House of Commons - Pub Companies - Business, Innovation and Skills Committee

Pub Companies - Business, Innovation and Skills Committee Contents

3 The Framework Code and company codes

Introduction

29. The Framework Code and company codes set out for lessees the industry's 'rules of engagement': what can be expected from either side in a pub lease business arrangement. The previous Business, Innovation and Skills Committee in 2010, looked at the Framework Code when it was first published and made various recommendations. A year on we are now in the position to further scrutinise the content of the Framework Code, how this has been applied in the company codes, whether our predecessors' recommendations have been taken on board and how the codes are working in practice for lessees. We have been interested to find whether the words of intention have actually been translated into actions by the pub companies.

30. In this section we consider the new Framework Code and whether it has delivered the reforms which were intended through it and through the individual company codes. Where possible we have tried to follow the 'headings' of the BBPA's Framework Code.

Pub Company Obligations

31. The BBPA code makes clear that:

A full copy of the company's own Code of Practice must be provided to all new and existing tenants/lessees.

We were keen to find out whether once produced the pub companies were supplying copies of their codes to their lessees. As the IPC said:

The best self-regulatory regime in the world is meaningless unless those affected by it are aware of their rights and obligations, are able to insist upon them and know where to go when things go wrong. Only then can it act as a genuine deterrent against malpractice or bad behaviour.[31]

32. Mr Dixon told us that at every single Punch Roadshow the Director had begun with saying "This is our Bible; this is our code of practice".[32] In addition, he told us that Enterprise had made sure every single person had been given one. He did concede that the smaller family brewers had taken the process less seriously:

I would think there are a couple of little family brewers who went through the motions and just submitted something that was standard, and it has probably gone onto a shelf and has not been taken out.[33]

33. The BBPA/IPC survey indicated that 14% of new lessees and a third of existing lessees had not received a copy of their company's code.[34] The IPPR survey had similar results, it found that a third of the lessees it surveyed had not seen their pub company's revised code of practice and only 17% of those that had believed it would benefit them.[35]

34. We are worried by the results of both the BBPA/IPC and the IPPR surveys regarding the availability of pub company codes to their lessees. The fact that approximately a third of lessees in both surveys had not even seen a copy of their companies' codes is extremely concerning and runs contrary to what we had been told by the BBPA and its members. In addition, the results from the IPPR that only 17% of lessees that had seen their company's code of practice thought that it would benefit them should be of extreme concern to those in the industry that believe updated codes would be the cornerstone to rebuilding trust between pub companies and their lessees.

Pre-Entry Requirements

TRAINING

35. In response to the previous recommendations by our predecessor committees on the need for greater lessee advice and awareness, the Framework Code stated that a new lessee had to 'obtain accredited pre-entry training to enable them to evaluate and understand the contract they are seeking to enter into'.[36] The BII have now introduced Pre Entrance Awareness Training (PEAT) for lessees. Neil Robertson of BII explained to us that since October 2010 "no substantive agreement should be given where the tenants or lessees have not done PEAT, unless they are provably experienced in the industry".[37] He believed that PEAT was already delivering positive outcomes for the industry and cited feedback from one pub company director:

The quality of the questions he is now getting at interview following PEAT is far better. He says that they now have an understanding of the difference between the full repair and the partial repair, an understanding of what it means to be protected by the Landlord and Tenant Act and not protected.[38]

36. However, the IPC was concerned that not all new lessees had been given the training. Furthermore, the IPC believed that the results of the BBPA/IPC survey suggested that the training was being side-stepped through the ability to waiver training for experienced lessees.[39]

37. Our predecessor Committee acknowledged that not all lessees would need the training and that a waiver for some would be appropriate:

Experienced publicans should not have to undertake basic training when taking on a new lease. We therefore understand why a waiver has been included in the training clause of the Framework Code of Practice. It is vital that both of these clauses are applied rigorously. We will expect the BBPA to introduce a system to monitor use of the waiver and publish clear guidelines on its use by the end of August 2010.[40]

The BBPA provided us with the guidelines on the waiver which stated that:

The Framework Code recognises that there are, in limited circumstances, good reasons for a waiver to be applied of the requirement to either complete the training or take professional advice. Having consulted our members the guidance to members is as follows:

The only circumstances under which the waiver should apply are:

Applicant is a multiple retailer with a number of other tenanted/leased premises
Applicant can demonstrate at least three years recent experience of running a successful tenanted or leased pub business
Applicant is an existing successful lease or tenancy holder with the company

38. Neil Robertson explained:

It is a known principle within qualifications that people who have prior experience in whatever discipline won't need to do it. We estimated that 15% of new agreements would be given to people who had sufficient prior experience. It is for the pub companies to show that they have established that there was sufficient prior experience to our satisfaction.[41]

39. However the BBPA/IPC survey found that one in five (20% as opposed to the 15% estimation) of new lessees were not required to take the pre-entry training but only 3% had had this requirement formally waived.[42] The BBPA recognised that the results of the survey were worrying and indicated that:

This process is not as formal as we would like and the BBPA will investigate further on procedures that could be put in place to make it clearer that the waiver had been applied.[43]

40. We welcome the Pre Entrance Awareness Training which should better prepare potential new lessees taking on a pub. We also agree that a waiver is necessary to avoid unnecessary training for lessees with prior industry experience. However, the training is inadequate. In addition, we have concerns over the creeping informality of the granting of waivers. This is not what we would have wished to see and it needs swift remedial action to ensure that waivers are only granted on a formal and recorded basis.

