningful
problems. The second one, and I think the BII are first to admit
this, is they are not independent—they claim to be impartial
but they are not independent—and they do not have the authority
or any sanctions at their disposal to deal with any breaches of
the code beyond, for example, listing it on a website. I do not
think those two things together enable anyone to police anything,
and I think by their own admission in the evidence they gave they
are more of an umpire than a policeman. This industry does not
need an umpire; it needs an effective code that is properly policed.
Simon Clarke: If
I could add to that, I think the BII had a fairly difficult start,
in that it was a poor beginning when they signed up and supported
an inadequate code in the first place. Many of the Committee's
recommendations and Government requirements were missed out of
that code: AWP machines, upward-only rent review clauses and free-of-tie
options were not included in the code at all, hence one of the
reasons that the IPC ended up being formed.
Q244 Chair: Could
I just intervene with a point, because earlier I think Kate said
in effect the issue was about monitoring and exercise of that
code, not the code itself. Is the problem a weak code or is it
the enforcement of it?
Simon Clarke: It
is a twofold problem. We have a primary issue, and that is effectively
the rulebook. If the rulebook is no good, then there is not really
a great deal of confidence in the mechanism for enforcing it.
It is a double-edged sword. We need the right code and the right
way of enforcing it, and at the moment we have neither.
Chair: There does seem
to be a difference of view on this.
Karl Harrison:
The code that we have was written by the BBPA and its members,
and it is signed up to by two organisations, the BII and the FLVA,
whose negotiating strategy in doing so seemed to be, "Where
do I sign?" There was not enough effort put in to arriving
at the right code. The IPC has made sensible suggestions about
what ought to be in that code, and one of those is a free-of-tie
option with an open-market rent review.
Chair: We will be coming
to the free-of-tie option.
Karl Harrison:
Keeping on your point, at the moment we have a badly and heavily
internally regulated and dysfunctional market where it is burdensome
for the tenants, and the proposals we have made move towards a
proper, efficient market. This was the vision of your predecessors,
and it is a vision that we have shared all the way down the road:
that a free and fair market is what we want. The proposals we
have made will deliver that.
Kate Nicholls:
Can I just clarify my opening remarks? I would hate you to infer
from my opening comments that I thought the code was strong enough.
I think it could go a lot further. What you asked me was: was
it an improvement on what had gone before? The answer to that
is: if it was implemented it would be an improvement. Is it good
enough? No. Could it go further? Yes.
Q245 Ian Murray: This
is really a question for all the members of the panel. Would
you be happy in keeping the BII as the police officers, if you
like, and if not what organisation should be policing this industry
and what sanctions should they have? I think Mike you said that
perhaps filing would be a sanction that you would look at. What
would be the ultimate sanction? Where should we ultimately go
with the proper police officers of this market?
Mike Benner: I
think the starting point for this is that it does need to be a
strengthened code on a statutory footing. Then of course it would
be enforceable through the courts. There are other alternatives
to that of course. It was mentioned earlier about there being
an adjudicator, so it is possible there could be—and CAMRA
has suggested it—an independent ombudsman that could be
funded in some way by the industry, perhaps via levies, and of
course behind that you would then have to have effective sanctions
in terms of commercial penalties and proper ability to enforce
its rulings. At the moment we do not have any of that from what
I can see.
Q246 Mr Ward: In
terms of the adequacy of a code, can I ask the same question I
asked earlier on about the period of probation? The criteria
were set a year or so ago by the Committee. What is your score
out of 10 in this probation period we are currently in?
Kate Nicholls:
I can take that first. I will probably be more generous than
most of my other colleagues. I would give them a cautious two.
Simon Clarke:
I would agree with that.
Karl Harrison:
I will stay with one.
Mike Benner: I
think if you look at—
Chair: Just give us a
number.
Mike Benner: I
would go with one.
Q247 Mr Ward: Just
to move on to the minimum pricing obligations, there were some
discussions last week about the BII putting on its website details
of all the pub company agreements: availability on discount levels
on beer and so on. Is it possible to do that, and would it be
beneficial?
Simon Clarke: Could
I just clarify whether the question is related to minimum price
purchasing obligations?
Q248 Mr Ward: That
is the block, but I am talking about the discounts.
Simon Clarke: From
a tenant's point of view—and we have heard the pubcos speaking
earlier and Mr Darby mentioning the issues of competition with
the discounts that they can achieve—what I can say is, whilst
that information might be very interesting to tenants, what we
need to know as tenants is the discount we are likely to get,
not so much what they are getting. We need to be able to see
that in a clear and concise fashion so that we can compare our
situation and genuinely look at the difference between being tied
and free of tie. If our rents are going to be set amount and
are purportedly lower than the commercial rent free of tie, then
we would need to see what the price and discounts were likely
to be. That is the information we need. We do not necessarily
need to know the confidential information that the pub companies
have.
Q249 Mr Ward: They
can be separated out?
