Small Business, Enterpise and Employment Bill

Written Evidence Submitted by Chris and Von Lindesay, The Sun Inn, Dunsfold, founders and coordinators of The Punch Tenant Network (SB 48)

Summary

Based on our experience of the self –regulatory process we have concluded that a statutory system is required to facilitate continuous improvement in the relationship between PubCo and tenant with the intermediation of an independent adjudicator.

We offer an example of a widespread problem in the specific case of cask conditioned ale which would require the immediate intervention of an independent adjudicator. If it existed today.

Regrettably the adjudicator does not exist so without special action this problem will remain unresolved for the whole industry.

1. Introduction

1.1. We are grateful for the opportunity to make comments to the committee on the subject of the Small Business, Enterprise and Employment Bill (The Bill)

1.2. In this context, we have been Partners and Leaseholders in the Sun Inn, Dunsfold since August 12th 2002. The Sun Inn is leased from the Securitisation A subsidiary of Punch Taverns plc under a 20 year FRI Growth Lease established in 2001.

1.3. In addition we act in an informal and voluntary capacity as coordinators of the Punch Tenant Network which comprises a number of tenants and leaseholders of the Punch Taverns group whose objective is to share information and mutual support in what has over the past few years been a very worrying and difficult time for Punch tenants.

1.4. We are delighted to note that after 4 select committee inquiries the government has at last responded to the clear will of the house to introduce this Bill. We believe there are shortcomings most importantly the failure to include the Market Rent Option but we confidently anticipate most of these will be tackled by comments from others.

1.5. The main purpose of our submission is to wholeheartedly support the establishment of an industry adjudicator envisaged in section 4 of the bill. We would be delighted to be able to contribute towards ensuring that the focus of the adjudicator is directed towards the primary issues, which will be most effective in achieving the objective of ensuring transparency and fair treatment of tied tenants. In particular to new entrants to the industry and profession who so frequently seem to fail early in their tenure, and by doing so, frequently trigger a cycle of decline which ends with the failure of the Pub and its loss to our heritage stock of Public Houses.

2. The failure of self-regulation.

2.1. It has been our experience in the twelve years that we have leased The Sun Inn that it is extremely difficult to communicate and prevail in any dispute with a PubCo landlord.

2.2. We have during our tenure at the Sun Inn engaged in two rent reviews which were subject to the "rules of engagement" that prevailed at the time.

2.3. In the first review the negotiation continued for over a year after the contractual deadline. It was only after writing a direct letter to a member of the main board of Punch Taverns and attaching an extract from the evidence, taken from Hansard, that he personally gave to the Trade and Industry Select Committee enquiry, and pointing out the stark contrast between that evidence and the actions of his staff on the ground, that the rent was resolved in mid 2007.

2.4. Our second rent review commenced in 2010 and was conducted after the introduction of the "Non statutory" Code of Practise. We were dismayed to find little inclination from Punch employees to adhere to the Code. Within days of starting the review Punch were forced to admit what was described by BIIBAS as a "technical" code breach. This was subsequently, and inaccurately, testified about by Punch’s then chief executive Roger Whiteside to the next Select Committee inquiry. This second review involved an exchange of letters between the Chief Executive of Punch and our own MP, who has been stalwart in his support of our battle with Punch for many years. The review involved long meetings with the "most senior executive on rent" at Punch also attended and witnessed by the senior constituency case worker of our MP. Finally, as it had been impossible to agree by negotiation, it was concluded through the binding PIRRS process which as it must, arrived at a rent. No reasoned decision was given and therefore no contribution was made to the process of rent setting to inform future negotiations. We acknowledge that PIRRS has now introduced the option of reasoned decision, possibly partially as a result of our objections at the time and if made public this will be an improvement.

2.5. Our experience under the "Self-regulatory" system in this industry, is that when it is a matter of absolute survival at the 5 year "rent review" opportunity to achieve a sustainable rent - it is only possible to achieve a reasonable outcome at the expense of months of total dogged obsession and dedication to the exclusion of anything else. We were finally able to hold our own against the professional surveyor instructed by Punch to conduct the PIRRS case, and while we do not agree with the outcome, it was significantly better than what was ever on offer from Punch. We do not regard this experience as a satisfactory relationship with a business partner.

