Written evidence submitted by Simon Clarke
RENTAL VALUATION GUIDANCE,
COMPANY CODES, RENT REVIEWS NECESSITY FOR GENUINE FREE OF TIE
OPTION AND OPEN MARKET RENT
1.0 SUMMARY
1.1 The RICS have fulfilled
the recommendation to redraft the rental valuation guidance.
1.2 The BBPA, perhaps inadvertently, have committed
their members to follow the RICS guidance and individual Company
codes confirm the same.
1.3 With effective compliance of the RICS guidance
tied rents could be redressed to appropriate, fair and reasonable
levels.
1.4 Tenant representatives are now seeing mass
non compliance with RICS guidance.
1.5 My own rent review demonstrates non compliance
with the RICS guidance and therefore potential Company code breaches.
1.6 The time offered to pubcos to implement reforms
has been used to reinvent their agreements to offer alternative
revenue streams in the event rents are set fairly and/or the profit
from tied product prices is put under pressure.
1.7 SUGGESTED
RECOMMENDATIONS
— Mandatory,
statutory code requiring compliance with RICS rental valuation
guidance.
— A
free of tie option, with open market rent, capable of third party
referral if the parties cannot agree.
2.0 PERSONAL
INTRODUCTION
2.1 My name is Simon Clarke
— Tied
publican.
— Chartered
surveyor.
— Steering
group member of Independent Pub Confederation (IPC).
— Steering
group member of Fair Pint Campaign (FP).
— Called
to both Business Innovation and Skills (BISC) and Business and
Enterprise (BEC) Select Committee Inquiries to offer oral evidence.
— Presented
various submissions to both Inquiries published in the subsequent
Committee reports.
— Participated
in the failed industry mediation attempt in 2009.
— Represented
the interests of the IPC in the Royal Institution of Chartered
Surveyors (RICS) working group assigned the task of rewriting
rental valuation guidance on public houses.
— Select
Committee chairman, Peter Luff MP, and the Committee's Inquiry
Manager, attended a demonstration of Brulines equipment in my
pub the Eagle Ale House, Battersea. I, together with my co-director
have become a source of much of the evidence currently being used
in active court cases relating to Brulines.
2.2 I wholly endorsed the findings of the previous
Committees.
3.0 RENTAL
VALUATION GUIDANCE
3.1 It was recognised, not least by the David
Rusholme, Director of Valuation at the RICS at the All Party Parliamentary
Beer Group debate two years ago, that previous RICS rental valuation
guidance was being manipulated by some and as a result tied pub
rents were being over inflated, leaving tied tenants at a disadvantage
to free of tie tenants.
3.2 The former guidance was written by the RICS,
Trade Related Valuations Group, chaired by Mr Rob May, the National
Rent Controller for Enterprise Inns.
3.3 The RICS committed to consult the industry
and undertook to re write the guidance. Given that previous guidance
was sufficiently unclear, allowing manipulation and a great deal
of latitude in interpretation, and the pubcos had influential
representation in the group writing guidance, they had little
to fear from a redraft.
3.4 To negate the risk of perception of conflicts
of interest, the RICS, quite rightly, invited additional surveyors
and industry experts to participate. Individuals representing
IPC members and the BII were included in the forum to offer membership
views and therefore impartiality overall.
3.5 The resultant new guidance is much clearer
than the previous paper. The acid test of its success will only
be demonstrated if it is followed. Whilst the phrase "the
tied tenant should be no worse off than the free of tie tenant"
is not expressly included, the general principle is addressed
within the new guidance.
4.0 COMPANY
CODES
4.1 During mediation the BBPA committed their
members to abiding by the revised RICS rental valuation guidance.
The BBPA were not aware, at that time, that tenant representatives
would be invited to participate in the process. Subsequent individual
Company codes commit the pubcos and brewers to compliance with
the new guidance.
4.2 I am already seeing evidence of systematic
non recognition of the new guidance, not least in my own rent
review. Failure to follow the guidance seems to indicate that
the pubcos are dissatisfied with the possibility that, if adopted
properly, falsely inflated tied pub rents may be redressed. As
long as the new guidance continues to be ignored or manipulated
nothing will change.
4.3 Policing of the Codes, and enforcing mandatory
compliance with RICS rent valuation guidance, is now essential
and the current enforcement or penalisation options available
to the BII are insufficient to undertake such a task. No one has
any powers over pubcos ignoring rental guidance.