Simon Clarke: Easily.
Nine times out of 10 the agreements that they offer will have
a rental level, the terms of the agreement and the discount they
are offering on that particular agreement.
Karl Harrison:
This was pretty well the only specific recommendation from your
predecessors in relation to what the BII had to do, and it did
not do it.
Q250 Mr Ward: Do
you accept Punch's argument that if they offered free-of-tie arrangements
they would be breaking their purchasing agreements with suppliers?
Karl Harrison:
I find that fascinating. The idea that we are supposed to accept
that some secret agreements that we cannot see ought to dissuade
us from moving towards a market that needs to be in place is frankly
laughable. In any event, we are talking here about companies
that have largely collapsed, and they are trying to defend a business
model that has failed them, their shareholders and their tenants.
These are companies that have collapsed by 90% in value. If
you look at the share price graph for these two companies, one
City analyst described them as looking like animals that were
born, had one giant heartbeat and died. We are now asked to believe
that a secretive, interconnected series of deals that they have
struck between themselves ought to dissuade us from doing the
right thing. It sounds nonsensical to me.
Q251 Mr Binley: Mr
Harrison, aren't you running the risk of creating a scenario where
many more pubs will go to the wall? At the moment we are in a
situation where these pubcos exist. It is recognised that they
were heavily overleveraged and it is recognised that that caused
one of the problems we are specifically talking about. But aren't
you worried that, by making it that much more difficult to trade
by undermining that reputation, you might be creating the situation
of loss of pubs at a greater extent than we have at the moment?
Karl Harrison:
Surely we are not suggesting that the loss of Punch, Taverns and
Enterprise Inns is going to create a problem? Surely we cannot
be suggesting that. If we look at the three main players, Admiral
Taverns is largely in the hands of Lloyds bank. As we have heard,
Ian Dyson, the Chief Executive of Punch Taverns, has conceded
that the business is not viable in its current structure, so they
are floating the tenanted side off with Roger, probably without
a paddle. Enterprise Inns: again we have a chief executive paying
himself £1.2 million and losing 90% of his shareholders'
funds, including pensioners and everybody else. They are a failure.
The businesses themselves are independent businesses.
I operate two free-of-tie pubs. Free-of-tie pubs will survive
better than tied pubs. We are in retailing. The joy of retailing
is that you can change things on a daytoday basis,
and you can move to different suppliers for different services
and you can do that on a daytoday basis. We have
a rigid, inflexible system, and if I could just conclude very
quickly: the proposal we have made for a free-of-tie option is
not something that is going to happen in every case over night.
This is something that gives the pubcos the opportunity to establish
that the services they claim to provide, the benefits they claim
to provide, can be provided. If they do not provide them, one
assumes that the tenants will exercise the option. If they do
provide what they say, one assumes that they won't.
Q252 Mr Binley: I
understand that, and I have been a severe critic of some of the
machinations of pubcos, as you know. I was on the previous Committee.
You saw that operate. I think that goes back to the Monopolies
Commission. I think serious errors were made, quite frankly,
which have undermined the business model to the extent that that
has damaged the pub network, a major social resource in our country.
Whilst I understand major changes need to be made, I am concerned
that undermining them too much could add to the destruction of
the pub network. Am I being over concerned?
Karl Harrison:
You are being far too concerned; they have undermined themselves
far more than you, me or anybody else could possibly do. There
is no confidence in these companies. They are seen as substantially
failed. Real companies have a growth plan. They maybe have
a national or international dimension, an internet strategy, all
of these things. These companies do not have any of that. Essentially
they are basically intermediaries that effectively take commissions
and backhanders for providing access to particular properties
that services can be sold into. It is not like a real company
with serious retail skills, like Wetherspoons or Mitchells &
Butlers.
Q253 Chair: Could
I just ask you: if these pub companies went out of business, in
the debris that would result as a consequence of that, do you
think there would be more pubs surviving than appears to be currently
the situation?
Karl Harrison:
Yes.
Q254 Chair: And on
what do you make that assertion?
Karl Harrison:
My own experience.
Q255 Chair: Sorry,
but we do not know what your experience is; can you define it?
Karl Harrison:
I have been trading in the licensed trade for 25 years, and the
free-of-tie sector at the moment is the area of growth. Back
to the City again, the City is only interested at the moment in
the managed and free-of-tie sector. It is not interested in the
tenanted and tied side. Every single company that is listed on
the stock exchange that is operating tenanted sides, whether it
be Alistair's company, Simon's company, Ted's company, are all
reporting poor performance in the tenanted side. However that
business model is being undermined, I would say that we are not
undermining it and your Committee has not undermined it; your
Committee is taking things in the right direction. That is a
problem they made: they borrowed too much money on a business
model that was wrong. Small business should not be impeded or
damaged. Enterprise and innovation should not be impeded by this
business model. We are not asking for them to disappear; we are
asking for a code that is statutory, enforceable and contains
a free-of-tie option with an open-market rent review so we can
have a real market, and the benefits will flow from that.
