Written evidence submitted by David Morgan |
REPORT TO BUSINESS INNOVATION & SKILLS
SELECT COMMITTEE PUB RENT REVIEWSPROGRESS 2008-11
1.1 I was called to give evidence to the Business
and Enterprise Committee on 18 November 2008 in support of my
written evidence to the Committee as recorded in the Committee
Report, pages EV 243-EV284 dated 13 May 2009.
1.2 In the intervening two and a half years I
have continued to have an active and detailed involvement in the
processes of rent review throughout the pub industry on a national
basis as a result of client referral and instruction. At any one
time, I have between 60-70 active cases with the cases being resolved
being regularly replaced on a weekly basis. The majority of the
referrals are acting for Tenants against Pubcos which include
Enterprise Inns, Punch, Wellington, Admiral and S & N.
1.3 Although the initial processes of rent review
have been better structured through the Codes of Practice (COP),
there is no uniformity of compliance with these initial processes
and an alarming number appear not to follow the lead-in time scales.
The imbalance in negotiating relationship still remains as before.
Only a very small number of Tenants are themselves aware of the
"rules of engagement" or are in the position of seeking
professional help in their use and implementation. The superficial
and paternalistic attitude of the Pubco representative still remains
in that the Pubco is portrayed as "knowing best" and
is in the guise of being a business partner in the assistance
of the promotion and well being of the profitability of the site
1.4 Disputed rent reviews have not changed either
in substance or content in the following of the newly formulated
COPs in the creation of a level (or policed) playing field. The
same inequalities are being followed as two and a half years ago
new objectives of the COP are never properly explained to the
RICS regulations (see under) are not adhered to either in principle
or in detail, the Tenants having even less awareness;
mantra that the Pubco "knows best" is all-pervading;
representatives' "opinion evidence" is paramount.
1.5 It is understood there have been a considerable
number of complaints as to breaches of the COPs accredited by
the Bll (see under). No details have been released of the nature
and number of complaints. This lack of transparency gives no reassurance
in the intended policing of the implementation of the COPs.
1.6 The Content of this Submission to the Committee
concerns the extended world of rent review. The expense of rent
and that of staff are the two largest cost items of any public
house. Staffing cost to a degree, can be reined in. However, rent,
if linked to annual increases in the Retail Prices Index (see
under) will inexorably rise and have no relationship to on site
profitability. Each example case hereunder is cross referenced
to a specific property and lessee, the details of which are contained
in Appendix A
to this Report. The names and identities of the properties, together
with the lessees, are supplied for the confidential information
of the Committee and must not be the subject of publication, due
to the very real possibility of reprisals against the individuals
concerned. (Example 1, South Wales).
2.0 POINT OF
2.1 As in 2008, the point of contact between
Pubco and Tenant is the Business Relationship Manager (BRM). If
matters become difficult or protracted, the next level of management
is involved which is either the Area Retail Manager, or Regional
Manager. None of these individuals are Chartered Surveyors or
have property based qualifications, yet are the only point of
contact with the Tenant for a property based negotiation of considerable
magnitude, ie the rent.
2.2 The rent review process is now generally
instigated well in advance of the rent review date, although there
are still a disturbing number that are left very much to the last
minute with the inference that there is an obligation to have
to urgently settle prior to the rent review date. (Example 2,
Surrey). A large number of cases significantly pass the rent review
date with little urgency being expressed by the Pubco. In almost
every one of these cases, this is where it is in the interests
of the Pubco to maintain a high rent for as long as possible if
a significant rent reduction is thought likely. (Example 3, South
Devon). There is then no incentive to hurry a big rent reduction
through the system as a result of its commensurate effect on book
value of the subject premises.
2.3 Real open negotiation per se did not and
still does not, exist. The BRM will arrive with a given script,
commonly known as a Rent Assessment Form, with the understanding
that for the BRM, only minimal deviation from that form is tolerated.
(Example 4, Midlands). Accounts are always requested whether or
not it is a lease stipulation that this information should be
divulged. "Bad" accounts results are generally ignored
(Examples 5 and 6 Sheffield) and "good" accounts are
often adapted into the assessment of fair maintainable trade (FMT)
(Example 7, North Devon). With very minor and rare exceptions,
goodwill (as a standard lease disregard) is ignored. The new RICS
Pub Rent Guidance Notes (see under) are totally ignored by BRMs,
either deliberately or through ignorance. The assessment of a
living wage, or the impact of annual rent rises through indexation,
is almost always ignored.