PROFESSIONAL ADVICE

41. The 2004 Trade and Industry Committee Report highlighted a concern that lessees were making important business decisions without taking professional advice and stated that evidence received suggested that "prospective tenants were not being provided with the quantity or quality of information needed to make a rational decision on the merits of a lease proposal.[44] That Committee concluded that:

We believe that many of the disputes which arise between pubcos and their tenants would be eliminated if pubcos insisted as a condition of acceptance that tenants obtained all necessary professional advice. This should be one element of an industrywide code of practice. [...] In the long run, ensuring that tenants know exactly what they are committing themselves to when they take on a lease will be to the benefit of the reputable pubco itself, as well as to its tenants.[45]

42. In response to this concern, the BBPA included in the Framework Code a clause to ensure that prospective lessees:

Demonstrate they have taken proper independent professional advice prior to accepting a tenancy/lease (and during the operation of the tenancy/lease whenever the need arises);[46]

43. Neil Robertson, the BII's Chief Executive informed us that the BII had now established a panel of advisers which was "quality assured" so that lessees could be confident of getting the right professional advice.[47]

44. However the BBPA/ IPC survey found that

half of all new lessees had not been asked to provide evidence of having taken professional advice; and
18% of new lessees had not been advised by their pub company to take professional advice[48]

45. We welcome the inclusion in the Framework Code of a requirement on a new lessee to take professional advice. However, survey data indicates some new lessees continue to enter the industry without fulfilling this requirement. BBPA/IPC survey data indicates that pub companies are not requesting proof that such advice has been taken. This fundamentally undermines a key requirement in the Framework Code.

Minimum Requirements for Company Codes

46. The Framework Code states that the key principle of the codes is to:

Ensure sufficient information is provided to enable the "reasonably competent operator " to understand the nature of the pub business being offered and how this will be embodied in a tenancy or lease agreement.[49]

47. However, in a June 2011 All Party Parliamentary Save the Pub group meeting, Neil Robertson, Chief Executive of the BII acknowledged that new tenants' understanding of the business model remained poor, despite the introduction of the new codes:

I am despondent in that…I suspect we are now back at four or five (out of 10) not fully understanding the business model…but that is the complication of the industry and we will work hard to improve that further.[50]

This suspicion was born out in the BBPA/IPC survey results which found that:

Only 30% of new lessees and 24% of existing lessees thought that the range of different business opportunities offered had been explained to them; and
23% of new lessees still did not understand the options being presented to them.

48. The Framework Code also said that a lessee should be provided with a full copy of the lease and heads of terms agreement before they are asked to sign any commitment. However the BBPA/IPC survey found that 18% had not been.[51]

Terms of Business

FLOW MONITORING EQUIPMENT

49. The 2009 Business and Enterprise Report found:

It is entirely legitimate for a company to seek to ensure that the other party to a contract respects its terms. However, we believe that where a measurement device is used to police this, it should be properly calibrated, and subject to external verification. If necessary, the Weights and Measures Act 1985 should be amended to ensure this. Furthermore, given the impossibility of distinguishing between beer dispensed and sold, beer run off and disposed of preparatory to serving, and water used to clean the lines, we believe pubcos should not be allowed to rely on data from Brulines equipment to enforce claims against lessees accused of buying outside the tie.[52]

50. The Framework Code was up-dated to say:

Pub companies to develop a protocol setting out the terms under which flow monitoring equipment may be installed and any further prima facie evidence available.[53]

51. The 2010 Report commented:

We welcome the inclusion in the Framework Code of the need for additional evidence above and beyond the data from flow monitoring equipment in any accusation of buying outside of the tie. However, such evidence must be physical evidence and not merely a signed 'confession' by the lessee. In relation to fines being taken by direct debit, without the authorisation of lessees, the BBPA must give public and unambiguous direction to its members that such a practice is incompatible with BBPA membership.[54]

And:

The accuracy of data from flow monitoring equipment and the analysis of that data are highly contentious issues. Flow monitoring equipment could be a helpful tool, for both pub companies and lessees but only if it is reliable and has the confidence of both sides. Clearly this is not the case at the moment. We recommend that the Government, through the National Measurement Office, urgently clarifies the position of beer flow monitoring equipment in relation to the Weights and Measures Act 1985. Such equipment must be included under the Act for calibration and verification purposes.[55]

52. The 2010 Government Response said:

It is right that monitoring equipment of this type should be accurate and reliable. Government is clear that the industry should voluntarily ensure that all such measuring equipment is calibrated by the National Measurements Office. However should the industry fail to do so within a reasonable timeframe this will result in Government prescribing the equipment to ensure fairness.[56]

53. Fair Pint have reported to the Committee that the BII have confirmed there is no inclusion of a mandatory requirement for additional evidence, above and beyond the data from flow monitoring equipment, in any accusation of buying outside of the tie.[57] It highlighted Enterprise Inn's code which it argued simply requires that, if suspected of buying out, the tenant should produce their confidential trading information for inspection and that failure to comply may result in a fine with no additional evidence to support the accusation other than the data from flow monitoring equipment.[58] Fair Pint argue that lessees are reluctant to disclose this confidential trading information as it may be used inappropriately as a basis for the assessment of rent at review or lease renewal.[59]

54. In response Mr Tuppen, Chief Executive of Enterprise Inns told us:

Despite frequent attempts by [Fair Pint] to distort and mislead on matters relating to flow monitoring equipment, no evidence has ever been produced to support FP's contentions in this regard.[60]

55. There is obviously still a dispute over flow monitoring equipment and its use in accusations of buying-out which the Framework Code has failed to address. In addition, there is still confusion over whether it can be proved to be 'in use for trade' and therefore covered by Weights and Measures Act 1985. Unfortunately, it is clear that little, if any, progress has been made in resolving this problem. We conclude that the Code does not address this in a satisfactory manner and does not meet our predecessor's recommendation.