Chair: I can do without
the background noise, thank you very much.
Q256 Ian Murray: I
have two very brief questions if I may. A market value by the
nature of the word "market value" means that the market
will determine an open and fair value for that. However, is it
not the case that, based on the information we have here in terms
of list prices, tenant discounts and purchaser discounts, if we
took an average property that was doing something around 10 kegs
a week, 520 kegs a year, the market values would then be skewed
upwards in terms of a value of a property that went from tied
to free, and therefore the value of the rent would go from x
to y, and potentially some of that £10,000 a year
that would have been paid in barrelage would then be added to
the rent? What would be your view on that?
Karl Harrison:
I am trying to understand the entirety of the question there.
Are you asking whether free-of-tie operators can secure the same
prices operating free of tie? Is that what you are saying?
Q257 Ian Murray: No;
the free of tie would obviously be able to secure better prices
I would guess. The point I am making is that the business model
for a pubco—or not necessarily a pubco but any tenanted
business—is based on the fact of a rent payable by the tenant
plus the differential between a list price, the price the tenant
pays and the price the pubco buys the product in at, and could
that balance of those two be added to a market value rate?
Karl Harrison:
Simon is a chartered surveyor and was involved in the process
of establishing the new guidance for the RICS, which takes account
of this I think.
Simon Clarke: Yes,
you are quite right. The valuation model requires the valuer
to consider gross profit. Gross profit would be a direct result
of the price you are paying for the beer and the price you are
selling the beer. Clearly, if you are buying the beer cheaper,
free of tie, you are going to make a better gross profit. The
end result would be a higher rent, potentially. A really simple
example—and I have used it many times—is my own pub.
My rent at the moment is around £50,000. I am doing, say,
400 barrels. The pub company is making around about £200 a
barrel profit on that. They are getting another £80,000
in revenue on that. We are looking at round about, in these numbers,
£130,000 income. If I went free of tie and were able to
go free of tie, I would envisage my rent would go up to maybe
£65,000 for example—do not hold me to that, Mr Tuppen—but
at the same time I would then be able to go out and get my own
discounts, and I would expect I could achieve somewhere to the
order of £180- to £200-a-barrel discount. My actual
income would be significantly better, and yes my rent would go
up somewhat, but in the overall scheme of things the revenue that
is going to the pub company would diminish. It is the sharing
of the profit.
Q258 Ian Murray: The
reason I ask that question is, if we use the word "market",
any major high street bank at the moment will not lend, in the
main, to a small business who wants to purchase or raise capital
for a tenanted property, but will for a free of tie.
Simon Clarke: It
highlights it to a degree. The closure rate is something you
hear about a lot: pubs physically closing. What you do not see
anything of is the churn rate of tenants, and the churn rate within
the tied estates is huge. Neil Robertson only a few months ago
was quoted in The Morning Advertiser saying that one pub
company foresaw that the introduction of BDM training would reduce
their churn from 65% in 18 months down to possibly 35%. Now that
in itself tells you it is the businesses that are closing, not
the pubs, in this instance. So in a bank's situation, why would
you lend money to something that almost certainly is going to
fail within an 18month to twoyear period?
Q259 Ian Murray: The
point being in a slightly less riskaverse banking sector
they are turning away from tenanted small businesses.
Simon Clarke: Yes,
absolutely.
Karl Harrison:
Can I just touch on that point very quickly about bankers? We
are talking to banks about lending to tenanted operators, and
also discussing that with Neil Robertson
and the BII and trying to get some of that
to happen.
Q260 Chair: Can you
be brief?
Karl Harrison:
I will be very, very brief. The banks essentially look at their
tie model; the pubco is removing from that particular tenant an
excessive amount of money, so they are not going to be able to
service the debts that they would be taking on. It is a big issue.
So, if the tenants can secure the right price to buy the pub
off the pubco such that they can go free of tie, then yes, you
are absolutely right—the bank will look to lend to them.
That is a growing market, particularly as companies like Punch
Taverns are looking to divest themselves of 2,500 pubs.
Q261 Mr Binley: I
was a little confused by your argument. You said that your rent
would go up, if you are free of tie, from £50,000 to £65,000.
My guess is your property is worth about £1 million, perhaps
a bit over, and I would have thought that any property company
would have wanted a 10% return on that property, making that rent
£100,000. So how do you get £65,000?