2.6. At the end of the rent review process we developed a long list of issues concerning adherence to the Code of Practise which we believed might have been helpful in future cases arising from our experience and to inform and guide BIIBAS in the future conduct of these kind of reviews. We did this in the hope that future tenants would benefit from some new findings of best practise, but regrettably, these remain on the shelf at BIIBAS and were never addressed. Only two breaches out of seven allegations submitted were even considered by BIIBAS and both were accepted. Then the BIIBAS process changed and eventually became PICA Service which is now only constituted to address specific disputes in need of arbitration, not to establish best practise and facilitate continual improvement in the way in which negotiations are conducted. Every case starts from ground zero and owing to the obsessive confidentiality there is no process of precedent informing best practice and improvement as is found in more transparent regulatory regimes. We regard this as a major failure of process.

3. The establishment of an independent adjudicator is essential to achieve fairness and transparency and "Best practise memory".

3.1. It is our view that the establishment of an independent adjudicator is essential to achieve the degree of fairness and transparency that will be required to ensure that the cycle of failure, closure and loss of our Pub heritage is minimised.

3.2. It is to be hoped that the Adjudicator will be able to investigate and rule on matters of best practise in the ongoing engagements between Pub Company and tenant in a way that will ensure that poor practise in one case will immediately inform practise in all PubCos. In this way best practise will be able to evolve across the industry as problems in one case can inform practise in others. It is to be hoped that the adjudicator can from time to time issue public guidance based on one or more specific cases but without compromising commercially sensitive or confidential matters of any of the participants.

3.3. We believe that the establishment of the adjudicator will facilitate a continually improving set of practices which will be able to propagate across the industry significantly more swiftly than has been possible under the "self-regulatory" regime where progress has been very fairly described as "glacial" on more than one occasion and prompted by long, complex and ultimately powerless parliamentary inquiries where PubCo executives are free to say what they will without accountability.

4. Best Practise Example

4.1. By way of illustration and prompted quite fortuitously by the Committee meeting on Tuesday 14th October where the St Austell brewery was briefly mentioned, we have discovered a startling example of how the tied tenant is massively disadvantaged as a result of PubCo practise.

4.2. In reviewing the St Austell brewery mentioned in glowing terms in committee it was noted that it publishes on its website a page described as "End Product Duty" which states:

"In accordance with the agreement reached between St Austell Brewery Co Ltd and H M Customs & Excise in relation to non-drinkable sediment in cask-conditioned beer by reference to which duty has been paid is shown below:

Normal Volume Sediment Duty Paid Volume

Metal 18's 81.83 Ltrs 1.7 Ltrs 80.13 Ltrs

Metal 9's 40.91 Ltrs 0.85 Ltrs 40.07 Ltrs

4.3. Further investigation has revealed that the changes to Beer Duty in June 1993 were intended to harmonise the European duty regime and to ensure that duty is only levied on beer that is sold and consumed rather than beer that is brewed. The unique British Cask Conditioned ales have undrinkable sediment in each cask, this resulted in an unfair duty regime for our unique product. As a result it was determined that all brewers could declare the volume of beer that was of merchantable quality in a cask conditioned ale and only pay the duty on that volume. The current HMRC guidance Notice 226 (April 2014) makes the following statement at paragraph 11.3.5

"Duty need not be charged on any undrinkable sediment in your cask-conditioned beer, provided:
your customer (for example, the publican) is made fully aware in writing, at or before the time of receipt, of the quantity of beer on which duty has been charged. If, for example, a barrel (163.7 litres) contains 2.3 litres of undrinkable sediment, the customer must be made aware, by a statement on the label, delivery note or price list and so on, that duty has been charged on 161.4 litres (a copy of the notification to customers must be retained)"

4.4. It seems clear that since 1993 it has been recognised by HMRC that a residue of undrinkable sediment exists in cask ales and, in the interests of not disadvantaging this product, unique to Britain, HMRC has agreed that Beer duty is only payable on cask ale that is "drinkable".

