Pub Companies - Business, Innovation and Skills Committee Contents

Further written evidence submitted by Simon Clarke



Rics Guidance Interpretation

1.  For the record I would like to clear up a few points.

2.  Contrary to Mr Tuppen's assertions:

—  I did not submit a business plan - my co director, David Law, did before we became business partners.

—  I do not have a bank loan.

—  I did not refer any business plan to a bank.

—  I acquired 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 purchaser.

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 ;

—  (a)  Enterprise 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 Appendix 1),[21] 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 not provided.

—  (b)  Costs 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 given.

—  (c)  The 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


—  There comes a point where tied prices have the effect of negating the rental value.

—  In 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.

—  In 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 to achieve.

—  I have 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 in

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 of misinterpretation.

I would like the committee to consider a recommendation either that:

—  the 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

—  just 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.


Capital Values

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[22]- 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

21   Ev not printed Back

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© Parliamentary copyright 2011
Prepared 6 October 2011