Supplementary written evidence submitted
by Simon Clarke
With regard to the ongoing interpretation issues
of RICS guidance I thought you should be made aware of Rob Mays
views and my response. The two attached letters were "open".
Clearly, if Rob is right and I am wrong then the
RICS guidance does not seek to resolve the issue of the tied tenant
being no worse off than free of tie tenant.
Rob May and I were both on the RICS panel rewriting
guidance and I believe he knew very well the spirit behind the
wording we published in the guidance. His views and Ted's oral
evidence do however highlight there is a massive discrepancy in
guidance interpretation and it is imperative the RICS clarify
the position as a matter of urgency.
If my interpretation is wrong then so be it—we
have achieved no ground on rent assessment or tied product prices
and the main reason for the committee inquiry, tenant profitability
remains untouched.
15 August 2011
LETTER TO MR ROB MAY, ENTERPRISE INN PLC
FROM SIMON CLARKE
EAGLE ALE
HOUSE - RENT
REVIEW
We refer to your detailed letter dated 3 August 2011,
which whilst informative, again fails to actually address the
queries and requests we made. We are seeking comparable evidence
and reasoned explanations why Enterprise Inns have deviated from
the RICS guidance. Sadly, experience has taught us, we should
be reluctant to take anyone's word for it that the Regional Manager
and/or Licensed Trade Valuer have acted appropriately (remember
five years ago? RM first proposal was £59,000—arbitration
award was £45,000—I rest my case).
Just to be clear, we may have some differences of
opinion on guidance interpretation and rent assessment, but leaving
them aside, the preliminary issues here are:
— Enterprise
Inns failure to be "open and transparent" and supply
requested, and promised, information.
— Enterprise
Inns failure to substantiate their proposal.
— Enterprise
Inns failure to demonstrate that they have not relied upon the
information supplied by the tenant.
— Enterprise
Inns failure to follow RICS guidance or offer reasoned explanations
why they digress from it.
The time that has elapsed since the Enterprise Inns
rent proposal (27 April 2011) with no substantiation, despite
repeated requests for comparables, does rather suggest that Enterprise
are unable to back up their proposal and that our suspicions are
well founded, despite your assertions to the contrary, that Enterprise
have indeed relied upon pub-specific evidence when calculating
FMT, your most recent letter, whilst lengthy, does nothing to
negate this conclusion. Rather than argue about it, or ask us
to take your word for it, just prove it and send the information
asked for, and promised, by the RM and LVT.
We are simply asking for the basis Suzanne Delaney
and Gary Sellwood so "carefully considered" in
order to create and present their "rational opinion of
FMT at the review date in the hands of a reasonably efficient
operator". Given you agree it is not appropriate to use
any pub-specific evidence it remains a mystery that Enterprise
Inns RM's and LVT's always seek it and their resultant rent proposals
seem to consistently be based on numbers conveniently close to
the figures supplied by tenants, where it supports an over inflated
rent relying on tenants goodwill, improvements and occupation,
which should all be disregarded under the rent review clause and
RICS guidance.
All we have requested, as REO's not surveyor's, is
the "open and transparent rent review negotiation" Enterprise
Inns have promised in their code. Obviously, given our involvement
with the select committees and RICS guidance panel, we are far
better informed than the average REO and able to recognise Enterprises
efforts to avoid code commitments and RICS guidance. If we are
having trouble promoting meaningful dialogue and adherence to
code obligations then a REO has no chance at all, demonstrating
the Enterprise Inns code is nothing more than a sham, being meaningless
and ineffective. The latter corroborates the IPC point and neither
the industry or select committee should attach any confidence
in voluntary codes which do not address the issues of primacy
and, where issues are covered, the pubco has the opportunity to
blatantly ignore them at will as they can be confident of no penalty
from the BII who have no enforcement powers and are able to offer
no substantive sanction.
At a surveyor level, we clearly have differences
of opinion, and I accept we may have difficulty in reaching an
amicable settlement, but that is no reason not to try. At worst
we should be able to minimise the issues for a third party to
consider. Leaving aside rental bid, we should seek to establish
an FMT, GP and costs, or at least close the gap in our differences.