4.5. Allowing for the fact that the brewers may well have regarded the Pubco as their customer, rather than the publican, who must be made "fully aware" we are astounded that this vital information appears to have been actively suppressed in rent assessments and FMT calculations price lists and delivery notes by every Pubco whether "Large" or Family brewer.

4.6. Intensive investigation has failed to discover any single case where a PubCo, be it property only, or indeed Family Brewery has suggested to its tenants that anything less than 72 pints in a 9 gallon cask or 288 pints in a brewers barrel is capable of being sold for the purpose of establishing revenue and profit from FMT, and subsequently for establishing a rent which is based on a share of the "net profit before rent" arising from the sale of cask ales.

4.7. Further, in examining the introductory brochures and training material charged for by the PubCos, as a mandatory requirement of entering into a tenancy or lease, we have not found any suggestion that it may not be possible to sell 72 pints from a 9 gallon cask of Cask conditioned ale because a certain number of them will have been declared by the brewer to be undrinkable and therefore unsaleable.

4.8. It has long been a point of contention between tenants and landlords that there is a proportion of "Wastage" associated with testing, proving, line cleaning, spillage and fobbing which results in a reduction of "yield" from both kegs and casks. These issues are quite rightly a matter for discussion around the quality of the dispense facilities and skills of the tenant and staff. However the issue is of unsaleable beer as agreed with HMRC is of a wholly different nature.

4.9. As far as can be determined the tenancy and lease management departments of both "Family Breweries" and large Pubcos continue to insist that every 9 gallon cask of British Cask conditioned ale contains 72 saleable pints and gross profits and rents are determined on that basis.

4.10. The following was received from Carl Heron Head brewer at Sharps Brewery, on 21st October 2014 in response to an inquiry concerning our own concerns over yield on Doombar this country’s largest selling Cask conditioned ale.

"We declare 1.9 litres of unsaleable sediment in a firkin to HMCE, which means that you should be able to yield 68 pints.
We brim fill our casks so it is likely that the yield should slightly better than theoretical.

4.11. Further investigation reveals that the Nominal capacity of a Doombar 9 gallon Cask is 41 litres = 72.15 pints, so the maximum possible "yield" from a cask of Doom bar is 68.8 pints not 72. The additional 3.2 pints simply do not exist and yet are charged for and the revenue , including duty and putative gross profits are fully included in FMT and Rent assessments.

4.12. Inquiries have been made with the Trading Standards Agency concerning this issue, but beyond confirming that Trading Standards do require every pint sold to a consumer be a fully compliant pint, thus far it seems that Trading Standards do not regard any volume discrepancy between brewer and publican to be a matter of concern to them.

4.13. By way of example Jonathan Neame the Chairman of the BBPA and Chief Executive of his family brewery Shepard Neame, who was tied trade director from 1994 until 1999 declares on labels attached to his product that a 9g cask of Master Brew has "Firkin Duty paid on 38.9 litres" which is 68.45 pints yet the Shepard Neame Tenanted Price list states that A Master Brew 9G Cask contains 72 "Measures" and helpfully suggests gross profit % and cash amounts based on suggested retail prices. It is now chillingly clear that the inexperienced tenant will have his expected profit largely extinguished if he were to follow the clear advice given in this "helpful" Price list and profit guide.

4.14. Perhaps to add insult to injury the 3.5 "measures" of non-existent beer that the tenants are being charged for in addition to those that the brewer deems "Drinkable" are charged at the same duty paid price so in effect these non-existent measures are the most profitable ones that the PubCo sells to its tenants. This issue arises even before the cask has been broached and the subsequent loss of "drinkable" beer from conditioning, testing, proving, line-cleaning,and spillage further reduces the achievable profit.

4.15. The discovery of this kind of issue presents a major problem in the absence of an independent adjudicator as there is no one to whom it can be taken for rapid resolution, and there are many very similar issues that have bedevilled the relationship between PubCo and tenant for a decade.

4.16. We believe that the establishment of a powerful adjudicator has potential to galvanise our industry and make a significant contribution to the survival of our great British Pubs.

4.17. We would encourage the government to remain resolute and ensure that the adjudicator is equipped with all the necessary tools and powers to achieve this essential task which has been delayed for far too long.

October 2014

Prepared 29th October 2014