Rent Assessment

56. Pub rental assessments are far from straightforward as has been discussed in our predecessors' Reports. Rent is based on a division of the 'fair maintainable trade' that a 'reasonably competent operator' could produce. Because of the complications involved in assessing rent our predecessors made many recommendations on this matter to both the Royal Institution of Chartered Surveyors (RICS) who set the guidelines on how rent is to be assessed, and to the BBPA and pub companies on how this guidance should be followed.

57. The 2009 Report made clear recommendations to RICS that improvements to its guidance were necessary. RICS accepted the findings of the 2009 Report, and the 2010 Report recognised that action was being taken. The 2010 Report also made it clear that the BBPA should entrench the RICS guidance in its Framework Code:

We welcome the progress being made by RICS to address the shortcomings of its existing guidance, and we expect the BBPA to deliver on its undertaking to "completely abide" by the new guidance when it is published.
We expect the BBPA and its constituent members to endorse the RICS Code of Practice for valuing pubs and to enshrine it into the BBPA Framework Code of Practice and individual company codes. [61]

58. Following on from the Committee's 2009 recommendation the new Framework Code said:

The guidelines for rent assessment are established by an independent body (RICS) and applied to all leases and tenancies.[62]

59. We invited David Rusholme, Chair of the Trade Valuation Group, RICS, to update us on the new guidance. He informed us that "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".[63] Mr Mallen, a multiple lessee and independent pub valuer, agreed that the new guidance represented an improvement. However, he argued that this positive development was being undermined by the fact that pub companies did not follow it:

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.[64]

60. Mr Rusholme argued that there was "not an avalanche—there is not even a trickle—of complaints coming in about non compliance of our members in using the guidance".[65] However, as Mr Mallen explained:

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 [pub companies Business Development Managers],[66] 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.[67]

This description was refuted by the pub companies. Ted Tuppen, Chief Executive of Enterprise Inns told us that in his company, all of his new regional managers have a "full two days of their induction given over to rent calculations".[68] Furthermore, he explained that since September 2010:[69]

RICS accredited, fully qualified, chartered surveyor members of RICS [...] run regular training courses, workshops for our BDMs, they visit every divisional business unit—which is 400 or 500 pubs—every six weeks to bring people up to date with any latest developments that they feel are necessary, and during that period they conduct workshops where necessary.[70]

61. Ms Nicholls, Secretary of the IPC, gave her assessment of where the problem may lie:

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[71] 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.[72]

62. We recognise the fact that many BDMs are not RICS members but they do work for employees of pub companies who are RICS members. For example, the National Rent Controller for Enterprise Inns is a RICS Member. We asked Mr Rusholme if Enterprise's National Rent Controller was therefore responsible as a member of RICS for the rents that those under his supervision evaluate. He told us:

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.[73]

Mr Tuppen told us that:

We have RICS-qualified licensed-trade valuers, as we call them, who evaluate in detail every single rent bid. There is not a rent bid that hits the market without being reviewed by our RICS valuers.[74]

He also said:

Within our business we do in fact have—and I checked yesterday—30 RICS-qualified people, so about 7% or 8% of our workforce. Many of those are surveyors and the like. There is plenty of RICS knowledge and experience.[75]

63. We questioned Mr Rusholme on how awareness of the guidance could be improved if, as Mr Mallen claimed, knowledge of its existence in the industry was poor. He told us:

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. [...] 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. [...]

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.[76]

64. The improved RICS guidance was one of the few positive messages to come out of the 2010 Report on Pub Companies. The continued disagreements between lessees and the pub companies on the level of adherence to that guidance is therefore a major point of concern. RICS must investigate as a matter of urgency whether its members are signing off rent reviews which have been prepared without clear application of its RICS guidance or benchmarked costs and to report back its findings to us. In addition, to ensure that RICS guidance is being followed it is paramount that both those assessing rent and those whose rent is being assessed are aware of the guidance. RICS, BII and the BBPA have shown themselves unable to enforce adherence to the guidance.

A TIED TENANT SHOULD BE NO WORSE OFF THAN A FREE OF TIE TENANT

65. The 2010 Report concluded that:

The acid test of its [RICS] success will be the extent to which the new guidance provides clarity on valuations and the principle that a tied tenant should be no worse off than a free of tie tenant. This should facilitate clearer discussion on what constitutes a countervailing benefit. If it does, then the guidance will represent a significant step forward in resolving a number of our concerns.

We asked Mr Rusholme if this had been achieved. He told us:

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.[77]

66. However, there still seems to be confusion within the industry on this point. Mr Tuppen told us that the theory was:

Not referred to anywhere in the RICS guidance; in fact, on the contrary, the RICS guidance said that comparisons between tied tenants and free-of-tie tenants are about as relevant as between tied tenants and fish-and-chip shops. They are different businesses, and the comparisons should be made between businesses of a similar type. [...] But the RICS guidance makes no reference to tied tenants being no worse off, as far as I can see.

