Pub Companies - Business, Innovation and Skills Committee Contents

Written evidence submitted by Nigel Wakefield

The RICS have, after considerable deliberations, produced a very workable set of Guidelines in respect of rental valuations.

I was invited to the RICS to discuss my views and thoughts over the failure of the last set of Guidelines to control the Industry.

It would now appear from my information that certain companies are trying to circumvent the latest Guidelines, which if successful, will encourage other companies to follow suit.

A number of us have always pushed for one Code of Practice enforceable by legislation and law, the BII were asked to Police the Industry and took the path of asking all companies to submit their individual COP's, leading to a hotchpotch of variations, the decent operators a single COP will not affect them, the ones that all the complaints are being made about will have problems.

These companies are now trying to avoid using the new RICS Guidelines because the loopholes that they used to continually ratchet rents higher to achieve enhanced estate valuations have been blocked in the main.

The points that I raised to the RICS are common sense business points in respect of Rental Valuation.

The use of FMT (Fair Maintainable Trade) has been consistently used as a reason for Pub Co's to raise rents on the basis that the lessee/tenant was underperforming, regardless of whether they were or not, the theoretical FMT demands have always been far in excess of the true economics of the available business.

Business is finite and the use of overestimated FMT assumes that business is infinite, the latest projections show that growth is minimal and in other sectors falling, if the total national over estimation was collectively added up we would find that the industry would require a considerable number of new breweries to satisfy the overall demand, a number of senior people in the industry agree with this thought.

Previously the RICS Guidelines ensured that a pubs existing business was factored in to the calculations for FMT, the existing business is its market share at that time and any growth is in the majority of cases, even more so in a recession, will be taken from a neighbouring business, no attempt is made to reduce the rent or rates when this occurs. The use of the details of the existing business was dropped some years ago supposedly under the RICS TRVG Chairmanship by Rob May (Chief Rent Negotiator for Enterprise Inns), he described himself on all paperwork as Pub Expert rather than a senior member of Enterprise Inns, causing an a large part to the problems that the industry has been forced to deal with.

The use of FMT without reference to existing business, does however, effectively ratchet rents and rates higher at every turn.

The use of Comparables does exactly the same, where so called similar pubs within a ten mile radius are quoted for their rental levels, normally cherry picked. If Comparables are used every leased pub, possibly up to a five mile radius should be factored into the equation, whether closed, open or under management, this will reflect the economic situation of the area.

Because of this massive over estimation of FMT by certain companies, not only are the rents unsustainable but there is no chance for the majority of licensees being able to achieve this fictitious level of business.

The RICS have reinstated the need for existing business to be factored into the equation.

Pretty well all leases and Codes of Practice are subject to using the RICS Guidelines, however certain companies would appear to be stepping back from using RICS members and are insisting that their BDM's and Area Managers conduct negotiations, relying on the naivety of the lessee to accept their findings rather that use the RICS Guidelines, in certain instances the BDM's had no knowledge of these Guidelines.

The BII have had many complaints about breaches of the COP's, one company is alleged to account for 70%, but because of so called confidentiality this information is not accessible, it would be very useful if the Committee asked a for details of all complaints regarding breaches of COP's from the BII before the Committee convene, whether correct or not, because a number of complaints do in fact fall outside the COP's, this would give a clear insight as to the extent of the problem, with the names of the companies involved and numbers of complaints.

When I met the Director of Valuations and his colleagues at the RICS, I suggested that rents should fall within the range of 6-8% of Turnover, at a recent Arbitration, after due consideration by the Arbitrator of all the facts the rent was set at 8% of T/O.

The Pub Co's supposedly work on a 50/50 Divisible Split on profits, sadly they do not include the discount that they receive from the suppliers/brewers within this divisible split, if this figure, less a 5% of the discount handling charge for the paperwork side, 95% of the brewers discount would bring many pubs back to solvency, the rent would then fall between my suggested figures.

Should the tie be removed, except for brewers selling their own beers within their tenanted outlets, rents should be at normal commercial levels within my suggested figures.

Unfortunately the Inland Revenue have benefitted by these excessive rents in many cases, again with scant consideration to viability, since rates are linked to rents.

I had an in depth discussion with a Senior Inland Revenue Rating Valuer, he agreed after consideration, that my points were totally correct.

The 70% of complaints to the BII are supposedly from Enterprise Inns, but this is unconfirmed, the BII should be able to clarify exactly and would assist the committee greatly in their discussions.

19 May 2011

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Prepared 6 October 2011