Further written evidence
submitted by Simon Clarke|
RELATING TO QUESTIONS
FROM MR. ZAHAWI AND MR. BINLEY
Rics Guidance Interpretation
1. For the record I would like to clear up a
2. Contrary to Mr Tuppen's assertions:
not submit a business plan - my co director, David Law, did before
we became business partners.
not have a bank loan.
not refer any business plan to a bank.
the Eagle around 11 months before the rent review, the premium
paid was clearly not reflective of the property being under rented
as, at review, that benefit would be lost if it existed. The premium
was paid to secure my business partners (whose wife was heavily
pregnant) a home (in which he had lived for almost 10 years),
employment prospects and income - we were essentially a special
3. Mr. Zahawi was trying to establish from Ted
Tuppen the "fundamental" issue at stake between myself
and Enterprise Inns in respect of rent assessment and the interpretation
of RICS guidance.
4. At the hearings, Mr. Tuppen seemed keen to
discredit my evidence by ridiculing the proposal of a nil rent
and to make my complaint simply one of differing valuation methods
- that is not the case, put simply my complaint is based as follows
code states they will follow RICS guidance and be "open and
transparent" in review discussion and negotiations and discuss
comparables. The foundation of rent assessment is a hypothetical
turnover, otherwise known as "fair maintainable trade"
(FMT), of a reasonably competent operator (REO). The actual tenants
individual figures would reflect goodwill, improvements and occupation
(all of which are to be disregarded at rent review under the terms
of the lease and RICS guidance). In arriving at FMT one of the
starting blocks is barrelage which should be established using
comparables. In their proposal to me, Enterprise have used an
unsubstantiated figure of 370 barrels as a starting point, this
is exactly the same as the arbitrators award of five years
ago and within a couple of barrels of our existing three year
average. Obviously, this demonstrates our actual barrelage and,
therefore, not necessarily that of a reasonably competent operator
(REO). They should be using comparables not my barrelage.
I have asked for comparables, which Enterprise have refused to
supply. I have also asked for the "Volume Reports" which
they do showing our sales mix and barrelage in relation to the
average in the region (an Enterprise Inns in-house volume and
mix benchmarking system and a useful tool no longer openly available
this would show, amongst other things our beer volume sales in
relation to the average in the region, and if we are to use the
arbitrators previous decision we can estimate a reasonable reflection
for the pattern of sales in the region over or under that - also
in the valuation should reflect benchmarking (another RICS guidance
requirement), or some good reason to deviate from it. ALMR estimate
an average of 42%, Milestone, Enterprises own benchmarking survey,
concurs - 42%, Enterprise have quoted me considerably less, I
have asked why they have deviated from benchmarking - no reason
RICS guidance says the valuer would reflect, amongst other things,
that the tied tenant would consider their circumstances if free
of tie (7.18 & 7.19) and reflect their perceived profitability
in their rental bid. These two RICS guidance paragraphs are taken
directly from High Court case law - the Brooker case. Despite
what Ted says, I believe this forms part of the firm guidance
to which David Rusholme refers, that the tied tenant should be
no worse off. I drafted these paragraphs and I submitted it for
the RICS approval at the re-drafing panel. Rob May, Enterprise
Inns National Rent Controller, not only approved the drafting
but was involved in the Brooker case - so Enterprise Inns know
it exactly what it means to convey. There is no way a tied tenant,
considering they could earn £60,000 on a 50:50 split of a
free of tie divisible balance, would settle for £45,000 tied
without good reason - maybe the countervailing benefits are worth
£15,000, if so the pubco should be able to quantify the benefits.
5. Please do not get hung up on the offers from
either party, it is negotiation nothing more at this stage and
I am pressing them as a REO in possession of a company code, not
as a surveyor.
6. It is fairly well accepted that a typical
tied gross profit would be 2% or 3% either side of 50% and free
of tie GP the same, either side of 65% - for easy numbers I have
used 52% and 62%.
7. My offer of NIL, as odd as it may sound to
some on first reading, is based on the final point above, regardless
of FMT or costs, the fundamental difference between tied and FOT
is GP. If we hypothetically take a 360 barrel pub. If the divisible
balance, FOT, is £130k, based on a 20% difference between
GP and costs (62% and 42%) then, all other things being equal,
if the GP is reduced by 10%, because the increased costs of tied
product prices have the effect of deflating tied tenants GP, the
divisible balance would now be £65,000 (based on a 10% difference
between GP and costs (52% and 42%). The FOT tenant would earn
£65,000 and pay £65,000 in rent, the tied tenant (guidance
7.18 & 7.19) would expect to earn the same as being FOT £65,000
leaving no rent. Sounds hideously unfair on the landlord but what
is being missed is that they have already taken their cut in tied
product price (£200 per barrel profit x 360 barrels) £72,000
- they are still actually better off than if they had offered
the pub FOT and the tenant is no worse off despite the "dry
rent" being nil.
8. If any committee member is having trouble
with this I would be pleased to meet or offer further information.