3.0 UPWARDS ONLY
3.1 The COPs of the various Pubcos have been
accredited by the British Institute of lnnkeeping (BII). Enterprise
Inns' COP does not apply to those leases in its estate that are
free of tie and Wellington Pub Co. have not sought BIIBAC approval
for any form of COP as they operate a free of tie estate. All
new Pubco leases and an alarming number of brewery leases, now
contain annual increases in accordance with the Retail Prices
Index. Save for one month in 2009 when the Index fell by 0.5%,
all monthly movement in the Index is upwards only. Currently the
RPI is at a level of a monthly increase of 5.5% which, compounded
over five years (the normal standard rent review cycle), equates
to a fixed uplift of c.30%. This is plainly an upwards only annual
rent increase, albeit to a "look again" after five years.
3.2 It would appear that the damage being inflicted
by annual rent rises linked to RPI had been recognised by some
of the Pubcos such as Punch (for some of its new lease agreements)
by suggesting a link to the Consumer Price Index. This has seen
a slightly lower rate of annual rise than the Retail Prices Index
and thus a "softer blow". However, as at the date of
this Submission (May 2011) the CPI has increased to 4.5% in April
2011 from 4.0% in March 2011. The impact on rent is virtually
the same as RPI.
3.3 It has to be considered that the COP obligation
of the setting aside of upwards only rent reviews, has been compromised
by the insistence of rent increases in accordance with RPI or
3.4 In cases of lease renewal where a previous
lease did not contain the provision of such annual indexation,
Pubcos are routinely attempting to infuse such indexation into
the new lease terms on the pretext of harmonising the documents
within their leasehold estate (Example 8, Hertfordshire). Conversely,
Wellington Pub Co. are insisting on upwards only rent reviews
remaining in leases that are the subject of renewal. (Example
4.0 BASIS OF
4.1 The nationally accepted method is that of
the profits test which if implemented correctly, produces a balance
of income and resultant gross profit, less expenses, to produce
a divisible balance (DB) from which rent and Tenant's remuneration
is derived. The DB in 2008 used to be automatically split 50/50
between Landlord and Tenant until clarification was obtained in
September 2009 in the case of Brooker -v- Unique Pub Properties
Ltd, Claim No. 7BS11690, 7 September 2009. That case involved
a fully supply tied, non assignable, five year lease which as
such is not often replicated within standard Pubco leases. However,
the Judge found that the DB should only attract a Tenant's bid
of 35%. The underlying principles have subsequently been confirmed
in RICS Guidance Note 67/2010, paragraph 6.13 which affirmed that
the Tenant's bid could range between 35% and 65%, RICS GN 67/2010,
paragraph 6.9. Pubco Rent Assessment Forms almost always still
show a 50% DB with the Brooker case and RICS Guidance Notes recommendations
being completely ignored.
4.2 Excessive reliance is placed on comparable
properties (Example 10, South London) and information to that
effect is shared between Pubcos to produce a cherry picked schedule
of properties within a given area to produce a desired "tone"
of rent settlements. Such rent reductions that may exist in a
given area, are hidden or not acknowledged and are never offered
in the rent negotiation process (Example 7).
5.1 The main disadvantages exist as in 2008 in
that the Pubco has all the detail of the comparable evidence and
the Tenant has access to none. The COPs make great play about
transparency which is not observed in the issue of comparability.
The profits test has at its heart the assessment of FMT. As is
regularly the case, the assumed FMT for rent review purposes is
over-estimated by up to 30%. No direct comparables are offered.
(Example 4). Accountancy information related to comparable properties
is either compromised by the Data Protection Act or only available
in rare instances through agents' particulars of sale. Indeed
previous RICS Guidance Notes stated in GN.7.2.13 (August
5.2 A secondary basis of comparison may be
on physical factors. However, when resorting to such a method
it is essential that any comparable is very closely relevant,
as regards style, location and trading circumstances. The accounting
information on which other transactions were based is likely to
have been strictly confidential and, unless all the factors are
known, any comparison of physical aspects alone can be misleading
and unreliable. (Emphasis added)
5.3 Stiff resistance is constantly noted in an
application for a blanket revelation of comparables within a given
and restricted radius of the subject premises, on the basis that
the applicant is on a "fishing trip". Transparency is
5.4 Usually the only information supplied is
the level of rent settlement and occasionally the associated barrelage.
This then builds up a picture of cherry picked rent settlements
in the justification of the assumed rental on the Rent Assessment
Form. Again, full transparency is not observed.
6.0 RICS REGULATIONS
6.1 By invitation I sat on the RICS Committee
known as the RICS Pub Forum, between April and September 2010
in the formulation of the RICS Guidance Note 67/2010 that was
issued in mid December 2010. Although at Committee stage I pressed
for fuller and more plain English explanations of the content
of the Guidance Note, it was deemed that the document was for
use by specialist Chartered Surveyors involved in licensed / leisure
property, rather than a general text book for non RICS members.
6.2 The new Guidance Notes have a wide ranging
effect in the clarification of rent review assumptions and procedures
and have produced, through extensive negotiation at Committee
stage including Pubco representatives, a reasonably level playing
field which is certainly a significant advance on those RIGS regulations
that existed in 2008.
