Pub Companies - Business, Innovation and Skills Committee Contents


Written evidence submitted by Paul Wigham

INTRODUCTION

We operate 32 pubs and bars in the South East of England. The business in various forms has traded since the mid-nineties with various forms of lease and tenancy agreements. The estate is entirely leasehold with agreements that are mainly tied for beer & cider supply. The sites, which are mainly suburban community or out-of-London high street, are wet led with food contributing less than 5% of income. The makeup of sites and their landlords, on a variety of different agreements, is as follows:
Long LeasesShorthold
Enterprise Inns Plc14 2
Punch/Spirit Group6 2
Scottish & Newcastle Pub Enterprises

("SNPE")

33
Free of Tie20
Total25 7

In addition we have operated 25-30 other leaseholds over the last 10 years that have been sold or disposed of. We have a broad picture of the landlords and agreements across the sector including free of tie, private rental market, and product pricing.

EXECUTIVE SUMMARY

ES1  We believe that all parties in the pub industry have started to make moves to bring changes to previous inequitable practices. We welcome in particular the RICS guidance which gives clarity to some rent valuation issues.

ES2  We remain disappointed on a number of matters. In particular:

—  (a)  The pace of change remains slow. Pub companies naturally wish to protect their profits and are therefore reluctant to see dramatic movements that would impinge upon these.

—  (b)  Whilst the concept of a code of practice framework is good, we believe that the codes do not extend far enough and we believe that BBPA is not the appropriate body to control the framework, given their interest conflicts.

—  (c)  In spite of undertakings previously given, there is no free of tie option available tied lessees at open market valuation.

—  (d)  The position regarding machine ties remains unacceptable. Pub companies still effectively rentalise machines and they still get a larger share of the takings than they admit.

—  (e)  Pub companies are reluctant to follow RICS guidelines.

ES3  We have made recommendations at the end of each sector. The key items are:-

—  (a)  BII takes over responsibility for the management and review of code framework.

—  (b)  Tenants be offered a genuine free of tie option at open market rental valuation.

—  (c)  The tie to machines be released but pub companies be allowed to include the income for the purposes of rent setting.

—  (d)  Increased trading data disclosure for all rent P&L's including benchmark data.

SUBMISSION DETAIL

I have set out our submission in response to the topics raised in Announcement 61 on 8 June 2011.

1.  If the BBPA and IPC are now in dialogue and if so how this is progressing

1.1  This is not a matter upon which we can comment, and I am sure it will be addressed in the submissions by BBPA and IPC.

2.  Whether the Pub Companies' individual Codes of Practice are robust enough and whether the major pub companies have built upon the de-minimis requirements of the BBPA's Framework Code

2.1  It is our opinion that these codes are not the effective tool that people have been led to believe. In many instances, they are not effective for either party.

2.2  The framework was designed by the BBPA following unsuccessful mediation. The terms included in that were the minimum that the BBPA wanted to offer to placate BESC. The pub companies that we deal with have different forms of these but there are no recognisable additional obligations beyond the de-minimis requirements. We do not believe that BBPA are the correct organisation to maintain the framework.

2.3  These codes were never robust enough and we never expected them to be robust on the principle that "turkeys do not vote for Christmas." The issues that we see are:

—  (a)  The issue of legal enforceability was never supported or addressed, leaving tenants exposed to successors in title.

—  (b)  The codes do nothing to address the inequity of the share of the benefit from the property, which is the cornerstone of RICS valuation methods for pubs. The BBPA code states that landlords must tell tenants how much they are going to charge them for beer and wet products, which seems like a "given" that anyone would expect in a commercial agreement. There is no suggestion of comparative pricing and there are no options to move to a free-of-tie lease with an open market rental valuation.

—  (c)  The code states that the pub companies will be clear on treatment of AWP. They are clear but it is of no financial benefit to the tenant that they are simply told what the landlord will take.