Mr Tuppen has since written to us with a clarification:

Can I be clear that these are not words used in the RICS guidance, merely my interpretation of their view in paragraph 7.21 of the guidance that comparability between tied and non-tied sectors is problematic and that it is preferable to compare transactions relating to similar properties with similar lease terms.[78]

67. Of particular concern to us is that two members of the RICS working group who updated the valuation guidance, Mr Rob May, National Rent Controller at Enterprise Inns, and Mr Simon Clarke, an Enterprise lessee and member of RICS, so vehemently disagree on the meaning of the wording on whether the tied tenant should be no worse off than a free of tie tenant. Mr Clarke has forwarded to us the open correspondence between him and Mr May to demonstrate the extent of the disagreement in relation to the rent of his own pub, The Eagle Ale House. Mr Clarke interprets the RICS wording as meaning that a tied tenant should be no worse off than a free of tie tenant when assessing rent whereas Mr May interprets the guidance in the same way as his Chief Executive, Mr Tuppen—that they are not comparable.[79] As Mr Clarke highlights to us this 'massive discrepancy' in guidance interpretation from two people who were involved in its drafting means it is imperative that RICS clarifies its position on the matter.[80]

68. It is deeply frustrating that within the industry there is still confusion over the status and interpretation of the principle that a tied tenant should be no worse off than a free of tie tenant when assessing rental valuations. This was a specific recommendation made to RICS. The on-going debate on whether this is being done and how the guidance is being interpreted is a demonstrable failure of RICS guidance. It also highlights the lack of willingness on both sides to resolve the matter to the benefit of the industry.

AWP MACHINE TIE

69. The Trade and Industry Committee's 2004 Report made two recommendations in respect of Amusement with Prizes (AWP) machines, which we set out below:

The machine tie improves tenants' takings from amusement with prizes machines (AWP). However, as free of machine tie tenants retain 100 percent of these takings as income, while tied tenants by pubcos' own admission receive an average 50 percent of these takings, it appears from the information the pubcos themselves submitted that in many cases free of tie tenants make more money from their second tier machines than tied tenants do from their more up-to-date models. In our opinion, pubcos do not add sufficient extra value from their deals to justify their claims to 50 percent of the takings from AWP machines. We remain unconvinced that the benefits of the AWP machine tie outweigh the income tenants forgo and we recommend that the AWP machine tie be removed.[81]

Pubcos' tenants, who are tied for AWP machines, pay higher rents for AWP machines than tenants who are not tied. This is due to pubcos' practice of extracting royalty payments from AWP operators to become a pubco's nominated supplier. We feel many tenants may not be aware of these arrangements. If the AWP machine tie is not to be removed quickly, there is no reason why pubcos could not immediately introduce more transparency about their contractual relationships with their nominated AWP operators.[82]

70. The Business and Enterprise Committee's 2009 Report returned to that recommendation and came to the following conclusion:

In 2004 the Trade and Industry Committee concluded that "In our opinion, pubcos do not add sufficient extra value from their deals to justify their claims to 50% of the takings from AWP machines. We remain unconvinced that the benefits of the AWP machine tie outweigh the income tenants forgo and we recommend that the AWP machine tie be removed." That conclusion remains valid.[83]

71. It was also considered in the Business, Innovation and Skills Committee's 2010 Report:

It is unacceptable that pub companies have again failed to address the AWP tie or to seriously offer free of tie options. If the AWP tie offers the benefits claimed for it, offering such a choice on an informed basis would demonstrate goodwill at little if any cost to the pub companies as lessees will freely chose to retain the tied machines.[84]

72. The updated Framework Code merely states:

It will be made clear in the process of profit assessment that where AWP machines are tied, and the income is shared, such income will not be included in the "divisible balance".[85]

In addition, the Code says that pub companies need to state company policy on AWP machines such as:

Terms of supply (whether or not a machine tie exists), number and siting of machines, arrangements for the collection of cash, machine-management support provided and details of how the landlord/tenant share of machine income will be assessed.[86]

73. The BBPA/IPC survey found that, just under half (42%) of new lessees were still tied for machines. The survey also indicated confusion amongst lessees over the AWP tie and how the income was treated in their rent: 15% said that machine income had not been removed from the divisible balance but over 70% were not sure how their machine income was being treated. In the case of existing lessees, just 22% had definitely had the income correctly removed from the divisible balance.[87]

74. The All Party Parliamentary Save the Pub Group told us:

Many pubcos are only offering a free of tie option on AWP machines in exchange for a penalty fee (described by Marstons, Admiral and Enterprise as a 'charge'/'increased rent'/'annual release fee' respectively). Scottish & Newcastle does not offer free of tie AWP option at all.[88]

Fair Pint said:

Previous Committees have expressly sought the removal of the machine tie. Neither the BBPA Framework or any individual pubco Company Code has attempted to accommodate this recommendation. FP consider this to be a clear example of avoidance of an express and simple requirement.[89]

75. More worryingly was the information supplied by the IPC on how the pub companies were again rentalising machine income having already split the profit. It argued that although the machine income had been physically removed from the divisible balance it was still being taken into account in the preparation of a rental bid. Reference to lessee machine income was now being made below the divisible balance, after the 'Fair Maintainable Rent' calculation had been concluded. The IPC highlighted that as a result, lessee machine income was still rentalised which had resulted in no gain to the lessee and in some rent reviews it had resulted in a net loss. The IPC said that it had reported this to BIIBAS who had acknowledged that it was against the 'spirit' of the commitments given to the Committee in 2009, but had been found not to be a technical breach of the Code of Practice. The IPC said this was because the Framework Code did not prevent pub companies from rentalising a tied lessee's machine income nor did it require the company to make clear where this calculation will be made in the rental assessment; it merely required the company to make clear that it is not included in the divisible balance and tacitly accepts that such income will be shared.[90]

76. The AWP tie is still in existence seven years after our predecessor's initial recommendation to dispose of this tie and despite two follow-up Reports endorsing that recommendation. It is deeply frustrating that the industry has chosen to ignore this as it is a relatively easy area for pub companies to show willing. The industry should have acted on this recommendation. The fact that they did not is another clear illustration of its refusal to engage in meaningful reform.

