Written evidence submitted by Garry C
Mallen
INTRODUCTION
1. I gave evidence at the BESC enquiry in 2009
as a member of IPC, I am also an ALMR Council Member with six
leasehold premises (two of which are tied ) under management,
a landlord of three Freehold premises which are let out on long
term free of tie leases and I have a practice which conducts rent
reviews on behalf of clients within the tied and untied sector.
2. Following the BESC I was invited to join the
Royal Institute of Chartered Surveyors Forum to review and revise
its valuation Guidance Paper, which took place during 2010. The
new Guidance Note 67/2010 was issued in December 2010 which I
believe is universally accepted as a much improved document.
3. The ALMR and IPC have highlighted in their
evidence that little regard is being paid to RICS Guidance and
Benchmarked Costs. I support and endorse these representations
and wanted to provide the Committee with some actual examples
of rent reviews carried out under the new self-regulatory regime
which demonstrate how it has failed to materially change the experience
of the lessee.
4. Attached at Appendix A is a spreadsheet showing
landlord valuations for seven premises, and although a summary
of each is attached as appendix CI. I have detailed below
a summary of the first premises to highlight the lack of adherence
to the Lease, The Codes of Practice and RICS Guidance GN 67/2010.
5. Roadtrip, EC1V, I have had extensive knowledge
of these premises over the last 12 years and have acted on behalf
of the last three tenants, carrying out the initial rental agreement
and the rent review in 2006. I have the barrelage figures back
to 2004, and up until my current client acquired the lease by
assignment, the historical barrelage had been considerably less
than 150 barrels. Since my client has taken over and developed
the outside area with a temporary planning permission to incorporate
a large decked area, and operated the premises in his undoubtedly
unique manner, the barrelage has steadily climbed from 111 to
nearly 350 barrels. Despite my client clearly overtrading the
premises, the landlord has provided a rental valuation based upon
320 barrels, and is looking to increase his rent by almost 70%.
The Code of Practice provided by this landlord clearly states
"In the event that you are achieving a greater level
of trade than that which we believe would be achieved by a reasonably
efficient operator, we will disregard this level of outperformance
from our rent assessment". The lease for this premises
also clearly states in section 2 of the Seventh Schedule that
the following should be disregarded:
(i) any goodwill attached to the property by
the carrying out on of business by the tenant in occupation under
this lease at the relevant Rent Review Date; and
(ii) any increase in rental value attributable
to any authorised improvements carried out by and at the expenses
of the Tenant during the term except under obligation owed to
the Company (whether or not under this Lease).
In my view it is very clear that the landlord company
is seeking to take advantage of the fact that my client is clearly
overtrading the premises, and attempting to apply an increase
in rent which effectively will penalise my client for having the
ability to trade so well. My client was able to increase the trade
from 111 barrels in 2008, to 250 barrels in 2009, he then obtained
Temporary Planning Permission in late 2009 for an
outside terrace for which he pays a separate rent to Hackney Council,
this helped to increase the barrelage further to 319 barrels.
The landlord company is insisting on using 320 barrels as the
FMT, yet the temporary planning permission only lasts three years.
This particular landlord company states in their Code of Practice
that they train their regional managers in making rent appraisals
and that they use and follow the guidance published by RICS, which
they clearly do not.
APPENDIX A
6. FMTThe establishment of FMT
Volume is paramount in valuing a trade related property, and this
is where I believe the first and greatest area of contention arises.
Fair Maintainable Trade is, as it suggests, meant to be both Fair
and Maintainable, and yet all too often in my experience FMT figures
are being used that are far in excess of the current barrelage,
or the barrelage within the previous number of years. You will
see at Appendix A the actual barrelage purchased for 2010 highlighted
in pink, and the four year average highlighted in green. Compare
these to the barrelage used as the FMT Volume highlighted in yellow
and you will see that in most cases the FMT used is much higher
than the previous years barrelage, and in one case it is 65%
higher than the previous years barrelage. In all the examples
the FMT used is much higher than the four year average despite
the fact that annual barrelage has been in decline for some years
as is evidenced by the historical barrelage and is also evidenced
by the BBPA Statistics which show a decline of 28% over the last
five years.