Simon Clarke: The
65,000 is purely based on the RICS guidance—and this goes
to the heart of Mr Zahawi's—
Q262 Mr Binley: I
am coming to that later
Simon Clarke: It
requires the valuer to look at the likely fair maintainable
trade for a reasonably efficient operator—not
necessarily me; I may be good or bad. With a reasonably efficient
operator's turnover, you then apply a gross profit that is relatively
easily calculated, knowing how much the price of the beer is and
how much you can sell it for. You take costs away from that,
hopefully with reference to ALMR's benchmarking, and you end up
with a net profit before rent that is then divided between the
parties. The £65,000 would be a simple split of the net
profit before rent, which I would suggest, using that system,
would be something to the order of about £130,000. If you
were going to buy that pub, I would suggest that you would not
buy that pub for over £1 million. It would be a situation
where you would not be getting 10% from it. If you were to knock
the pub down and rebuild it into flats, which is quite often the
case, then, yes, you would. There is a pub right opposite me
that has just been sold for £1.6 million for redevelopment.
Karl Harrison:
Can I simplify it? The capital value of the building is determined
by the rent, not the other way round. So, it is what rent you
can achieve and then the yield you would apply will arrive at
the capital value, and it will probably be about 7.5% as a yield.
Mr Binley: I am happy
to have that answer.
Q263 Mr Ward: I
would just invite Mr Benner to make a contribution, because you
describe the tied pub sales as being economically unviable businesses
and would you just like to contribute?
Mike Benner: Well,
we have heard quite a lot about this already from Mr Harrison;
it is the £6 billion question, isn't it? I would say
that the industry is already at crisis point and we should not
be too concerned about unintended consequences from the pubcos
disappearing. There are 25 pubs closing every week. Thousands
of pubs have closed in the last few years already and we are already
seeing a situation where lots of pubs are coming on the market
from the pubcos—2,500 or so from Punch Taverns alone, and
an accelerated rate of sales from Enterprise Inns. But the key
issue of course is at that pub level, and we are still seeing
a situation where rents are too high, the wholesale beer prices
are too high, the tenants are not making enough money and they
are unable to invest in their business. Then they enter this
spiral of decline where consumers lose out because the amenity
is not there and the pub eventually closes.
In the ALMR's research it shows that the capex investment
in tied pubs is half what it is in freeoftie pubs,
which demonstrates the problem. Next week some independent research
is coming out that will show that the financial weakness of the
tiedpub model is leading to nearly half of licensees still
earning less than £15,000 and often that is for a couple.
Now, that does not look like a sustainable business model to
me, and only by opening up the market and allowing it to operate
freely is that going to change.
Q264 Chair: You have
just mentioned research—who is releasing this?
Mike Benner: It
is the Institute for Public Policy Research.
Q265 Mr Ward: You
mentioned a spiral of decline: can we just link that with another
question, which is to do with the minimum purchasing obligations,
which, as I understand it, is where there is an increase in the
price as sales fall. Is that something that is having an impact?
Simon Clarke: Minimum
purchase obligations are actually a situation where the tenant
is required to purchase a certain amount of beer from their tied
supplier on an annual basis. These practically died out voluntarily
back in the days when undertakings were given to the European
Competition Commission to seek to get through block exemption
of vertical agreements. The problem is that they died out then
and they have just recently started to become resurrected, and
I would suggest that a great deal of the time offered to pubcos
and brewers to offer the reforms that the Committee has asked
for has been spent seeking ways to circumvent those recommendations.
Indeed under the RICS guidance the minimum purchase obligation
would be one and it seems to me that that, combined with inflationary
increases, which you mentioned earlier, would be a bit of a recipe
for disaster in a declining market where the beer volume sales
are in decline. It does not portray, to me certainly, that this
is a situation where a business partner is offering to share the
pain, when they are putting a tenant in the situation where their
rent is going to be going up annually and they are going to be
penalised if they do not buy beer that potentially they cannot
sell.
Q266 Mr Binley: I
specifically want to get confirmation or otherwise from Kate,
who is Strategic Affairs Director of ALMR, Secretary of IPC.
You will know that we have had evidence to the effect that Enterprise
Inns state on their example an operating cost of 35%. You will
know that it is said they carried out their own survey, which
showed costs of between 42% and 51%, and I maintained that that
is totally misleading ingoing new tenants who know little about
the business to the point of being more than dishonest, and I
am choosing my words very carefully. Bearing in mind that your
own survey of operating costs was north of 40% by some considerable
margin, can you confirm what I have stated just now? Do you know
of tenants who have found themselves in that specific situation—being
given a cost base of 35% when actually the costs were closer to
50% and certainly over 40%.
Kate Nicholls:
Yes, we have cases raised with us on a regular basis. ALMR runs
a legal helpline through its offices. We have cases raised with
us where they have rent reviews coming in with costs well below
that. I think in only 13% of cases have you got an accurate reflection
of operating costs in the cases that we have had sent to ALMR.
Enterprise Inns is one of the few pub companies who have met
us to discuss the benchmarking data that we provide. Last summer
I met Rob May to discuss it and he brought with him and shared
with me and left with me an extract from Milestone's openbook
accounting from their own tenants, which has the details of the
operating costs, to see if we could compare figures to see whether
there was any way in which we could collaborate. That data does
show operating costs on average for their lowest performing estate
of between 42% and 51% of turnover.
