Small Business, Enterprise and Employment Bill

Written evidence submitted by Fair Pint – supplementary (SB 64)

SMALL BUSINESS, ENTERPRISE AND EMPLOYMENT PUBLIC BILL COMMITTEE

PART 4 - THE PUBS CODE ADJUDICATOR AND THE PUBS CODE

PARALLEL RENT ASSESSMENT AND THE RIC S .

1. INTRODUCTION

2. We believe the RICS submission to committee may as well have been written by the pubco placemen within the organisation or is at the very least heavily influenced by them.

3. The RICS representation seeks to muddy the water to what is a relatively simple concept.

4. Rob May (National Rent Controller for Enterprise Inns) was chairman of the RICS Trade Related Valuations Group who wrote the pub rental guidance until it was amended in 2010. He stayed on that group until last year.

5. It is this group we understand blocked clarification of the new guidance, as requested by Government and Select Committee - hence the Government sought to offer the clarification the RICS would not and indicated that the RICS rent assessment guidance should be undertaken ensuring that the result was a tied rent which left the tied tenant no worse off than if they were free of tie, a prospect confirmed by the RICS previously in 2009.

6. The problem is that the field of pub valuations is specialist and there are relatively few surveyors in the field. Given the pubcos and brewers own almost half the pubs in the country almost all surveyors will have been 'touched' by the pub owning companies and, to a reasonable man at least, would be seen to be conflicted and compromised.

7. Take any of the larger firms dealing with pub valuations, rent reviews or lease renewals, many of their directors are high up in the RICS influencing rent assessments - a considerable portion of their annual incomes are derived from pubco and brewer instructions.

8. SIMPLICITY OF PARALLEL RENT ASSESSMENT

9. The RICS report seeks to over complicate the ' parallel rent assessment' (PRA), implying that a formulaic approach is not the current approach used. This is none sense everyone in practice uses a formulaic approach. The PRA simply adds another column to an existing methodology.

10. The implication is that a free of tie valuation has never happened and is almost impossible to deliver but what they omit to say is that free of tie valuations take place now.

11. Free of tie leases on pubs are not as common as tied agreements, granted, but the valuation approach for a pub is the same regardless of whether it is tied or free of tie.

12. Unlike most shops and restaurants, which are valued on a rate per sq metre, pubs are valued using the profits method. Put simply the valuer must establish a level of sales (from market comparables). The procedure then is to and apply an estimated gross profit (GP), dictated by the prices that can be achieved by the tenant both on purchase and sale of goods. This is where the terms of the agreement come in, tied GP generally being substantially less than free of tie GP due to inflated tied product prices . From GP an estimated level of costs are deducted leaving what is called a divisible balance , which is the net profit before rent, put simply, the amount to be split between the pub owning business and the tenant.

13. It is common for the divisible balance to be split 50:50 (but not set in stone). If a tenant running a pub on a free of tie basis paid a rent of say £30,000 and earned £3 0,000 (the free of tie divisible balance being £ 60 ,000) there is no reason, all other things being equal , why they would not expect to earn the same if they were tied.

14. As the pubco take a slice of their income from tied products, the resultant tied divisible balance is lower than if free of tie so their 'cut' of the divisible balance should be less, leaving the tied tenant no worse off.

15. THE CHALLENGES

16. All things may not be equal in the hypothetical free of tie and tied agreements.

17. Of course there are some complications, every pub is different. There are a multitude of variables creating a multi tiered system (so binding the larger pubcos and excluding the smaller brewers from the statutory code do not split an existing single tier system, they just add another tier to many existing) , but the terms of trading (fully tied, part tied or free of tie ) are just one of the variables to consider and not that difficult to estimate compared to say location, demographic or size.

18. Some pubcos claim to offer special benefits to their tied tenants, which generally would only be beneficial if they make or save the tenant money. These are quantifiable and can be incorporated into the assessment formula altering the likely level of sales and/or costs and should be going some way to countervailing the disadvantage of being over charged for a limited supply of tied products.

19. These surveyor would have to consider the longevity of these purported benefits, if they are discretionary they hold little more than a perceived value. I would suggest a rent should not be assessed having regard to a cost saving that can be withdrawn the next day .

20. What PRA seeks to do is compare the likely circumstances and profitability, using existing RICS guidance outlined in Section 5 of the guidance note, to balance the hypothetical tenants earnings under each scenario, free of tie and tied. This level of earnings is deducted from the divisible balance to be split between the parties and the resultant tied rent is then established.

21. THE PROBLEM

22. For all the wrong reasons the RICS have sought to over complicate the PRA but the fact remains that PRA should be the tool used hand in hand with the MRO option. There are terms in free of tie and tied agreements that are difficult for any valuer to place a number on and typically the pubco will seek to imply that a perceived benefit has a disproportionate value, whereas the tenant may place no value on it all.

23. In order to seek to justify artificially inflated tied product prices, and essentially take a greater piece of the action, the pubcos have invented spurious 'so called' benefits.

24. You will often hear pubcos claiming they offer benefits like external repair to be undertaken by the landlord not the tenant, this generally only occurs in brewery tenancies and is accounted for in the calculation by simply adjusting the tenants likely repair costs. Lower fixed rent - this is exactly what the PRA seeks to establish. Easy exit terms - these are not contractual the pubco has only committed to 'considering' so called easy exit, usually for a fee, in their code of practice. Cellar and heating maintenance and tech services are all generally charged at a separate price and therefore no benefit at all.

25. This is where the necessity for MRO comes in, to work hand in hand with PRA. A tenant would establish their likely earnings free of tie using the PRA and consider whether the tied rent proposed would enable them to achieve such an income. If it does not then it is possible there are benefits, that the tenant may not have considered, it is for the pubco to justify their existence and value to the tenants satisfaction. If the tenant does not concur and disputes either the existence or value of the purported benefit they may sever the trading obligation and potentially lose those benefits that they place little or no value on - is that not what market forces are all about ?

October 2014

Prepared 5th November 2014