—  (d)  The codes do nothing to address the position of current tenants. Many tenants entered into agreements based upon a division of profits that was inequitable and many of the rents set in 2006-08 are still current in spite of the altered economic climate. The codes make reference to talking to the landlord in times of difficulty, but there is no genuine process of change.

—  (e)  These codes of practice are only beholden upon members of BBPA. Not all tied pub landlords are members of BBPA and membership is not mandatory. Therefore the adoption of an accredited code is effectively optional.

RECOMMENDATIONS

2(a)  The ownership of the Framework Code passes to BII who are a more independent organisation capable of implementing a fairer and more effective framework.

2(b)  BII carry out an immediate review of the terms, followed by triennial reviews of those terms.

2(c)  The requirement for compliant codes to be extended to all pub companies and not just BBPA members.

2(d)  The adoption of the codes be made legally binding upon successors in title.

2(e)  The codes include an option for a tenant to move to a free-of-tie agreement at an open market rental valuation. This option be extended to existing tenants in a reasonably short time frame.

2(f)  Pub companies be forced to declare their benefits under machine supply terms where tied.

2(g)  Machine ties to be removed from all agreements in excess of 5 years but the income to be assessed and included in rent setting and review.

3.  If the Codes of Practice are being complied with

3.1  We received the Enterprise and Punch codes in early Winter of 2010. We received the SNPE codes in Spring of 2011. It needs a period of time to see how they comply but the codes are not onerous so it ought to be simple. To date, we have had one code breach regarding rent review procedure with SNPE, which was addressed via BII. We have another code breach on another pub landlord but as yet we have not reported it.

4.  How the BII is policing the codes and whether this is effective

4.1  BII will probably provide statistical evidence on policing. We note with concern that the fairness of the codes is not considered when reviewed. BII will only comment on compliance of individual pub company codes within the BBPA framework. The fact that the code may or may not be fit for purpose is not addressed.

4.2  We think BII have checked code compliance properly. The only matters that we note are the failure of the SNPE code to provide a complaints procedure regarding BDM's in line with clause 35 of the BBPA framework and clause 34 has not been addressed by any of the codes.

RECOMMENDATION

4(a)  The responsibility for setting and reviewing codes of practice be passed to BII per Recommendation 2(a)

5.  The enforceability of the codes

5.1  Our view is that basically, these are not enforceable in any meaningful legal sense.

5.2  There is no simple mechanism to ensure enforceability upon the landlord or his successor in title. It would seem relatively straightforward for the pub landlords to issue deeds of variation to agreements that cover the essential matters of the codes such as the removal of upward only rent review clauses and the procedures regarding rent setting in line with RICS guidance.

5.3  As the codes stand, they are capable of any amendment by the landlord at any time. The only safeguard is that they need to comply with the BBPA framework in order to comply with BII accreditation IF the landlord is a member of BBPA.

RECOMMENDATIONS

5(a)  BII agree a "key clause" deed that can be used in conjunction with any pub company agreement.

5(b)  Amendments to codes only implemented with the consent of BII as the arbiter authority.

6.  If AWP machines are now being treated more fairly and tenants are being given a genuinely free of tie option

6.1  We believe that tenants are not being given a genuine free-of-tie option on AWP machines, nor are tenants being treated more fairly. This matter was addressed in 2004 by TISC but the pub companies have chosen to ignore the recommendations.

6.2  In the situation of new agreements and rent reviews, the landlords say that they have removed the income from the divisible balance of profit. That is technically true. However, they have then added it in again below the divisible balance and either rentalised it OR amended the divisible percentages to compensate for the loss of income.

6.3  There is one further issue in terms of fairness that we believe has been overlooked. The basic premise of a tied machine agreement is that the owner of the machine collects the cash, deducts his rent and collects duty, and the proceeds are shared (usually 50%) basis between tenant and landlord. The process is set out in lease agreements.

6.4  However, the common practice is that the pub companies ask machine owners to set an artificially high price and the owner then pays over further money to the pub company to increase the landlord profit. It is implied in the lease agreements that net income is shared on an open basis with the landlord, when in fact it is not. This would not happen in a genuinely free-of tie market and ought to be abolished as a practice.