Q267 Mr Binley: So
the information that was on their last interim accounts showing
operating costs of 35% in their example is, to say the least,
misleading, and, to say the worst, immensely harmful to the state
of the trade?
Kate Nicholls:
In five years of doing a benchmarking survey and gathering information
from lessees, I have not seen an operating cost as low as that.
Q268 Mr Binley: I
am grateful. One final question: the repudiation of that by Mr
Tuppen of Enterprise Inns was not as you would understand it?
The situation was that his repudiation was incorrect?
Kate Nicholls:
I am sure that the information given was given in good faith;
I am sure that lots of tenants take it at face value and take
it on good faith and make commercial decisions based on that assumption,
because it was a public document presented to the City.
Q269 Mr Binley: But
it was in your experience, from the information you have had from
tenants, incorrect?
Kate Nicholls:
Yes.
Mr Binley: I am grateful
to you.
Q270 Chair: I would
just pursue one angle to this, because we were assured that all
this, in effect, was validated by RICSqualified valuers.
What is the problem? Do you know?
Kate Nicholls:
I do not think the problem is with the existence or otherwise
of a national database. We have the national database that we
need on the key rental variable. The issue is to do with the
acceptance of it and its use and practical application. At the
moment the problem is the codes of practice are badly drafted
in this area; they do not meet the clear commitment that was given
to your predecessor committee to completely abide. So, surveyors
and BDMs are able to have regard to the RICS guidance. They do
not have to explain why they deviated from it. They do not have
to demonstrate that they have read it or used it; they can still
come up with an idea and say, "This is what we assume the
FMT to be; this is what we assume the operating cost to be."
They are not obliged to provide any evidence. The RICS guidance
and the codes say there should be reference to the ALMR benchmarking
survey or other industry benchmark, but if you want to deviate
from it there is no obligation to explain why you have deviated.
Q271 Chair: I am
an innocent in this respect. It would seem to me that if you
were an RICS-qualified valuer and you had guidance, then any valuation
you did would have to be demonstrably in accordance with that
guidance? Is this not happening?
Kate Nicholls:
If it was my professional reputation on the line, I would want
to be sure that I was following guidance to the letter and to
the spirit.
Simon Clarke: Could
I just add to that? This is one of the issues that I obviously
have with Enterprise Inns over the issue of benchmarking. I am
told by David Morgan, also a chartered surveyor, that he has put
a submission in to you. I do not know the content of that, but
I believe that contains many examples where apparently benchmarking
has been ignored. I think one of the reasons for the difficulty
we have is—and it was explained by Mr Rusholme last week—they
are only in a position to enforce it against chartered surveyors,
and today is the first day I have actually heard that they had
been signed off by chartered surveyors at Enterprise Inns. We
have complaints in at the moment with the BII; as Mr Tuppen mentioned
earlier I have one in with them at the moment, and I know Mr Morgan
does and obviously last week you heard of other examples from
Mr Mallen. Now that I know that an RICS surveyor has signed those
off I am in a position now to take that to another level with
the RICS, which I intend to do.
Q272 Chair: Would
you keep us in touch with that particular action?
Simon Clarke: Absolutely.
Chair: I think it is fair
to say that arising out of this dialogue Enterprise Inns may give
us further information.
Q273 Mr Binley: We
heard last week from RICS that there had been no progress on the
national register of rents or on the industry costs register.
Can I ask you, Kate, as a representative of ALMR, can you update
us on the ALMR benchmarking survey and what the pub companies
and BBPA's reaction has been to it? Can I ask: have pub companies
worked with you on this?
Kate Nicholls:
Okay. Can I take the opportunity to correct some of the misinformation
that was given in the previous session about the ALMR benchmarking
survey?
Q274 Mr Binley: I
think we would be delighted.
Q275 Chair: That
is why you are here.
Kate Nicholls:
It has been running for five years. We started doing a preliminary
analysis in 2006 to set it up, so we just published earlier this
week the fifth round of data, so we have quite robust data that
goes back. We can provide historical trends and we can provide
detailed analysis. Punch does not contribute information to the
database. I would be very pleased for them to do so either as
Spirit or as the Punch pub company if they have openbook
accounting that their tenants are willing to share with us.
Thirdly, I keep saying this—I think I have
said it for the past two years—it is not a database with
managed operators in it. If it had Mitchells & Butlers and
Spirit providing the data I could just about understand why there
might be reservations about comparables. The data that is provided
is from lessees: individual and multiple. It comes across the
whole range of the industry but at its heart are operators of
a mixed series of estates: we have freehold, we have tenancy,
leasehold, commercial leases to allow us to compare commercial
leases with industry leases. I am not quite sure what the problem
is in having managed operators in the database, because we could
control it and have it separated out in any case, and it does
provide a useful comparable. That is the purpose of a benchmarking
database: to provide comparable data so you can take your specific
case and look at it and say, "Is it fair in the marketplace?
Am I just worse at controlling my costs?"