6.3 It is a noted feature of all COPs registered
with the BII, that full adherence to the new RICS Guidance Notes
is openly expressed. In addition, the British Beer & Pub Association
(BBPA), has confirmed that all of their members should adhere
to the new RIGS regulations. A minor number of Pubcos are not
members of the BBPA.
6.4 In reality, the first line of negotiation
(see above) which is the Pubco BRMs, still totally ignore the
detail and content of the RIGS Guidance Notes. This is particularly
noticeable in the lack of acknowledgement of the status of the
Reasonably Efficient Operator, (Example 11, South London), the
calculation offsets in the profits test of the obligation of the
assumption of vacant possession (Example 12, Midlands) and the
disregard of structural works undertaken by the Tenant at the
Tenant's expense (Example 13, South London).
6.5 Reasonably Efficient Operator
understanding of this definition is:
keyword is "reasonable". Referring to the Collins Concise
Dictionary 21st Century, the word "reasonable" is defined
as: "having modest or moderate expectations".
The Concise Oxford Dictionary defines the word as "fair
and sensible as much is appropriate, moderate".
Pubcos are in denial that this definition exists and are not quantifying
how the existing lessee either equals or exceeds the above definition.
(Example 4). As earlier mentioned, Tenantable goodwill is almost
always completely forgotten.
6.6 Vacant Possession
lease makes the assumption of vacant possession on rent review
or lease renewal. This requires that the hypothetical Tenant has
to acquire the inventory at in situ value, all wet and dry stock
and consumables and have available working capital. The assessment
of the three input factors is rarely if ever satisfactorily calculated,
as is the finance associated with the provision of the capital
monies concerned. (Example 14, South Wales).
6.7 Structural Works
large number of leases require that structural works undertaken
by the Tenant at the Tenant's expense, have to have formal Landlord's
authorisation and approval. In a similarly large number of situations,
the finality of formal approval is often overlooked when the works
are undertaken and in almost every case, the Pubco does not remind
the Tenant that such a document is required. (Examples 13 and
15, Central London).
leads into the regular occurrence that extensive structural works
are then rentalised to the detriment of the Tenant. This situation
is covered in RICS Guidance Note 67/2010, paragraphs 6.20-6.25.
The opportunity does exist for an application for retrospective
consent which is almost always granted. For example, a multi award
winning lessee in South London (Example 13) lavished some £300,000
on his Pubco owned premises, whose current rent is £32,000
p.a. The Pubco is now seeking a rental of £70,000 upon rent
review, on the basis that formal consent for structural works
was never ratified, notwithstanding that all of the company representatives
knew that the work was being undertaken, the relevant consents
and permissions had been given and that the entire cost was financed
by the Tenant. That particular case is currently being resolved
7.0 MACHINE INCOME
7.1 Notwithstanding the recommendations of the
Parliamentary Hearings in 2004, new lease agreements are constantly
being entered into that require a 50/50 share of net proceeds
of machines being split between Pubco and Tenant. There is thus
little incentive for promoting machine income save for pool tables
which have a higher net return than AWP machines. Machine income
is regularly over-estimated by Pubcos in the assessment of total
sales in the profits test calculation.
8.0 THIRD PARTY
8.1 All leases contain the opportunity for disputed
rentals to be settled by third party. Almost always this process
is of arbitration. There has, however, been an innovative move
being made by the Bll in the creation of the PIRRS system of dispute
resolution. The administration of the PIRRS system through the
Bll is wholly funded by the BBPA by mandatory annual levy on its
members. A full factual critique of the differences between PIRRS
and Arbitration was prepared by agreement with the leading licensed
trade publication The Morning Advertiser last November (which
has yet to be published) and is enclosed in Appendix B.
9.1 The general imbalance that existed in 2008
between Landlord and Tenant, still continues in 2011. The root
cause is the disparity between the financial strengths of the
parties and the lack of common ground in information sharing as
to the processes that should be reasonably followed in the negotiation
of a rental upon either review or lease renewal. The following
factors continue to exist:
over stating of FMT and gross profit margins and the under stating
of expenses on the Rent Assessment Form;
of RICS Guidance Note 67/2010 published in December 2010;
of the implications of the Brooker case and associated RICS GN
67/2010 paragraphs 6.9 and 6.13;
of annual rent increases in accordance with the RPI or CPI;
of structural works undertaken at the Tenant's expense with Landlord's
verbal but not formal authorisation in the assessment of FMT;
of any form of property based qualifications in the first or second
line of Pubco / Tenant negotiations;
of recognition of the ability of the Tenant to obtain a "living
wage" or of the continued impact of the reduction in leisure
spend (with the exception of Central and parts of suburban London);
leases continuing to require that machine income be shared between
Landlord and Tenant.