To this end, once again, we repeat our request for an open and
transparent negotiation and the information promised to us by
Gary and Suzanne at our meeting—that being the barrelage
information of the tenants on the list we supplied (attached)
or, if there is a confidentiality issue and Enterprise Inns propose
negating their opportunity to admit the information as evidence
at third party referral, the operators contact details in order
that we may approach them ourselves. The Enterprise Inns, "Volume
Sales Reports" will offer us a basis for an average regional
barrelage and sales mix, from which either one of us may chose
to adjust and qualify our opinions on a reasoned basis accordingly.
Given past performance, on the assumption Enterprise
Inns will be unable to support their proposal as requested, if
we are to progress at all, the above information is required which
will assist in our preparation of our rent assessment and a substantiated
counter offer for your consideration. Withholding the information
severely hampers a REO's opportunity to make a rent assessment
and any counter offer will be as meaningless as the initial Enterprise
proposal, if it is based on nothing more than opinion and hearsay.
You have asked us for our counter proposal which we would be pleased
to supply on receipt of the information requested.
With all the latter in mind, in the event we are
unable to negotiate a mutually acceptable settlement, we believe
that it is now important this review is conducted in the most
effective and formal way and to that end it seems imperative we
refer to arbitration and not independent expert, there being little
cost difference in reality. Given Enterprise Inns failure to engage
since the review notice (eight months ago) and substantiate their
proposal, after almost four months, it seems in order to establish
the appropriate information for a valuation based on RICS guidance,
we may need to rely on specific disclosure offered by the Arbitration
Act. As this particular review relates in part to interpretation
of RICS guidance we consider it important that a reasoned award
is published by an arbitrator for our mutual benefit, the select
committee, the industry as a whole and RICS, to enable consideration
to be given to guidance revision if necessary where interpretation
confusion remains.
We are informed that Colliers CRE acted in the portfolio
sale and lease back transaction of 29 pubs for £42.6 million,
between Enterprise Inns and Max Corporation Group, which included
the Eagle, clearly rental values would be of great importance
to the new freeholder and as such it would probably not be appropriate
for anyone at Colliers to be acting as a third party in this instance.
In the light of this, we feel it would be unreasonable to put
Gareth Jones in the position of third party and as such would
suggest an alternative is sought to act.
Assuming Enterprise Inns wish to maintain they have
nothing to hide, and have confidence in their convictions, we
look forward to your confirmation that an arbitration would be
most appropriate. We would suggest the following individuals as
possible arbitrators Peter Gwilliam, Neil Richmond or Angela Warr
King all of which should be known to you and we are satisfied
are adequately independent enough to avoid perception of conflict
of interest.
If Enterprise Inns were to continue to insist on
a review by independent expert it would not be unreasonable for
some to draw the conclusion that you do not consider their position
strong enough to persuade an independent arbitrator that your
proposal is a reasonable reflection of open market value and that,
in reality, Enterprise consider an independent arbitrator may
find contrary to Mr. Tuppen's interpretation of RICS guidance
and prove his view to be incorrect.
11 August 2011
LETTER FROM MR ROB MAY, ENTERPRISE INNS PLC,
FROM SIMON CLARKE
EAGLE, BATTERSEA:
RENT REVIEW
9 NOVEMBER 2011
As you know, our RM, Suzanne Delaney, and LTV, Gary
Sellwood, worked carefully to create and present to you a rational
opinion of the Fair Maintainable Trade as at the rent review date,
in the hands of an REO operating the pub on the current lease,
tie and price list terms. It is wrong to suggest that they have
simply used the information you supplied. We don't generally use
any pub-specific evidence when the RM or LTV creates their worked
FMT opinion as this is not an affordability test for the
actual operator.
Their assessment is also not related to the workings
used at the previous rent review. It may be misleading to try
to compare rent assessments for the same pub at different dates;
what matters is the market perception of trade potential and value
at the relevant valuation date.
You have asked us to explain what evidence supports
the key parts of our P&L model:
— (a) Our
opinion of the best sustainable business plan for each pub and
its RSPs for all products is based on our investigation of the
local market and the trading style and prices at competing pubs.
From this, one creates a hypothetical business plan for the Reasonably
Efficient Operator (REO). I draw your attention to the definition
of the REO at 2.10 of the RICS Guidance. The REO does not include
the current actual operator (the tenant).