7. Gross Profit PercentageThe second
area of contention arises over the Gross Profit percentage being
used. In my experience, the percentage that is used is higher
than that being achieved or potentially could be achieved, unless
in the case of exceptional tenants, where the landlord companies
use the exceptional tenants actual GP because it's high. It is
not a difficult exercise to assess the selling prices for a particular
market, and since the cost of the goods is known to the landlord
companies, then it is a simple calculation to arrive at the market
gross profit percentage. In my experience, this exercise is rarely
carried out by the regional managers dealing with the rent reviews.
8. Costs PercentageThe costs percentage,
not surprisingly, is the only area of the valuation that the landlord
companies constantly under assess. The ALMR Benchmarking
Survey, which is the most authoritative survey of its kind, would
suggest that operating costs, excluding rent and management are
circa 40%. As is evidenced in Appendix A, only one of the seven
valuations is remotely close to a realistic operating cost percentage.
The remaining examples show a cost percentage of between 32.4-34.6%,
and one example shows the costs allowed at an astonishing 27.7%.
These running costs are simply not enough, and there is ample
evidence available to the landlord companies. The ALMR Benchmarking
Surveys have provided robust information concerning operating
costs, and I attended a meeting in July 2010 with Enterprise Inns
to discuss the results of the surveys, and to discuss data, which
they had requested from Milestones Accountants, which was gathered
from nearly 700 Enterprise tenants. The data supplied by Milestones
and included within the ALMR Submission, shows remarkably similar
operating costs to those contained in The ALMR Survey, and in
some cases higher costs than those shown in the ALMR Survey, and
markedly higher than those shown in the seven examples shown at
Appendix A
9. The Rental BidThis is the percentage
of the divisible balance (DB) that the Reasonably Efficient Operator
would offer to the landlord for the rent. The Divisible Balance
is calculated by deducting the operating costs from the gross
profit achieved. Historically this bid has been 50/50, but following
the case Brooker -v- Unique Pub Properties Ltd Claim No
7BS11690, 7 September 2009, and further clarification via the
new RICS Guidance Note GN 67/2010 Section 6.9, this bid is now
considered to fall somewhere between 35 and 65%. In the seven
examples in Appendix A, it clearly shows that the landlords rental
bids fall between 47.8% and 62%, which I believe to be excessive
for a tied leasehold premises. I would consider that rental bids
for most supply tied leasehold premises would vary according to
levels of discounts from the wholesale selling price, whether
or not they are subject to RPI increases, and location of the
premises. If one reasonably assumes a 65% bid would apply to a
free of tie premises in exceptional locations, then a supply tied
premises in a less desirable location, would in my opinion, attract
bids around 40-45%. The RICS GN 67/2010 contains a section dedicated
to the tied lease market, and section 7.19 states "The
Reasonably Efficient Operator (REO) would consider many factors,
some outlined in paragraph 6.12 against the background of the
supply and demand for such properties. In respect of the effects
of supply agreements, the REO may have regard to the fact that
free houses are available in the market. Therefore, it could expect
to make an increased profit as a result of being able to buy products
in the open market and not at the prices charged by the supply
tying landlord or its nominated supplier." It
is absurd to think that the REO would bid 62% for a supply tied
premises in Rochester, as has been put forward by the landlord
company of The George in Rochester, as evidenced in Appendix A.
10. The valuations used to formulate Appendix
A show an expected tenant income which is the difference between
the divisible balance and the proposed rent. On the face of it,
these amounts appear reasonable, but given that they have been
based upon unrealistic assumptions, then they bear no resemblance
to reality. In Appendix B I have used a number of more realistic
assumptions and applied them to the same premises to highlight
how unreasonable to landlord valuations are. The assumptions are:
FMTI have used
the four year average of each of the premises for the purposes
of this assumption, despite the fact that BBPA figures show a
decline of close to 28% over the last five years.