19 May 2011
PIRRS AND ARBITRATION
Who Controls the Two Systems?
The President of the RICS and the RICS Dispute Resolution
Service (DRS) control the appointment of either arbitrators or
Under PIRRS, the Tenant begins the proceedings by
completing the PIRRS application form and selecting their preferred
independent valuer from the regional list of recommended experts.
Although the Tenant's selection of valuer is final, the opportunity
exists for the brewer / Pubco to object to any particular appointment.
Who Pays for the Appointments?
The applicant (this could be either the Landlord
or the Tenant) for an RICS appointed arbitrator or expert, currently
pays £361 (inclusive of VAT) application fee for the appointment.
The applicant has no control over the President of the RICS or
the DRS. The opportunity does exist for challenge. The
RICS Dispute Resolution Service is funded by the general membership
of the RICS through individual RICS members' annual subscriptions.
There is no application fee for a PIRRS appointment.
The PIRRS system is funded by the British Beer & Pub Association
(BBPA) through a mandatory levy of £2.50 per unit of pub
ownership for every BBPA member.
Who are the Experts and who appoints them?
The RICS has a nationwide pool of arbitrators which
also includes some of those experts registered in PIRRS. Re-examination
of the RICS panel members occurs on a regular basis.
PIRRS experts are appointed by the PIRRS board on
the understanding that each of the individuals has to hold a qualification
(not specified) and professional indemnity insurance and have
to have at least five years experience of conducting and being
involved in pub rent reviews. PIRRS currently has 14 experts appointed
by the PIRRS board, representing nine different surveying practices.
The experts are split into ten different regions with a number
of the experts serving in a large number of different regions.
Can the Tenant represent himself?
Yes. Both the RICS and PIRRS allow for the Tenant
to represent themselves.
On the understanding of Tenant self representation,
the RICS appointed arbitrator will initially confirm an hourly
rate fee charge, but will not be specific in respect of ultimate
fee costs for the whole arbitration. Associated fees can vary
between regions with Central London based arbitrators being the
most expensive with some hourly rates exceeding £350 plus
VAT. Regional arbitrators' fees generally start at £175 an
hour plus VAT. The ultimate fee charge, which can vary between
£3,000-£8,000 plus VAT as a rough guide, is initially
split evenly between parties.
The PIRRS system has a fixed fee charge for the services
of the independent expert which fall into two categoriesthose
with rents under £25,000 and those with rents over £25,000
p.a. Under £25,000 the Landlord pays a fixed fee between
£2,000-£2,500 and the Tenant pays a fixed fee between
£1,000-£1,500. Over £25,000 p.a. rent, the Landlord
and the Tenant pay fixed fees between £1,500 and £2,000.
Can the Tenant recover costs and fees?
Under the Arbitration Act 1996, the opportunity exists
for the recovery of all costs and fees after the issuance of a
successful Calderbank offer (easily Googled for further and more
PIRRS has no system for the recovering of costs and
each party bears all of their own costs including the initial
fixed expert's fees.
Do I need a Deed of Variation?
Not required at Arbitration. Existing Tenancies /
Leases identify the binding nature of any dispute resolution system.
No threat of lease forfeiture is implied in the system of arbitration
PIRRS requires a Deed of Variation for the PIRRS
appointed expert's determination to be binding on both parties.
The Tenant will need legal advice in the preparation of the Deed
of Variation which is an extra cost which will have to be borne
by the Tenant. Any subsequent deviation from the agreed Deed of
Variation carries the threat of Lease forfeiture.
An arbitration award has to be fully reasoned and
must include the detail of the arbitrator's calculations.
The PIRRS expert gives no reasoning, calculations
Can I Appeal the ultimate Judgement?
Under the Arbitration Act 1996, there are strictly
governed opportunities for appealing the arbitration award.
The final PIRRS independent valuation cannot be appealed
under any circumstance.
Extent of Evidence
An arbitration has no restrictions or constraints
on the type or length of evidence that can be submitted.
The PIRRS scheme limits the Statements of Case.
Points of Law
Under the Arbitration Act either party to an arbitration
can raise points of law and have them determined either by the
arbitrator, or an independent legal assessor that is appointed
by the arbitrator with the agreement of the parties.
PIRRS does not allow any dispute of interpretation
in law to be resolved by the PIRRS independent expert.
Similar. PIRRS on average takes six months.
Arbitration awards as to rent calculations, valuation
methodology etc are widely used in the assistance of setting other
rentals and can be of interest in establishing comparable properties
as evidence. The prior approval of the parties to the arbitration
should be obtained.
In the Terms & Conditions, PIRRS requires that
all details of any PIRRS case and the independent expert's workings
on any particular case, are strictly confidential.
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