6.5  Seventeen of our sites are free-of-tie for machines and the remainder tied. In the worst example of Punch, we are charged a weekly rent of £87.99 for machines for which we pay less than £45 per week in the free market. It is inconceivable that in our small estate of machines, we have negotiated rents that less than estates of thousands of pubs.

RECOMMENDATION

6(a)  We refer you to Recommendations 2(f) and 2(g) above that address this issue. The release of machine income from ties will prevent malpractice.

7.  The treatment of flow monitoring equipment

7.1  We do not feel qualified to comment on this topic.

8.  The advice being provided by BBPA to prospective publicans

8.1  We know of no mechanism by which we would obtain advice from BBPA and we would be wary of the validity or objectivity of any advice given. In the course of agreements over years, no-one has ever mentioned advice available from BBPA.

9.  The effectiveness of the new RICS guidance on pub rental valuations and whether it provides clarity on the principle that a tied tenant should be no worse off than a free of tie tenant by defining what constitutes a countervailing benefit

9.1  The new RICS guidance is by its nature "new" and we are yet to see it working in practice. We welcome the guidance and we believe that if it is followed by the pub companies, then many of the issues regarding the fairness of the share of the divisible balance from pub agreements would be addressed.

9.2  However, we have not seen this guidance followed or introduced in our dealings to date. We have 7 rent reviews with different landlords in various stages of process and hitherto no BRM or other pub company official has mentioned it. There may be a training or education gap here for the pub companies.

9.3  Enterprise and SNPE codes both refer to it and state that they will follow RICS guidance that is produced. Punch state that they will "adopt recognised valuation methods used in the open market." That does not bind them to the specific pub valuation guidance as they could use another method.

9.4  RICS guidance is clear on the statement that a tied tenant should be no worse off than a free of tie tenant. Where we are not clear is what a countervailing benefit is. We find no benefit from our ties in terms of service, guidance, facilities or purchasing opportunities from pub company deals. At no time in 20 years has a pub company been able to offer us free-of-tie wet product at a price preferable to our own open market sourcing. We can only assume that RICS see the tie value being reflected in rent but we know that to be patently untrue at the moment.

9.5  We have a clear example of the tied/free of tie disparity and therefore an assessment of what value those countervailing benefits must achieve. We operate two properties within three miles of each other in West London with similar demographics. The facets of the properties are:

—  One is tied for beer and cider with a pub company, the other is free of all ties with a private landlord.

—  The two sites have identical branding, are similar in fit out, and are the same size.

—  Neither sells food although both have kitchens, albeit the tied kitchen is on the first floor which means that would cost more to run.

—  The tied site has a barrelage of 444 barrels, the free-of-tie site 421.

—  The tied site rent was last reviewed in 2010, the free-of-tie site in 2007 when values were stronger.

—  The tied site receives a composite barrelage discount of £114 per barrel, whereas the free-of-tie site discounts are generally in the range of £180-£210 per barrel on key products.

—  The rent on the tied site is £56,500, the free of tie site is £45,750 including the benefit of income from a private flat at £9,925 per year making the net rent £35,825.

Of the two sites, the costs of rent and draught beer & cider of the free-of-tie site are around £50,145 less than those of the tied site. That would therefore need to be the value of the countervailing benefit of dealing with the pub company. It seems inconceivable that we would see this value of benefit and at no time has any pub company attempted to tell us what the countervailing benefits or their values are.

RECOMMENDATIONS

9(a)  Pub companies be forced to comply with RICS guidance and principles.

9(b)  Pub companies should train their staff in the principles of rent setting guidance within the current guidance.

9(c)  Pub companies provide evidence of their countervailing benefit such that the comparative value of the tied agreement may be assessed against a free-of-tie agreement on an open market rental valuation basis.