5.0 RENT
REVIEWS
5.1 Having consulted with David Morgan, founder
member of Fair Pint Campaign, and Garry Mallen, of the ALMR, both
of which have given oral evidence and sat on the RICS redrafting
forum, we agree that there seems to be universal non compliance
of the RICS guidelines. Messers Morgan and Mallen will no doubt
present their individual views and findings in separate submissions.
5.2 My own rent review has just started. In
the spirit of openness and transparency, I offered some trading
information in exchange for evidence of comparables from Enterprise
Inns, they have chosen not to disclose the latter, making a sham
of their "open and transparent rent review" claim in
their code. Enterprise Inns have offered a proposed rent assessment
based on the information I have provided.
5.3 In order to establish open market rental
value, the RICS guidance clearly requires a valuer to undertake
a shadow profit and loss calculation by estimating a hypothetical
turnover (fair maintainable trade - FMT) using comparables NOT
relying solely on a tenants trading information. Costs should
reflect benchmarking evidence and the rental bid should reflect
the tied tenant considering their circumstances if they were free
of tie.
5.4 Enterprise Inns appear to have estimated
hypothetical turnover (FMT) and sales mix based on my pubs actual
beer volume sales and known sales mix (which reflect my individual
goodwill and occupation - not the foundation for RICS rent
valuation and specifically required to be excluded under the terms
of the lease).
5.5 Enterprise Inns estimated costs make no
reflection of the ALMR benchmarking (which averages costs at 42%
of turnover). Even Enterprise Inns have their own "in-house"
benchmarking surveys indicating an average of around 42%, from
"Milestone" their tenants open book accountants. The
RICS guidance requires the valuer to reflect benchmarking findings
yet still Enterprise Inns continue to fly in the face of the evidence
seeking 35% or less as a cost allocation in valuation.
5.6 I realise this may make little sense
to a non valuer, but rent is extremely sensitive to fluctuations
in the estimation of valuation variables. To demonstrate the implications
of under estimating costs in valuation, getting it wrong by 7%
(42% minus 35%) has the effect of at least halving the tenants
earnings, whilst increasing the rent by the lost amount.
5.7 Enterprise Inns estimated rent bids on the
net profit before rent (divisible balance), are still based on
a 50:50 split which would be ludicrous if tenants were to consider
the lost profit as a result of being tied. Case law (the Brooker
case) and now RICS guidance both require the valuer to consider
that the tied "...tenant may compare his own property
with the circumstances of being free of a supply tie and consider
the profit they might otherwise achieve under those circumstances."
Free of tie gross profit results in a higher tenants earning.
There is nothing to indicate a tied tenant would not expect to
earn the same amount, all other things being equal. In view of
the latter, it is implausible that any tenant would consider a
50:50 split unless they were free of tie. In a tied relationship
the pubco have already undermined the gross profit achievable
in by demanding high tied product prices, the rent as a result
should be lower to reflect the consequences of product pricing
and a tenants rent bid weighted to maintain the same tenants earnings
if they had been free of tie, for example, in the case, mentioned
above, Brooker was a tied tenant, the split of net profit before
rent was 35% rent, 65% tenant earnings. I should add lower rent
is consistently cited as a benefit of being tied by the pubcos
themselves.
5.8 In my opinion, Enterprise Inns' use our
trading information to suit their argument, over estimating turnover
and gross profit, under estimating costs, failing to reflect benchmarking
and tied my expectations, had I been free of tie, are all non
compliance with the RICS guidance.
5.9 A Code breach complaint has been registered
with the BII, I do not anticipate the they will have the necessary
enforcement or penalty powers to effect a remedy.
5.10 The RICS have stepped up to the task set out
to them in recommendations requiring they reconsider rental valuation
guidance. The new guidance is capable of delivering the required
adjustment if complied with. We now need to enforce compliance
with the RICS guidelines.
6.0 EFFORTS
TO CIRCUMVENT
RICS GUIDELINES
6.1 Clearly the pubcos
run the risk of RICS guidance becoming mandatory in the future
and therefore the simplest method to avoid such an eventuality
is by altering the agreements with tenants in order to impose
new terms that have no need to refer to RICS guidelines.
6.2 Shorter agreements,
potentially with no rent reviews but instead subject to inflationary
increases are one such way to avoid any reference to RICS guidance.
6.3 Removing security
of tenure by offering tenancies instead of leases means the tenant
has no lawful right to renewal and no right to refer the rent
at lease renewal to a leasehold valuation tribunal, who would
be obliged to follow RICS guidance.