The data is split by size of operator, so you can
identify individuals, micro businesses, small businesses, all
the way up, and it is split by trading style, so you can look
at your cost structure whether you are a wetled community
local or a foodled operator and you can provide some benchmarks
across there. It is also a sort of general state of the nation
survey, so it provides us with some very useful information and
trends on the way the market is going, the type of pub operators
we have and wet sales versus food in the industry, so you can
plot all of that back. So that, in an nutshell, is the ALMR.
The fifth survey that we have done is the most robust
and comprehensive to date and we have the biggest participation
of individual lessees to date.
Q276 Chair: Just
very briefly—you are waxing very eloquent.
Kate Nicholls:
Sorry. In terms of relationship with the pubcos and the BBPA,
I offer to meet them twice a year. First, just when the survey
goes out, to ask people and invite them and say, "Can I come
and talk to you about how you can participate in the survey?"
Second, when it is published: "Can I please explain to you
the nature of the results?" I think the fact that you had
all of those misunderstandings about the nature of the survey
presented to you is testament to the fact that those discussions
have not happened. I can go back through my files and have the
details of when I have offered to meet and there has been no meeting.
Chair: Okay. We will
not go there for the moment.
Q277 Mr Binley: I
will try to be brief but this is very important, because this
predecessor committee said that this register should happen.
The BBPA knew of your survey, because it has been going for five
years; they knew they could get important information relatively
quickly and yet they did not approach you.
Kate Nicholls:
No, the approaches have all been one way. I have offered on several
occasions to explain to them the results.
Q278 Mr Binley: Does
that suggest to you there is a deliberate unwillingness not to
abide by the instructions of our predecessor committee?
Kate Nicholls:
Yes.
Mr Binley: Thank you.
Chair: I would appreciate
if there were not prompting from the audience.
Q279 Mr Binley: Should
I put that again without prompting?
Kate Nicholls:
You would have had the same answer prompted or unprompted.
Mr Binley: I am most grateful.
Kate Nicholls:
I did not hear any prompting.
Q280 Dan Jarvis: Just
specifically on the area of mediation and dispute resolution,
can I just ask you to comment on the relationship between lessees
and the pub companies? I think I know what your answer to this
is going to be, but are there still instances of an overmuscular
approach as was alluded to by the BII a week ago?
Simon Clarke: My
definition of that, and I think I speak probably for most of the
members of IPC—probably all; I am not sure—is that
overmuscular means intimidation, threatening and bullying,
which we are seeing on a fairly wholesale basis. The BII has
a difficult role to fulfil in that they have got the existing
code that is hideously inadequate in our view, and therefore the
primary issues that started this inquiry, tenant profitability
and abuse of tenants, are not touched in those codes. As a result
the BII is, to its credit, referring anybody who comes to them
with those complaints to members of IPC—not just Fair Pint—I
know the GOMV, Justice for Licensees and the ALMR are all having
the same complaints and problems. I think the fact that mediation
has been created is very indicative of the fact that the code
has a great deal of flaws, and if the code was adequate enough
and enforced properly there probably would not be as much need
for mediation. The very fact it has been introduced so quickly
after the code has been published is, I think, indicative of the
absence of conditions within the code.
Q281 Dan Jarvis: Can
I follow up by asking you about that mediation: is it enough,
in your view, in its current form, and if it is not, what else
is needed?
Simon Clarke: If
I can just let Karl go on that, because he is probably more experienced
in it than I.
Karl Harrison:
I have been involved alongside Simon in one of those mediations.
As I said at the beginning, I was a member and am now a member
of the BIIBAS accreditation committee and, as we said earlier,
we have a weak code accredited on a very, very limited basis.
So, we are now going beyond enforcing the code because we are
having to look at mediation for things that are surrounding the
code—some within the code; partially one or the other—and
we still have the BII, in good faith, trying to deal with that.
Ultimately it is not independent; it claims to be impartial,
but it needs to demonstrate that independence.
The mediation I saw was organised by the BII. There
was some intention by the pub company involved to arrive at a
conclusion. Part of the conclusion was arrived at and immediately
following that there was more overmuscular action with the
tenant in relation to what I considered, having seen all the details,
to be a blatantly false allegation of buying out in breach of
contract. So it needs, as we have said and as Mike has indicated,
firm enforcement by a truly independent policeman. The BII cannot
demonstrate that independence in its current form. It may be
able to do so in a different form—I do not know—but
it cannot do it at the moment. There is still a connection there
that perhaps means that it cannot enforce and it certainly does
not have the teeth to do so.
So it is nice to sit around a table and chat about
a solution, but ultimately if one party on one side of the table
is a small tenant spending their own money to be there—perhaps
spending their own money on surveying support or legal support—against
a company with many millions at its disposal then there is an
imbalance there, and that balance needs to be rectified and put
on a more even footing by a proper code. What we have recommended,
and what the Committee has done and your predecessors to date,
is the right way to go.