Disclosure and Transparency

SHADOW PROFIT AND LOSS ACCOUNTS

77. In 2004, the Trade and Industry Committee's Report recommended that:

Pubcos should provide their tenants with a comprehensive breakdown of how their rent was calculated. This should reveal the whole detail of the profit assessment and how the specific requirements of the lease conditions had been interpreted by valuers.[91]

At the time of the Business and Enterprise Committee's Report in 2009 there was a debate over whether this had been achieved. Enterprise Inns told that Committee that "the assumptions used in the construction of rent calculations are disclosed to licensees, together with an estimated and summarised profit and loss account which supports the rent assessment".[92] However, the then Business and Enterprise Committee conducted its own survey of lessees which found that 44% of lessees had not seen any form of breakdown of their rent calculations.[93]

78. We asked whether further progress had been made on this since the new Framework Code had been published requiring that a shadow profit and loss account be provided at the start of a new lease or at rent review. Mr Robertson, Chief Executive of the BII, admitted that it had been hard persuading some pub companies to include this in their company codes:

The shadow profit and loss for that particular pub is extremely important. We have pushed companies hard on that. Some needed more pushing than others[94]

79. However, Mr Dixon, an independent adviser and member of BII, insisted that:

We have basically returned the industry to the transparency that existed before computers, when handwritten, detailed rent calculations were given to tenants. I am passionate about the issue that a tenant needs to be given sufficient detail[95]

80. The introduction of this requirement is important and we welcome its inclusion into the codes. We note that according to the BBPA/IPC survey, 20% of new lessees had not been provided with a shadow profit and loss account and 50% of existing lessees had not been given one when changes to their agreements had been offered.[96]

81. Mr Robertson of the BII highlighted that there was 'a degree of optimism' in some of the shadow profit and loss accounts provided by pub companies for their lessees.[97] Mr Dixon said he referred to fair maintainable predictions as "fantastical mythical target" and that they were not fair maintainable.[98]

82. Gary Mallen reported that from the work he had been carrying out rent reviews:

Landlord companies are still allowing valuations to be compiled and presented to tenants with unrealistic FMT volumes, despite them holding a great deal of comparable evidence or making any allowance for the declining beer market.[99]

83. Often 'shadow' profit and loss accounts do not provide the lessees with the necessary level of information to make an informed business decision. As the Business and Enterprise's 2009 Report concluded:

We accept that in many cases pubcos do not have access to their lessees' books. However, they have access to a substantial amount of information about the business of a particular pub, and are likely to have extensive information if a business is in difficulties. Pubcos entering a commercial relationship with a new lessee should be required to share all their information on a pub's trading history with them.

We endorse that recommendation.

BENCHMARKING OF COSTS

84. The 2009 Business and Enterprise Report found that a key area of the industry which lacked transparency was that of costs:

We note that, without transparency, rental calculations are open to manipulation by the pubcos, in particular by systematically underestimating the costs for a lessee of running their pub. We recommend that there should be industry guidelines on the average costs of running a pub such as those in the ALMR benchmarking survey. These can be used by lessees as comparators against the rental assessments put forward by their pubco.[100]

85. The 2010 Report concluded:

We welcome the ALMR's decision to open up its benchmarking survey to the whole of the pub sector, the work it is doing to encourage other companies to provide data and the fact that it has undertaken to 'gift' the survey to the industry. [...] The same cannot be said of the BBPA which has appeared to resort to resistance, obfuscation and hostility. We appreciate the fact that there are 'complexities' in the pub sector but the BBPA has had long enough to overcome these problems.

We believe that the publication of industry data on the costs of running a pub, such as that available in the ALMR's benchmarking survey, represent a significant step forward in increasing transparency in the industry.[101]

86. In evidence, Mr Rusholme gave RICS's support to benchmarking:

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.[102]

Mr Mallen also supported greater transparency in this area:

[Benchmarking] 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. [103]

87. Despite clear recommendations from our predecessor Committees and RICS support, there is still no industry agreed benchmarked costs available. A form of benchmarking does exist in the form of the ALMR benchmarking survey. However, its use is limited because the majority of the pub companies have refuse to engage with it. Mrs Simmonds of the BBPA explained the reason for her members' position:

The issue with ALMR data is much of it is about managed houses. We have tried, but it is obviously not the actual tenants that are members of the BBPA, to get more information from actual tenants.[104]

In supplementary evidence the BBPA expanded on this point:

The ALMR data includes managers' salaries which results in a higher cost base overall [...] which is specific to a multiple retail operation as opposed to a single tenant/lessee.[105]

However, Ms Nicholls of the ALMR argued that this was not a relevant objection to participating in her organisation's benchmarking survey:

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.

Ms Nicholls went on to tell us that despite offering meetings with the pub companies and the BBPA both before and after the survey was conducted both the pub companies and the BBPA refuse to meet with her.[106] The following exchange sets out the lack of engagement with the ALMR's survey:

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.

