Written evidence submitted by Paul Wigham |
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:
|Enterprise Inns Plc||14
|Scottish & Newcastle Pub Enterprises
|Free of Tie||2||0
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.
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:
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.
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
spite of undertakings previously given, there is no free of tie
option available tied lessees at open market valuation.
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.
companies are reluctant to follow RICS guidelines.
ES3 We have made recommendations at the end of
each sector. The key items are:-
takes over responsibility for the management and review of code
be offered a genuine free of tie option at open market rental
tie to machines be released but pub companies be allowed to include
the income for the purposes of rent setting.
trading data disclosure for all rent P&L's including benchmark
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
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
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
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:
issue of legal enforceability was never supported or addressed,
leaving tenants exposed to successors in title.
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.
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.
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.
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
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
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
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.
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.
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.
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
8. The advice being provided by BBPA to prospective
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:
is tied for beer and cider with a pub company, the other is free
of all ties with a private landlord.
two sites have identical branding, are similar in fit out, and
are the same size.
sells food although both have kitchens, albeit the tied kitchen
is on the first floor which means that would cost more to run.
tied site has a barrelage of 444 barrels, the free-of-tie site
tied site rent was last reviewed in 2010, the free-of-tie site
in 2007 when values were stronger.
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.
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.
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
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:-
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.
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
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.
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%.
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.
received a rent model with Sky cost at £4,000 per annum.
That is not even possible on the Sky rate card.
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
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
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