Q282 Chair: Earlier
I put the question to the previous panel: is one possible answer
to this basically what I would call a pub code adjudicator? What
is the feeling of the panel?
Simon Clarke: Yes.
Kate Nicholls:
If you have a statutory code, if the code is put on a statutory
footing, it becomes, without question and without any shadow of
doubt, legally enforceable, finally and fully in the courts.
The other alternative is to have an ombudsman. I have worked
on a self-regulatory scheme and sat on the board of a self-regulatory
scheme that does have access to an ombudsman above and beyond
the tier of regulation that the BII provides, almost an upper
appeal. The key thing is, if you put it on a statutory footing
and you put in place a stronger code that contains elements that
they must deliver, there is a real commercial deterrent to police
your own behaviour and to root out bad practice throughout your
company wherever it exists and to root out any abuses. The ultimate
threat is that your lessee will walk away and turn to a freeoftie
agreement. You will do everything in your power, therefore, to
try to remedy your behaviour, your relationship with that lessee,
and make sure that both sides get a fair share of the economic
benefit. That is all we are asking for; we are not asking for
one person to get more than the other, just a fair share.
Q283 Chair: So if
I understand you right, your preference is for a legally binding
code.
Kate Nicholls:
Yes.
Q284 Mr Binley: Not
with an adjudicator?
Kate Nicholls:
You could have both
Q285 Mr Binley: That
is what I was thinking.
Kate Nicholls:
It does not have to be either or.
Q286 Chair: But equally
you could have a voluntary code with an adjudicator with the ability
to enforce?
Kate Nicholls:
If you had the voluntary code that we have got at the moment and
you put in an adjudicator and enforcement powers, please can I
leave you in no doubt: that would not change a thing. The problem
is the code is vague, weak, badly drafted and it does not deal
with the key commercial elements.
Q287 Chair: Right.
Could I slightly amend that? With an amended, strengthened code
that was voluntary and an adjudicator, do you think that would
work?
Kate Nicholls:
Given the length of time that we have all spent discussing this
and the fact that we are no further forward than we were in 2004,
the only answer is a statutory code. That is the only thing that
will change behaviour and deliver meaningful reform.
Q288 Chair: The downside
of a statutory code is, of course, the enforcement of it and the
expense of enforcement, and that can apply either way. Could
not that act as a disincentive in itself for people to want, in
effect, to challenge the pub companies?
Kate Nicholls:
I do not think it will because, as I say, if you have got a very
clear statutory code that everybody is aware of, you have self-policing.
It becomes a light-touch regulatory reform and it opens up the
relationship to the market forces that are at play and delivers
fairness in that way. So I do not see why it should be unduly
burdensome.
Q289 Chair: What
I am saying is that when you have a statutory code, even though
it may be quite clear—and I accept your point that pub companies
may well be much more circumspect of any potential breach of that
code—in the event of a dispute the tenant is at a much greater
financial disadvantage in prosecuting that through courts of law
than the pub companies.
Karl Harrison:
The legal process includes provisions for mediation in any event,
as you know, so there is always an opportunity for parties to
mediate and, in fact, as you know, the courts encourage parties
to settle and to mediate in advance. That is always an option,
and people can continue to discuss. Whether or not that has to
be with a formal person who is going to do that, in the form of
arbitration or adjudication as you are suggesting, certainly the
statutory way forward is the way forward.
Kate Nicholls:
I take your point that it is a long process and you need some
deep pockets to take things to court, but the other advantage
is that, if you do, at the end of it you have a final decision
that is robust, binding on all the parties and that everybody
can use going forward as precedent. So you only would have to
take a small number of test cases in order to get some clarity
on some of these key issues, if there are any outstanding key
issues.
Q290 Chair: Would
you back anybody to do so?
Kate Nicholls:
Personally?
Q291 Chair: Your
organisations.
Kate Nicholls:
If they had a strong case I would do whatever I could to assist
in that process. We have done that in the past, where we have
taken cases against councils collectively as an industry. We
did when I worked with a small group of lessees in Westminster.
We did the same thing when we were challenging decisions of the
council. That was on licensing and planning, but the point remains
that where there is a will, collectively, to get a ruling, to
get decision—what small businesses want more than anything
else is stability and clarity—if you have got a ruling from
the courts you have got that. You have a stable basis on which
to build your business, grow forward, invest and deliver a healthy
return.
Karl Harrison:
The position at the moment is that some of the pub companies—and
I am going to single out Enterprise Inns here—are particularly
legally heavy handed, so the legal cost issue is there now. I
have just been assisting a tenant of Enterprise Inns, trying to
resolve a position where, in the final analysis the claim—and
this is in the High Court as well—amounted to under £4,000
and Enterprise Inn's cost claim was £54,000 against the tenant.
This is very common; why have a discussion when a High Court
Injunction will do? That is one of the problems. So the idea
that keeping on a self-regulatory, voluntary basis is of less
cost to the tenant I think is probably wrong.