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.[107]

88. Brigid Simmonds pointed out to us that the BBPA's members "recommend to tenants who take on their pubs that they should look at the ALMR database",[108] and that this was reflected in every pub company code. However, according to Mr Mallen, many pub company employees remain unaware of the ALMR survey data:

The BDMs [Business Development Managers] that I have seen of late, and certainly within the last six months, know nothing about the ALMR benchmarking survey[109]

89. We note that in its recent submission to us, the ALMR said that Punch Taverns have "expressed strong support" for the benchmarking survey and they are working together to explore funding for dissemination, for example, Punch paying a one off fee on behalf of all their lessees.[110] We also note that the BBPA subsequently wrote to inform us that it has now collected data from its members which has been collated and that the BBPA was "arranging a meeting with ALMR to share" the data. BBPA said the data would be made freely available on its website.[111]

90. A example of the problems with assessing costs was given to us by Gary Mallen, a member of the ALMR and an independent rent review adviser. He questioned the ability of pub companies to understand the actual costs of running a pub and cited a survey by Milestone in support of his view that pub companies underestimated the level of costs incurred when running a pub.[112] This view was endorsed by Kate Nicholls who told us:

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.[113]

91. However, Ted Tuppen, Chief Executive of Enterprise Inns and the BBPA asserted that the survey was not a fair reflection on pub companies' estates.[114]

92. We are unable to judge the merits of either side of the argument. However, this disagreement is a further example of the lack of trust and engagement between both sides. It clearly demonstrates the need for a system of benchmarked costs on which everyone in the industry can rely.

93. The lack of engagement with the ALMR's benchmarking survey is another example of the industry failing to follow one of our predecessors' recommendations to increase transparency in the industry. While we acknowledge the BBPA's recent undertakings to engage with the ALMR's benchmarking survey the BBPA's consistent failure to deliver on the important issue of transparency on costs leaves us sceptical.

A NATIONAL DATABASE OF RENTS

94. The ability to compare rents across the industry was first considered by the Trade and Industry Committee in 2004. It believed that greater transparency in this area would go some way to resolving disagreements at rent reviews. That Committee recommended:

We believe it would be preferable for the industry to develop a nationwide register of rent reviews, accessible by professional valuers representing both sides of the industry. Although we believe the proportion of rent reviews not resolved amicably is small, such a register would increase transparency and reduce contested reviews.[115]

The 2009 Business and Enterprise Report supported that recommendation:

A system must be put in place to allow lessees to assess whether their rent is fair and in line with similar businesses. Our predecessor's recommendation to create a register of rent reviews would have increased transparency. We note it has been disregarded, and neither the pubcos nor RICS have taken any serious action to make sure the rental system is not unfairly biased against the lessee.[116]

In 2010, the previous Business, Innovation and Skills Committee said that it welcomed undertakings by RICS to "pursue the objective of a more open and transparent method of comparing and assessing rents."[117]

95. We questioned Mr Rusholme, from RICS, how RICS had progressed with its objective. He told us:

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 wide ranging 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.[118]

96. When pushed on why so little progress had been made since the Trade and Industry Committee's recommendation in 2004, Mr Rusholme explained:

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.[119]

97. Mr Rusholme conceded that the creation of a database was 'not rocket science' but there was a problem in that companies did not want to give information freely that affected their 'commercial confidentiality'.[120] This issue was explored during the evidence session:

Mr Binley: 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.

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.

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.

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.[121]

98. Brigid Simmonds, representing the BBPA, confirmed that BBPA members had discussed banding and that they would be "very happy to contribute towards their business research unit in producing such data and in bands and in the way the Committee would like to do it".[122] Mr Whiteside of Punch Taverns went further:

We see it as a benefit to the market. In other words, we want the market to operate effectively. It is the market that determines rent, and therefore if the market has better information it will help the market to work more efficiently. As a result of that, we will end up with accurate rents.[123]

The evidence given by the BBPA suggests that there is willingness to provide banded information on rents to create a national rent database. Given this apparent enthusiasm for it, we find it difficult to understand why such a database has yet to be created.

99. RICS subsequently wrote to us stating its "willingness" to continue working with the industry on this matter but stated that it "cannot, however, be the driving force behind initiatives within the industry".[124] It also stated that that RICS was "not in a position, on its own, to create, maintain or market such a database without the cooperation of both landlords and tenants within the industry".[125]

100. A database of national rents was first recommended by the Trade and Industry Committee in 2004. Despite the BBPA's assertion that its members 'would be happy to contribute' to the database with banded financial information, RICS and the pub companies have consistently failed to produce a database of national rents. As Mr Rusholme, Chair of the Trade Valuation Group, RICS stated the creation of a database is not "rocket science". Unless the pub companies deliver, and swiftly, we will have to conclude that, again, they are unwilling to deliver on their promises.

Pub Independent Rent Review Scheme (PIRRS)

101. The 2009 Business and Enterprise Committee Report commented:

We agree that some form of low-cost independent procedure for dealing with disputes over the rate of rent is needed and needed urgently. The BII's proposed dispute resolution system in which fees will be known at the outset, and will be related to rental value is, in principle, welcome. We would be more confident in the prospects for the successful implementation of the BII's proposal if the Trade and Industry Committee had not recommended precisely such a procedure over four years ago. We are astounded that nothing has yet been done.[126]

102. Following that Report the BII set up its proposed rent dispute system and called it the Pub Independent Rent Review Scheme (PIRRS). The ensuing BBPA Framework Code stated that company codes had to include details about PIRRS and contain a reference to the PIRRS website.