Gross Profit PercentageFor
premises in Inner London I have used a GP% of 57.5%, for those
in Greater London, Kent and Sussex I have used 55% except for
the premises in BR3, which is a fully tied premises without any
discount where I have used 50%. In the past few years the expected
gross profit achievable has declined dramatically with the introduction
of the Duty Escalator and the increase in VAT to 20%.
CostsThe evidence
available in the ALMR Benchmarking Survey, and indeed that supplied
by Milestones of nearly 700 Enterprise tenants would suggest that
the operating costs are around 40% excluding rent and management.
For the purposes of this example I have used 40% for Inner London,
and 37.5% for those in other areas.
Rental BidGiven
the clarity obtained through the Brooker -v- Unique Pub Properties
Ltd case, and the guidance from RICS regarding the tenants
bid, I have used 45% for supply tied premises with some discount,
and 40% for supply tied premises without discount and being subject
to RPI increases.
11. The resulting changes within the valuations
are dramatic, and you will see within Appendix B that the drop
in proposed rent is significant. The two most important factors
within this spreadsheet are the revised Expected Tenant Income,
and the Expected Tenant Income if the quoted rent has been applied.
Allowing for the assumptions outlined above, the Expected Tenant
Income is around £25-35,000 which I believe is a much more
realistic figure than that shown in Appendix A. The Expected Tenant
Income if the quoted rent in Appendix A has been applied, results
in the Tenant making less than £12,000 in five of the examples
and actually losing money in one.
12. The recent Code of Practice Survey OverviewQuestionnaire
Results show that more than half of the existing tenants are not
aware of dispute resolution processes, and many will agree to
rent reviews without the knowledge of whether they have been prepared
properly or not. In many cases the tenants agree to unsustainable
rent reviews because they are not aware of the valuation process,
nor are they aware of The RICS Guidance Notes and they are not
advised to seek professional assistance.
SUMMARY
13. Since the BISC recommendations in 2010 the
only meaningful change within the tied rent review process has
been the introduction of valuations being provided by most landlord
companies. However, in my experience, most of these valuations
are unrealistic and are being prepared by regional managers or
business development managers that have no training in carrying
out rent reviews. Of the seven premises contained within Appendix
A, not one of the regional managers knew anything about RICS GN
67/2010, and none of them were aware of the ALMR Benchmarking
Survey providing data regarding operating costs.
Landlord companies are still allowing
valuations to be compiled and presented to tenants with unrealistic
FMT volumes, despite them holding a great deal of comparable evidence
or making any allowance for the declining beer market.
Landlord companies are still allowing
valuations to be compiled and presented to tenants with unrealistic
operating costs, despite the evidence being available to them
through the ALMR Benchmarking Survey and Milestones data, and
despite the guidance given in the RICS GN67/2010 Section 7.22.
Landlord companies are now allowing
valuations to be compiled and presented to tenants with over inflated
rental bids, despite the advice given in Brooker -v- Unique
Pub Properties Ltd, and guidance given in the RICS GN 67/2010
Section 6.9.
Historically, landlord companies have used the RICS
valuation methods because public houses are trade related properties,
and it has served their purpose to do so. Following its review,
and promises made to BISC, The RICS has prepared a new Guidance
Note which is much more equitable than the previous paper. This
new guidance note is being routinely ignored by the landlord companies.
In fact some landlord companies are attempting to circumnavigate
the new guidance paper by issuing new leases without
rent reviews, but with an RPI clause which is, in
practice, an annual rent increase. During TISC, BESC and BISC
most of the landlord companies have stated that they no longer
rely upon their upwards only rent review clauses, yet they now
apply RPI clauses which are upwards only rent review
clauses. The landlord companies state that RPI can go down as
well as up, but this has only happened in nine months over
the last 50 years, and they were all in 2009.
It is all too common that a regional manager prepares
the valuation without any reference or consideration to, the financial
and benchmark data that is available.
In my opinion, it should be made mandatory that the
landlord companies provide valuations in accordance with The RICS
GN 67/2010, and to use only trained personnel in preparing those
valuations.
20 June 2011
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