10.  The creation of an industry benchmarking survey

10.1  We welcome industry benchmarking surveys because they enable the industry in general to make more informed decisions and allow measurement of pubs against the sector in general. The ALMR Benchmarking Survey is the main survey that we are aware of and the BBPA framework and RICS guidance refer to it. The data is in its fifth year of production and therefore holds high credibility. We are also aware that BBPA produces data for its own members with limited distribution. Some of this data includes valuable information on sector barrelage that reflect the movements in Fair Maintainable Trade.

10.2  Our conclusion is that the data is there to be seen if made available and it is good data. However, there are two issues:-

—  (a)  It is not easily available to tenants or new entrants. Members of ALMR are entitled to the benchmarking reports and ALMR makes it available to the wider public, but a tenant would need to know how and where to find it. Similarly, the volume information released by BBPA is not widely available. In our opinion, it should be. Note that prima facie, we cannot find any reference to benchmarking surveys in any of the codes of Enterprise, Punch or SNPE.

—  (b)  When the matter of benchmarking is raised with the pub companies in the course of a rent review or at the start of a new letting, the pub companies do not want to recognise the information. The issue is that there is a distinct reluctance to accept data that will reduce rents and impinge on profits.

10.3  Our own experience is that costs are understated by the pub companies. This is a result of production theoretical rent P&L's using a limited number of generalist cost categories that mask the true level of individual costs experienced by the business. In a recent rent negotiation, the landlord devoted 28 lines to sales and margin on wet products, but only 8 on the costs that can swallow up 80% of the margin on sales.

10.4  These are some examples of what we have seen recently:

—  BBPA figures show that on-trade beer sales have declined by around 28% in the last five years, which therefore implies that the FMT barrelage has fallen by a similar amount. Yet in recent reviews, we have seen reluctance to accept that any trade fall could have occurred, which must be counter-intuitive.

—  The ALMR Benchmarking survey shows that the average running costs for pubs in our profile are around 42-43% of turnover. This figure is consistent with the previous five years' data and we believe it is valid as it matches our own actual cost percentages. However, we have not seen any landlord rent P&L where costs are anywhere near that level. The average seen is around 34%.

—  In one particular pub company rent model for a pub in the London Borough of Bromley, the cost percentage was 27%. With London staff costs and London rates, that is simply impossible.

—  We received a rent model with Sky cost at £4,000 per annum. That is not even possible on the Sky rate card.

RECOMMENDATIONS

10(a)  The pub companies extend their "shadow P&L" to include a higher level of cost detail. This could be set out in agreement with BII.

10(b)  Shadow P&L's to include benchmarked cost percentages to show tenants or potential tenants market comparatives that will allow fairer assessment.

10(c)  Pub companies provide direct access for tenants to ALMR Benchmarking and BBPA volume data.

11  The availability and effectiveness of complaints procedures and an independent disputes mechanism

11.1  We referred earlier to the complaints procedure on BRM's which are only covered in two of the three codes that we have seen. All of them have a statement saying that effectively, a tenant should talk to the company if you have a problem. That seems really weak.

11.2  We believe that the PIRRS system appears to be working although we are yet to use it ourselves. We have reported one code breach and that was addressed by BII effectively.

12.  The guidance from BII on the type of pub leases available and what the options mean in reality to prospective lessees. This includes free of tie, tied pricing and discounts as well as the business support countervailing benefits available

12.1  We are aware that BII have published information on the type of leases available. However, it does not give detail of all leases in all sites, how to negotiate agreements, discount options, etc. and nor could it as the types of companies and agreements in the market are so wide and varied. The information is intended primarily to promote the industry and the training aspects of BII.

12.2  We note with concern that there are no obvious "health warnings" included in the BII guidance. It focuses more on what can go right than what can go wrong and we believe that tenants coming to the industry need to enter with eyes wide open.

RECOMMENDATIONS

12(a)  BII set out more warnings about the financial pitfalls that may be ahead for new entrants.

12(b)  The pro-forma or shadow P&L from pub companies include a pension-style example of financial result if projected FMT and turnovers fail to meet the level set by 5%, 10% and 20%.

15 June 2011



 
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Prepared 6 October 2011