The 2010 Report welcomed the launch of PIRRS although at that time it had only been running for three months. The Committee at the time recognised the fears of some of the lessee groups over how PIRRS would operate. Over 20 months since it was launched we are now in a better position to assess its effectiveness.

103. The BII presented the following information on PIRRS' first year of activity:

Cases completed through PIRRS 7

Cases completed outside PIRRS 7

Stalled cases - no further correspondence received 5

Cases currently open 8

Serious Enquiries 8

TOTAL 27

Of the cases currently open:

Application Stage 4

Awaiting signed Deed of Variation 2

Cases handed over to Independent Expert 2

Pub Companies:

Enterprise Inns 21

Punch Taverns 3

S&N 1

Unknown (from stalled cases) 2

BII submission Ev 49

104. Mr Robertson of the BII—which administers PIRRS— was confident in the success of it and asserted that "it has done what it said it would do". While he acknowledged that it was not a "spectacular" scheme he believed that it was nonetheless "a very valuable scheme".[127] Mr Dixon, a member of the BII, also believed it to be "the fairest scheme that there has ever been in the industry for a tenant to have their rent settled by a third party".[128]

105. Mr Robertson thought that the small number of cases in the system did not mean that the scheme was not working but that it was acting as a 'catalyst' for people to resolve disputes over rent before it reached PIRRS.[129] He also suggested the reason that some pub companies had had more cases referred than others was not necessarily a case of one pub company performing any differently in rent reviews but that different pub companies had taken different approaches to PIRRS. He believed that some had said "We do not want any cases going through PIRRS"; whereas others had said, "The PIRRS service is there; let's use it as a backstop".[130]

106. This was borne out by the evidence given by Mr Tuppen. He argued that the high number of PIRRS cases involving Enterprise Inns demonstrated the value of the system:

When we enter a negotiation, we, perhaps more than any other company, make it very clear to our tenant that if this is not working they have a very cheap route through PIRRS, a well respected cheap route, that they can follow. Whereas it could be interpreted that we are the most difficult, I would like to interpret it, and believe it to be true, that we are the most open.[131]

Phil Dixon added:

Enterprise are very, very keen to make sure all their licensees are aware of the PIRRS process. There are one or two valuers out there who always say, "Do not go down the PIRRS process. The BII is in the pubcos' pocket. Go for the more expensive, lucrative fees for me at arbitration." Enterprise, in fairness, are totally transparent about that. So I do not see anything wrong in the numbers of Enterprise cases.[132]

107. While this is encouraging, the BBPA/IPC survey suggests that there remains a significant lack of awareness among licensees of the scheme and that over half (56%) of existing and new licensees said they were unaware of PIRRS.[133] The ALMR also was concerned about awareness and said that the PIRRS Board was "only now taking steps to publicise the scheme—18 months after it started operating".[134]

108. Early evidence suggests that Pub Independent Rent Review Scheme (PIRRS) is a positive development in the industry and one that is being used for mutual benefit. As a good news story for the industry we would have expected this to be widely promoted. The fact that this genuinely successful reform was not, highlights the malaise at the heart of the industry.

Business Relationship/Development Managers

109. In 2004 the Trade and Industry Committee recommended:

It would appear that the performance of business development managers (BDMs) varies across the industry from excellent to dire. We found no consensus within the industry as to their role and function. Some seem to be more concerned with the policing of operations in the public houses under their supervision rather than the provision of genuine assistance to tenants. We recommend that the industry should review the support offered to tenants to ensure the application of best practice in the provision of support to individual businesses.[135]

110. The 2009 Business and Enterprise Report concluded:

The Trade and Industry Committee found that "the performance of business development managers (BDMs) varied across the industry from excellent to dire." That conclusion remains valid. The evidence we have received suggests that there are still too many BDMs who offer lessees little or no support, and some who bully or intimidate them. Moreover, some of our evidence suggests that this culture is not limited to BDMs but can reach further up a company.[136]

111. Mr Robertson, Chief Executive of BII, highlighted that areas of complaint which were not covered by the Framework Code of Practice included "an overly muscular approach to the business relationship", the "premature use of debt collection" and "overly rigorous tie compliance monitoring".[137] He went further by saying:

So much rests on the relationship with the business development managers. There are some very, very good ones and there are some who perhaps need to move on and certainly some who need to be trained.[138]

112. Mr Dixon, independent adviser and member of BII, told us that the issue was whether BD stood for 'business development' or 'business debt'.[139] However, he pointed out that Punch Taverns had now recognised that it needed to better engage with its lessees:

There are some great relationships out there still. The problems are, as you know, with the property companies. Let's face it, you know why they came in. They are big property companies. Roger Whiteside knows—and he says it all the time—"We need to get closer to our retailers; we need to restore that trust." I said this two days ago: Enterprise need to take a lesson from Punch and they need to get closer to their retailers.[140]

113. When we asked the IPC about relations between lessees and BDMs, Mr Simon Clarke told us that he believed "over muscular" meant "intimidation, threatening and bullying, which we are seeing on a fairly wholesale basis".[141] The Fair Paint Campaign made the following observation on this matter:

There is still considerable anxiety amongst tenants that raising a complaint will encourage repercussions from their pubco and many continue to suffer in silence. Fair Pint have seen a huge increase in direct contacts from tenants feeling bullied and intimidated but there is very little confidence that registering a complaint would be anything more putting themselves in the firing line. Many tenants seem to be aware that complaints in respect of bullying or profitability are not Code breaches and that the BII are powerless to enforce or penalise pubcos even if a Code breach could be established.[142]