9. The long and short of it is, neither Enterprise
Inns, or I, have so far done a rent assessment in accordance with
the RICS guidance, me, because I am currently acting as a REO
and need the information they refuse to give, them, because they
don't want to - it means a much lower rent, not NIL but much lower.
10. I have simply put forward a hypothetical
scenario demonstrating that the consequence of increased tied
product prices is a lower rent (below) and sought their substantiated
rebuttal and counter proposal, which they have failed to deliver.
Reflective, only to demonstrate relationship
comes a point where tied prices have the effect of negating the
order to offer Enterprise Inns a valuation in accordance with
the RICS guidelines, as a chartered surveyor, I would need relevant
information some of which they have obligated themselves to offer
in the "open and transparent" rent review negotiation
described within their code.
the absence of comparable evidence neither I, nor they, have an
effective starting point to establish an FMT and therefore a rent
assessment in accordance with RICS guidance is extremely difficult
requested the necessary information which would enable me to undertake
a proper rent assessment but Enterprise have declined to cooperate.
This I believe is a code breach.
11. To conclude, my initial offer was not
based on a professional rent assessment but the sentiments of
a reasonably efficient operator with limited information to hand
considering the profit they may make if they were free of tie.
I undertook this exercise deliberately, precisely to demonstrate
the difficulties faced by a "normal" tenant in assessing
his rent. General evidence such as barrelage sales history can
be benchmarked by dates and locations or regions, indeed Enterprise
conduct such an exercise in house. ALMR and in house benchmarking
surveys are available to establish estimated costs.
12. David Rusholme at the first hearing confirmed
the tied tenant should be no worse off by quoting para. 7.21 of
the rent valuation guidance. 7.18 & 7.19 substantiate this.
13. If Enterprise Inns use a specific tenants
barrelage as a starting point for calculation of an estimated
turnover, do not consider benchmarking and do not acknowledge
that the tied tenant should be no worse off within the RICS guidance
then they seem to fail, on at least three counts, to follow the
RICS guidance - a further code breach.
14. If Enterprise were to comply with their code,
and offer an open and transparent negotiation, I would be furnished
with the necessary information enabling me to conduct a valuation
in accordance with the RICS guidance.
15. Whilst an offer of nil may appear unrealistic
to some, please consider five years ago an Arbitrator concluded
my rent should be £45,750. Since then we have seen a drop
national beer volume sales of around 25% (BBPA figures),
gross profits have dropped as a result of tied price increases
above and beyond inflation and costs increased as a result of
inflation, utility increases, higher minimum wage and higher rateable
values, amongst other things. Enterprise Inns unsubstantiated
offer of £45,000 today reflects all these detrimental effects
in the form of a £750 reduction in the Arbitrators rental
decision of 5 years ago. In my opinion, as neither offer if based
on essential and relevant information, at today's date, neither
party has yet conducted a rent assessment in accordance with RICS
guidance. I am unable to until they cooperate and fulfil their
code obligations hence my code breach complaint to the BII.
16. Suggested Recommendations
(a) Despite concerted efforts to agree firm and
clear RICS guidance, relating to the tied tenant being no worse
off, the differing interpretations, helpfully highlighted by Mr.
Tuppen, demonstrate that continuing manipulation of valuation
guidance will continue if the matter is not fully clarified by
the RICS. It is accepted that the guidance is a technical document
and a tool for experienced valuers to follow but the "spirit"
of the document should be clear to the average man and incapable
I would like the committee to consider a recommendation
RICS redraft the guidance on this specific issue to avoid future
manipulation and make it absolutely clear what the guidance seeks
to achieve in this regard;
Or, at the very least
as they did in 2009 in their "Pubco Forums Report",
the RICS issue a statement confirming that if the guidance is
followed correctly the tied tenant should be no worse off than
the free of tie tenant.
(b) Pubcos should make their "Volume Reports"
available to the ALMR for consideration into developing further
information for a benchmarking/database system.
The information, presented in a local, regional or
national level for example, is no breach of confidentially between
the landlord and tenant. The reports used to be available to all
tenants until they were used in rent reviews as evidence by tenants
demonstrating they were out performing the region and therefore
their Enterprise Inns rent proposal was excessive and may have
failed to disregard their goodwill, improvements and occupation.
17. Mr. Binley questioned me specifically on
a capital value issue. Assuming the free of tie rental value were
say £65,000, he considered the pub may be worth something
to the order of £1 million. If this were the case he suggested
a property company might expect to see a 10% return and therefore
it followed that my numbers may not "add up". I digressed
into the value of pubs for alternative use and never got to answer
the question appropriately. Whilst Mr. Binley's logic was quite
correct, the yield he suggested would probably not be appropriate.
18. Enterprise Inns themselves claim that their
recent freehold sales have achieved an average yield of around
6-7% (in fact, the Eagle was sold as part of a sale and leaseback
portfolio of 29 pubs in January 2011 - Appendix 2-
the average initial yield was 6.7%. Applied directly to the estimated
FOT rent of £65,000 this would equate to a capital value
of £970,000 - pretty close to Mr. Binleys £1 million
estimate - £65,000 x (100/6.7) = £970,000).
29 July 2011
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