Pub Companies - Business, Innovation and Skills Committee Contents

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



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



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.


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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