114. To demonstrate this Fair Pint said that it was receiving on average five calls a day from distressed lessees,[143] ALMR reported that calls to its helpline had gone up by five times in the last year,[144] and the All Party Parliamentary Save the Pub Group reported to us the number of lessees that had also approached it for help.[145]

115. Greene King told us that it was actively working to educate its BDMs and had collaborated with Birmingham City University to deliver BDM training which results in a diploma in multi-site retailing. Simon Longbottom, Managing Director of Pub Partners at Greene King said:

We think that is the top qualification a BDM could gain in our sector. We take that very seriously, and we look to improve our BDMs.[146]

116. Phil Dixon also informed us that the BII are now developing a qualification developed for BDMs. [147] He also said that pub companies were taking cases very seriously and that he had investigated a couple of complaints where the business development managers had lost their jobs because they had not acted within their procedures. He concluded "companies are taking this very seriously; I would want to assure you of that".[148]

117. The actions and behaviour of some Business Development Managers (BDMs) has been an issue that the previous Committees have noted and highlighted. Such is the deep-seated culture of poor relations between pub companies and lessees that BDM training should have been considered a priority. Individually, some pub companies are beginning to address this failing but we are still hearing far too many unpleasant reports across the industry of bullying and intimidation towards lessees.

Disputes

118. In 2004 the Trade and Industry Committee recommended:

Pubcos would improve their reputation as landlords if they ensured that tenants' agreements contained an inexpensive and efficient system of arbitration or alternative dispute resolution with fully independent arbitrators or experts to resolve such disputes without imposing legal costs on either side.[149]

119. The 2009 Business and Enterprise Report found:

The small number of cases pursued to independent arbitration should not be taken as a sign that all is well. It could simply demonstrate that, even though they were dissatisfied, lessees did not consider the dispute resolution system appropriate.[150]

120. The updated Framework Code stated on disputes:

The adoption of codes by companies in line with the framework code provides an adequate procedure for the resolution of differences. It is nevertheless acknowledged that in individual cases, lessees may feel that a company has not properly followed the procedures set out in its code.

In such circumstances, it will be open to him or his representative to send the BII a brief description of the circumstances with an explanation why the lessee believes the code has not been properly followed. The BII or FLVA will pass on this information to the company concerned and use its good offices to ensure, as far as possible, that there are no misunderstandings, or personality issues, that are standing in the way of a more fruitful dialogue between the company and the lessee or his representative.[151]

121. The 2010 Business, Innovation and Skills Committee Report concluded:

We remain profoundly concerned that no effort has been made to create an independent dispute mechanism for general complaints about pub companies. The system still relies on complaints being made to managers within a company. This is a wholly inadequate response to a pressing need. Urgent consideration should be given to extending the work of the BII and PIRRS to cover this role. We recommend that the BII be recognised in the Company Codes of Practice as an independent dispute body and clear details of how a lessee can apply to the BII for help must be provided by the pub companies. The absence of such a mechanism may yet trigger regulatory intervention. [152]

122. During this inquiry, the BII told us that it had now started to pilot a dispute resolution/mediation service—a year and a half since the 2010 Report was published. Mr Robinson, Chief Executive of the BII, defended the time taken to introduce the service:

The priority was establishing the codes, the nature of the codes and particularly the scope of the codes. [...] We were not sure until we started to implement where we would see disputes that fall out with the scope of the codes. We are now much clearer about where those areas are, so we have been able to pilot the service. We need to understand which percentage of the business relationship the codes effectively cover and then the mediation service is needed to support the balance.[153]

The pub companies appear to be positive about this development. Mr Whiteside, of Punch Taverns, welcomed its introduction as "a more formalised channel for licensees to be able to appeal to a higher authority",[154] while Mr Tuppen, Chief Executive of Enterprise Inns, gave the following assessment:

I think BII have done an outstanding job with PIRRS, both the implementation of it and the process since then, and I think it has made a huge difference for good within our industry. I think a similar mediation service can only be good for us, and we wholeheartedly support it.[155]

123. Mr Clarke of the IPC took a different approach to the BII piloting of mediation:

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.[156]

124. We asked what lasting result the mediation could have and whether it was enforceable. Mr Robertson told us:

Formally there is nothing that we can do. Informally, of course, we would take an ongoing interest in that relationship. There are a couple of the mediation cases where they have not resolved all of the issues in the relationship difficulty. We take an ongoing interest in the relationship and would ultimately want to see that resolved. But to be clear, it is mediation; we cannot enforce any recommendations.[157]

125. One of the acknowledgements made back in 2004 by the Trade and Industry Committee and again in 2009 by the Business and Enterprise Committee was the balance of power in the relationship between pub company and lessee. This argument has again been raised in 2011 and has not gone away. Karl Harrison told us in regards to mediation:

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.[158]

126. We welcome the piloting of a new mediation service which appears to have the goodwill of pub companies. However, the need of such a service was highlighted by our predecessors with no resultant action until now.

31 Ev 67 Back

32 Q44 Back

33 Q46 Back

34 Ev 67 Back

35 Glen Gottfried and Rick Muir: Tied Down The beer tie and its impact on Britain's pubs, IPPR, August 2011 Back

36 BBPA, Framework Code of Practice on the Granting of Tenancies and Leases, January 2010, p 6 Back

37 Q17 Back

38 Q19 Back

39 Ev 68 Back

40 HC (2009-10) 138, para 45 Back

41 Q20 Back

42 Ev 68 Back