— (b) The
fair maintainable trade volumes are based on this business plan.
We note that delivery records may or may not be of assistance
in respect of the tied beers. It really depends on one's view
of the optimum trading style, the quality of the incumbent operator
and new opportunities in the market. The estimated volumes multiplied
by RSPs creates turnover, to which we add estimated non-liquor
turnover and other income.
— These
opinions are based on the RM's experience of trade assessment
generally and locally, and on the similar assessments for other
pubs where deals have been agreed. Whether the assessment includes
gaming machine income depends on the style of operation of the
REO, not on whether there is an actual machine currently on site.
— (c) Our
opinion of the gross margin is arithmetic, based on these RSPs
and our actual tied wholesale price list for all the beers, then
adding an opinion of the discounts (off our tied price list) obtainable
in the open market for the ciders, FABs, wines, spirits and minerals.
— (d) As
the BISC inquiry was told by the ALMR, benchmarks of % of costs
are available from them but they do not also provide the £s
figures because their contributors are commercially sensitive
about the data.
— Many
of a pub's operating costs are fixed costs, so when we have quoted
operating costs (before rent) of £137,900 pa for the Eagle
they represent 33.5% of the projected turnover of £411,600
pa, but if the FMT turnover opinion was reduced to £350,000
pa and overheads were unchanged the cost percentage would be at
39.4% of turnover. This illustrates that incomplete information
must be treated with caution.
— The
percentage operating costs reflect the operational efficiency
of the building in its location—is it the right size for
the available trade, is the trade style "stand-up and drink"
or "sit down and eat" (the former is the more cost-efficient),
is it operable at quieter times with a single bar person etc?
— We
have some regard to the un-audited ALMR and Milestone reports,
which show an overall average operating cost of 40%. However any
average requires that the more cost-efficient buildings
are run at costs well below 40% to compensate for some large,
inefficient properties where costs are above 40% on low turnovers.
— Such
statistics should be audited by experts because the end product
risks being biased by the mix of pubs actually trading above or
below FMT, the range of cost-efficient and cost-inefficient buildings
and operators, the mix of multiple and solus operators and different
trade wet/dry/other trade mix.
— The
Eagle is a one-bar pub in a low-density pub area with a substantial
expected FMT turnover, so it is bound to be more cost efficient
than average to operate, leading to a substantially lower than
average costs percentage of turnover.
— (e) Rental
bid is based on our understanding of supply and demand for tied
pubs to let and to assign locally. In this area the pub estates
are largely fully let, so there is little evidence of new letting
transactions. There is demand from new lessees to take on tied
pubs in this area, which we know because there is an active lease
assignments market. Where demand is strong and supply is tight,
rent bids will be relatively high.
— We
have used the term opinion many times, because every FMT assessment
we prepare is based upon the accumulated knowledge and experience
of our team. Any external valuer similarly applies their own knowledge
and experience.
WITH REGARD
TO THE
PROCESS TO
TRY TO
SETTLE THIS
RENT REVIEW
1. I note that you have highlighted the Brooker
case, as well as your interpretation of the RICS Guidance.
2. It is hard to see how we can start a productive
negotiation when we appear not to be valuing the same thing. You
have repeatedly asked us to assess a value as if the pub lease
is free of tie, but this pub is on a beer tied lease and that
is the basis of valuation that the rent review clause in the lease
requires. See RICS Guidance 6.2 "It will be the actual lease
terms that will need to be considered".
3. The RICS Guidance does not say that "a
tied REO would consider their circumstances if free of tie".
It warns the valuer in paragraph 7.18 that the TENANT may do this,
then, at 7.19 it says "The REO may have regard to the fact
that free houses are available in the market". Again, see
section 2.10 for the vital distinction between the REO and the
actual tenant. The subject property is a beer-tied house and the
best comparable evidence for a tied pub lease are similar pubs
on similar lease terms, as stated in the Guidance at the end of
7.21.
4. I am pleased that we agree on both the principle
of the expert process and the identity of Gareth Jones to be that
expert. I have checked that he is available for this case and
he confirms he is. I have attached a joint letter of appointment,
would you please sign and return to me. I will countersign, attach
a copy of the lease and send it to Gareth Jones.
3 August 2011
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