6.4 The introduction of
"stealth rent". Minimum Purchase Obligation (MPO's)
were voluntarily abolished during the days of EU block exemption
compliance. Pubcos are now seeking to reintroduce MPO's attaching
them to agreements. An MPO requires the tenant to purchase a fixed
amount of tied products every year and penalises them if they
do not. In a declining market, inflationary increases or MPO's
could cripple a tenant but a combination of the two would be devastating.
6.5 Many new agreements
require the tenant to agree to additional onerous terms, tied
services at the tenants expense, open book accounting, stocktaking,
maintenance and Health and Safety charges and decorating, repairs
and maintenance funds, to name a few. These are simply pubcos
building in the flexibility of charging unregulated sums for services
which the tenant would otherwise source themselves, another stealth
rent. Historically, pubcos have had the luxury of two income streams
commercial rent (dry rent) and profit on tied products (wet rent),
MPO's and tied services are examples of efforts to open up new
uncontrolled or unregulated revenue streams in the face of fair
rents returning and pressure on tied prices (in the form of FOT
pricing options). These will be the subject of Select Committee
Inquiries of the future if allowed to slip by unhindered.
6.6 The pubcos are "selling"
these new agreements as if to offer some sort of concession and
the unwitting prospective tenant may well be convinced by the
purported virtues. An agreement with one, or a combination, of
these onerous terms would successfully negate any progress that
might be made in rent redress by RICS guidance.
6.7 Simon Townsend recently
confirmed, at the Save the Pub Group debate, Enterprise Inns are
offering limited free of tie options but the tenant is required
to surrender their existing lease in exchange for a new agreement
which includes many of the features listed above. Their Retail
Partnership Tenancy and Retail Partnership Lease agreements, available
online (using the link below) outline these additional charges
and funds, inflationary increases and, in the case of RPT's no
security of tenure.
http://www.enterpriseinns.com/Applicants/Pages/LeaseTenancyAgreements.aspx)
6.8 In reality, the majority
of existing leases are perfectly acceptable in all but one respect,
the tie obligations. In the event of statutory intervention resulting
in a mandatory provision for tied tenants to be offered genuine
a free of tie option, this could easily be documented in the form
of a deed of variation to the lease. It is considered the Committee
and governments message was that a genuine FOT option should be
accompanied by an open market rent and most leases accommodate
the eventuality of such a change should it be implemented by statutory
intervention (Appendix 1, clause 3.2 - a page from my lease which
is a standard tied lease dated 2001).[20]
6.9 The pubcos bleating
gives the impression that the eventuality of statutory intervention
is an unheard of concept but, as can be clearly seen above, it
has always been considered a possibility and indeed that possibility
has been accommodated in the standard lease terms.
7.0 COMMITTEE
RECOMMENDATIONS TO
CONSIDER
7.1 A statutory, mandatory code for all companies
operating the tied tenanted model, subject to independent enforcement
and penalties for non compliance needs to be implemented. The
code should require all to strictly adhere to the RICS rent valuation
guidance.
7.2 Even the distant hope of fair and reasonable
rents is undermined in the face of pubcos being able to alter
tied product prices, or introduce stealth rents, to compensate
their rent losses. A free of tie option to tied tenants with
an open market rent and independent referral, in the event
the parties are unable to agree, is fundamental to avoid the unintended
consequence of tied product prices spiralling out of control and
unregulated tied service charges in the future.
If the Committee require any further information
or my presence at the oral hearings I would be pleased to assist.
18 June 2011
APPENDIX 1
3. The Landlord may at any time give written
notice to the Tenant requiring the rent to be reviewed:
— 3.1 at
the end of each Review Year and on the day before expiry of the
Term (the date of the end of each such years or the day before
such expiry being called "the relevant anniversary")
a notice given under this sub-paragraph being hereinafter referred
to as "a periodic review notice";
— 3.2 at
any time after the happening of any event (whether a decision
of the court of competent jurisdiction or the enactment of legislation
and whether of the United Kingdom or the European Union) whereby
all or any part of the provisions of Clause 11 and the Third Schedule
(or the fifth Schedule, as the case may be) may in the opinion
of the Landlord be or become unenforceable by the Landlord (hereinafter
called "a tie termination review notice");
— 3.3. at
any time in the event of the Landlord giving notice under clause
15.3.4 (hereinafter call "a Type 'A' trading review notice");
and
— 3.4 at
any time in the event of the Landlord giving notice under Clause
15.3.7 and that notice has expired (hereinafter called "a
Type 'B' trading review notice").
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