Q292 Simon Kirby: Perhaps
I might play devil's advocate: is there not an argument that the
tie actually helps lessees, insofar as that it puts a traderelated
variable to what is after all a total rent. Does it not help
people in times of difficulty when trade drops, and therefore
the overall rent drops?
Karl Harrison:
Isn't that assuming that the dry rent is less than what the open-market
rent would be in any event, which in our experience it very often,
and probably usually, is not?
Kate Nicholls:
Can I just come back on that? That may well be correct, and I
am sure that in certain cases the tie is extremely beneficial
and helps an individual lessee. That is why nobody is saying
abolish it; nobody is saying, "Force these companies to make
people free of tie." If the choice is available and the
option is there, if they do deliver those benefits nobody will
go free of tie.
Mike Benner: Can
I add to that as well? In the last session we talked about whether
the tied tenant should be no worse off than free-of- tie tenants.
Well, surely, if the pubco tie is so great, they should be better
off, so that principle should be welcomed. I think that this
is a matter of the industry earning the tie, and the best way
of them being able to do that is through a genuine freeoftie
option. Let the licensees, the entrepreneurs, choose what they
want.
Q293 Mr Binley: Just
a quick one: there is one area where the tie has relevance and
that is in terms of a person being able to start their own business
at less cost than might otherwise have been the case. Given that
there was a proper relationship between the pub co and the tenant,
that is an advantage, isn't it, but it is no advantage if new,
ingoing tenants are being totally misled as to the reality of
the situation. Is that the case or would you correct me in any
sense?
Kate Nicholls:
In a nutshell. The real genuine point of low-cost entry is a
brewery tenancy, which is only three years. You are limited as
to the risk that you are exposing yourself to. The problem is
where you get people signing up to very longterm agreements
that are fully repairing and insuring, and therefore expose themselves
to a greater degree of risk. It is the balance between risk and
reward that is at the heart of this.
Q294 Chair: Thanks
very much. Just one question I think that I would like to finish
on: going back to the issue of benchmarking, one argument given
to us last week for why benchmarking survey had not been expanded
was cost. How much does your benchmarking survey cost the ALMR
to run?
Kate Nicholls:
It costs us £5,000 a year to run.
Q295 Chair: Interesting.
Thank you.
Q296 Simon Kirby: On
the benchmarking, does it benchmark likely income as well as likely
costs?
Kate Nicholls:
No; it looks exclusively at costs and it asks for information
about costs as a percentage of turnover. We deliberately did
it that way to reduce any concerns about commercial confidentiality,
about sensitivities. We also had a number of lessees who were
very fearful about giving us their data if they were giving us
absolute figures of turnover—that it might be used against
them. So we put in place a number of elements to reassure those
people. So, we ask about their turnover mix, "What proportion
of your turnover is wet, dry, accommodation, other, gaming?"
but we do not ask for absolute trading information; we just ask
for costs.
Q297 Simon Kirby: Why
I ask the question is that, from experience but also probably
logically, the most difficult thing to assess when you have a
business plan is the turnover, because you can have an idea of
your likely staffing costs and the rent and the discount you might
be able to obtain, but turnover is very difficult unless you are
really experienced and you have run pubs or you have run a number
of sites before. It is a very difficult thing to say, "Actually,
I am not going to achieve that turnover," and that is the
difficulty I would imagine people often are faced with.
Kate Nicholls:
It is, but it is not what they come to us about. They come to
us about the operating costs first and foremost because they know,
and the evidence that was presented last week showed, what a big
difference it can have on profitability of the business. If you
get it wrong by seven percentage points, it is the difference
between a £35,000 income and an £11,000 income, and
then it does not really matter what your turnover is.
The other point is that, yes, you can ask about FMT,
but that does not deal with the full turnover of the business
and it depends on from where you are deriving most of your income.
The reason we express it as a percentage of turnover is that
it helps to make things more understandable. You heard in the
last session about tied rents going down, but as a percentage
of turnover they are not going down, and it is as a percentage
of turnover that is the most relevant. That puts it in context
rather than your absolute figure about what your electricity bill
is.
Q298 Chair: Right.
That concludes our formal questions. Obviously we have had two
different panels and I think we might describe it as robust and
totally divergent opinions over a whole range of issues. It is
the job of the Committee to assess the validity of the points
that have been made. I am conscious of the fact that the pub
companies will have heard comments made about them at this meeting,
and I would repeat what I said earlier: the Committee will take
further evidence until the end of the month, and I would guess
the pub companies may well want to make some observations about
the comments that have been made about them at these meetings.
I do make it quite clear that there is an invitation for them
to do so, because they will have not had a chance to respond to
the individual points that have been made here publicly.
On that note, can I thank you? And again, if you
wish to submit any further evidence—I have a feeling that
you have not had a chance to cover one or two points that you
would like to—please feel free to do so. But can I thank
you for coming and helping us with our deliberations?
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