Pub Companies - Business, Innovation and Skills Committee Contents


Written evidence submitted by the Brighton & Hove Licensees Association (B&HLA)

1.  B&HLA

1.1  Brighton & Hove Licensees Association is an Association (B&HLA) of responsible publicans all of whom operate in the City of Brighton & Hove. We represent over 150 venues, many of which are tied houses with a turnover in excess of £60 million and employing over 1,200 people within the city.

1.2  This report has been circulated to the membership of B&HLA and has their unanimous support.

1.3  The concerns we raise with regard to the model operated by Pubcos is not an exhaustive one. We have, however, attempted to highlight what we consider to be our main concerns and have chosen to offer some solutions where we feel it is most appropriate.

1.4  The report is based upon the position as we find if as of the time of writing, May 2011, all Pubco conduct referred to will be based upon evidence after the previous report of the select committee into Pubcos.

2.  PRICING & THE TIE

2.1  As an association we remain concerned that the wholesale price upon which most tied lessees prices are based remains an arbitrary figure paid for only by tied leaseholders. The tied tenant has no input into the wholesale price and has no opportunity to negotiate it or to avoid it by purchasing from an alternative source.

2.2  The tied tenant relies upon the wholesale price being negotiated on their behalf by their landlord the Pubco. The Pubco is disadvantaged by negotiating the wholesale price downwards, indeed by ensuring an inflated wholesale price the Pubco will improve their own margin when compared to the price they pay a brewer, a price that will be negotiated.

2.3  In February 2011 both the two major pubcos have raised their prices to their tenants. Enterprise Inns by an average of 3.8% and Punch Taverns by an Average of 3.3%. Simon Townsend of Enterprise Inns noted "As in previous years, we have sought to keep the number and variety of percentage increases as low as possible" however this would appear to be at odds with the price rises of some brewers announced at the same time, one example being Coors who raised their prices by 2.3%.[6] If the Pubco price rises were as low as possible why are they increasing their prices by more than that raised by the brewer themselves?

2.4  Where discounts are available to Pubco tenants these are often not subject to rises in line with that of the wholesale price. Many tenants complain that the discount level is frozen and so becomes increasingly less valuable over a period of time Indeed even where discounts are given the value of these when increased by a similar margin as that applied to the cost price still become increasingly less valuable over time because of the nature of the increased discount producing lower margins over time as the difference between cost price and discount increasingly widens.

3.  MACHINE INCOME

3.1  Whilst the BBPA code of practice, the benchmark for all BiiBAS approved codes has stated that where there is a machine tie income from machines will show below the line and not form part of the divisible balance there is clear evidence some Pubcos are circumventing this in a variety of ways to ensure they maintain the revenue of the machine that they previously enjoyed.

3.2  Enterprise Inns have simply changed the percentage of the divisible balance that they would previously have taken to compensate for their loss by showing the tenants machine income below the line. We have site of one regional manager's email on the subject where they state "the divisible balance and machine income are considered together for the purposes of the rent review as machine performance is part of the pubs income and logically must have some bearing on rental bids. Machine performance is displayed below the line as according to the BBPA's code of practice." In essence where a rental bid of 50% would have been made of the divisible balance a rental bid is now made of 50% of the divisible balance plus the machine income to the tenant, or in other words a higher percentage of the divisible balance is taken by the Pubco to compensate them for their loss. Moving it below the line is therefore purely a cosmetic exercise and makes no difference to the income of the tenant. It is our opinion that this is how any Code of Practice accredited by BiiBAS expected a Pubco to deal with machine Income and is at best an example of sharp practice and creative accounting.

4.  RENTS & RPI

4.1  Whilst it is to be applauded that upward only rent reviews are now considered a thing of the past for the majority of tied tenants we would have liked this confirmed by a deed of variation to the tenants contracts rather than through side letters and commitments in codes of practice. It is our opinion that only then can the tenant be convinced that upward only rent reviews could not be enforced at some future date. We fail to see why this has not been done to date. If the pubco is genuine in their commitment to end upward only rent reviews for the tied tenant than there should be nothing stopping them from issuing a deed of variation to the lease confirming this. Why has this not happened? What is the motivation of the Pubco for not ensuring tenants have peace of mind on this issue?

4.2  It has come to our attention that many pubcos are circumventing the end of upward only rent reviews by producing new leases with only a five year term and subject to an annual increase by RPI and no rent review. Having no rent review removes the ability of the tenant to have a revised rent downwards.

4.3  We reject the pubco claims that RPI increases are a fair measure of annually adjusting rent. It is our opinion that this measure amounts to an annual upward rent review to the disadvantage of the tenant. The tenants position made all the more acute in a market place of declining beer sales year on year. In essence the tenants rent rises whilst income goes down.

4.4  AS a society we are dismayed that Pubco's continue to fabricate proposed profit and loss accounts to arrive at a divisible balance in total ignorance, possibly deliberately, of the world within which we trade. There is continued over expression of sales and under estimation of costs, all designed to create a larger divisible balance leading to a higher rent bid. Examples include venues where sites have increased barrelages attached to them at a second rent review where no major improvements to a venue have been made and where the local trade has seen a double digit drop in beer sales. Other examples include failure to account for benchmarking of costs and a refusal to take account of the ALMR benchmarking survey, currently the only one available leading to a serious under estimation of costs, one example seen by the association shows staff costs at over 5% below that benchmarked for a venue of it's style. No evidence is provided by the pubco to support their costs.

5.  SCORFA

5.1  We remain unconvinced by the value of SCORFA (Special Commercial or Financial Advantage) countervailing benefits. For any tenant to understand the value of their lease and to know whether they are paying an appropriate rent we feel a Pubco should list and place a value on the SCORFA benefits they are providing. Failure to do so leaves a tenant unable to negotiate their rents.

5.2  The RICS guidelines also note that they need to take into consideration the countervailing benefits of SCORFA of any particular lease. We would envisage this benefit needing to have a value and envisage this value being made available to the tenant to ensure they do not enter into any arbitration process unarmed wit the full facts. Currently no such information is available.

5.3  We are unconvinced by some of the claims of Pubcos with regard to SCORFA. The claim that Pubco employees such as Business Development Managers help to promote and improve the business of their tenants is questioned by our members, most of whom see them as policeman of the tie and rent negotiators and not business partners. They appear to add little value to the business of our members in most if not all circumstances. The claim that machine management must also be discounted where there is a tie, they cannot claim SCORFA when they are already charging for the service and they offer no such service where a machine tie does not exist. Many other "services" the pubco claims are actually services that the tenant can already get for the same if not better cost, such example being ratings appeals and insurance.

6.  CODES OF PRACTICE

6.1  We have already noted the commitment of the Pubcos with regard to machine income and how some pubcos are circumventing this commitment. (see 3. Machine Income). This is an example of how the Pubcos are viewing the codes of practice, not as a guide to ensuring a fair and equitable relationship between landlord and tenant, but a document to be circumvented where possible.

6.2  We have concern that some pubcos are exerting pressure on their tenants to sign for their Codes and so run the risk of obliging themselves to commitments outside the scope of their existing leases. Indeed some codes we have had sight of actually propose more onerous terms on the leaseholder to the benefit of the Pubco.

6.3  Members have expressed concern that regional managers and Business Development Managers continue to avoid or ignore standards set out in the code of practices.

7.  MONITORING EQUIPMENT

7.1  Our members remain unconvinced about the accuracy of many of the systems utilised by Pubco's to monitor beer flow.

7.2  Where not specified within a tenants lease we believe that any equipment installed at a premises should be done with the expressed permission of the tenant and that the Pubco should reimburse the tenant for any wastage of calibration and installation along with servicing and for any running costs incurred by the tenant such as electricity to power the equipment.

8.  OUR SOLUTION

8.1  The Pubco's continue to maintain that the existence of a beer tie is beneficial to their tenants. We are supportive of the IPC position that the Pubco's should offer open market free of tie options to all tenants. In doing so they would have to ensure that the benefits of their tie is one that the tenant understands and considers advantageous. If, as the pubcos argue, the tie is beneficial then they have little to be concerned with, no tenant will take the open market rent review offer. We believe this to be the acid test of the claimed benefits of the tied model.

8.2  The open market free of tie option should be made available to all tenants where the landlord does not have an estate of over 250 pubs, known as the de minimus option also supported for by the IPC. This would ensure small brewers are protected.

8.3  A statutory Code of Practice should be introduced.

May 2011



6   Source Morning Advertiser - http://www.morningadvertiser.co.uk/news.ma/ViewArticle?R=89742 Back


 
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Prepared 6 October 2011