Small Business, Enterprise and Employment Bill

Supplementary written evidence submitted by Chris and Von Lindesay, The Sun Inn, Dunsfold ,
founders and coordinators of The Punch Tenant Network (SB 72)

The Role of The Royal Institute of Chartered Surveyors (RICS) in regulating Pub Rent Assessments.

Summary

1) The submission from RICS to this committee has brought into focus an issue that has been discussed among the Punch Tenants Network concerning the highly ambiguous role that RICS and Surveyors specialised in the Pub trade seem to occupy. There is a misconception that RICS can influence the behaviour of Surveyors employed by PubCos or the behaviour of surveying firms instructed by them.

2) In order for an RICS surveyor to execute the assumed by BIS, BISC, and the self-regulatory process, (BIIBAS, BBPA, PGB,ALMR etc..) they would have to act in a manner that does not favour the best interests of the paying client or employer. We do not believe this can possibly happen in practise.

Rent Review Experience

3) When our highly acrimonious first rent review was concluded in 2007 with a 38% rent reduction and apology from the then Punch Operations Director, we commented that we had expected a higher standard of integrity from their RICS surveyor and received the reply "you have to understand who pays his salary".

4) By the time of our second rent review, matters had evolved in that PubCos had agreed to incorporate the RICS GN 67/2010 into their "Voluntary" codes of practice.

5) In addition the PIRRS process had been introduced, purportedly designed to promote the resolution of rent disputes simply and at an affordable cost.

Rent "Negotiation"

6) In preparing for our rent negotiation we had researched and applied what we believed to be at least 4 different RICS compliant approaches to evaluating evidence supporting our "rent bid".

7) We learned that the previous rent review negotiation had not served us particularly well as after indexation we had, five years later, achieved only a 20% reduction in rent at the half way point of our "High Rent, low drinks price" FRI 20 year Growth Lease. Our comparable "Sister Pub" on the identical terms, was enjoying a rent reduced by more than 70% having been reset by "Open Market Transactions" by way of serial abandonments and TAW episodes in the preceding decade.

8) None of our detailed market analyses found favour with Punch, these included:

a. Contemporary Open Market Transaction offers

b. Comparable Sister Pub

c. Stock counter Business mix evaluation

d. Demographic Share of spend evaluation.

9) Punch’s view was that we were "under trading" but presented no evidence for this at all.

10) We concur with RICS that comparing the situation with regard to pubs on different tenure agreements and obligations is a complicated process. In conducting our research we applied a sensible research methodology. A brief paper detailing the thought process that the REO might use and the consequent rental bid was presented and is offered as an appendix to this submission (Appendix 1 - "Rent Comparables and the Reasonably Efficient Operator.)

11) Regrettably what the RICS describe as "not a matter of failure in the landlord and tenant relationship. It is a difference of opinion on one or more of the individual aspects of the rental valuation." became increasingly acrimonious.

12) Our negotiations, such as they were, had moved from a 15% increase to a 17.5% rent reduction, which was still not yet sufficient to offer a prospect of sustainability, considering the risk factors in the economic outlook, never mind funding repair obligations or a "Partners profit" for the next 5 years. The review ended up being referred to PIRRS.

13) The reference to PIRRS was not a signal of confidence in the self-regulatory system but was more by way of defence from thinly veiled threats, that if we continued to argue our case through the Code of Practise route, the review would be unilaterally referred to arbitration and we would, by implication, be buried in costs.

14) The risk of further delay, more costs and the potential lottery of "Calderbank Offers" with uncertain cost implications was unattractive. So the PIRRS route was seen as the least bad way of resolving the matter - this "difference of opinion" is all very well when "differing" on an hourly fee but is not so amusing when a business and home is at stake.

15) In the PIRRS process we felt we were subjected to all the tactics of ambush, partiality and misdirection that one might expect from a professional doing what he regarded as his job in representing his client’s interests and achieving as high a rent as possible. This was not a friendly uncomplicated DIY process as advertised.

16) The absence of a reasoned outcome was frustrating as nothing was learned by anyone from the coruscating exercise, which felt about as satisfactory as one might do being judged against an unclear set of rules, in absentia, by a secret process sitting in camera.

17) PIRRS, is an unsatisfactory process, born out of a tradition of backroom horse-trading. It has little to do with transparency and fairness but has the single benefit of resolving an irreconcilable "difference of opinion" arising from a non-mandatory and therefore wholly un-enforceable set of RICS guidelines, which will therefore only be used to serve the best interests of the employer or client. The only benefit to the tenant is to keep the costs relatively low, but only if he attempts to handle his own case.

BISC Frustration with RICS

18) In the Tenth BISC Pub Companies report, BISC expressed its frustration and dismay that there was continuing controversy over the actual interpretation and observance of the RICS Guidance Note GN 67/2010.

19) RICS evidence was that the guidance must be being observed as no one was complaining that it was not.

"60. Mr Rusholme argued that there was "not an avalanche-there is not even a trickle-of complaints coming in about non-compliance of our members in using the guidance"."

20) The BISC report continues:

"64. The improved RICS guidance was one of the few positive messages to come out of the 2010 Report on Pub Companies. The continued disagreements between lessees and the pub companies on the level of adherence to that guidance is therefore a major point of concern. RICS must investigate as a matter of urgency whether its members are signing off rent reviews which have been prepared without clear application of its RICS guidance or benchmarked costs and to report back its findings to us."

This illustrates the confusion between what RICS, BIS and BISC believes the role of RICS might be. RICS in their submission have alluded to this confusion.

A trickle of complaint to RICS

21) Our second rent review concluded at about the same time as the 10th report from BISC, and the instruction to RICS to "investigate" the performance of its members was taken at face value. However the then Chief Executive of the BII, Neal Robertson, advised "not to bother with RICS as you will get nowhere with them".

22) We took immediate steps to make a complaint to RICS about the apparent failure to apply GN 67/2010 by two RICS surveyors employed by Punch and a third surveyor, a member of a RICS regulated professional firm instructed by Punch.

23) Our approach to RICS was pushed back effortlessly on several grounds:

a. The RICS complaints service was not aware of any instructions from BISC "to investigate as a matter of urgency ……. and to report back its findings to us." nor was there any apparent intention of doing anything of the sort.

b. On the matter of making a complaint about RICS surveyors employed by Punch, this was not seen as an issue for RICS as Punch was not a firm regulated by RICS.

c. When attempting to make a complaint about a firm regulated by RICS and employing a surveyor who had, in our view, not applied the RICS guidelines, this was not a matter for RICS to consider because, we, the complainant, had not instructed the firm.

d. Finally it would seem that the RICS guidelines themselves contain a provision fully worthy of Alvin Toffler’s "Catch 22" in that, as the RICS state in their submission:

"It is important to note that members are not required to follow the advice and recommendations in the guidance note i.e. it is not considered mandatory from an RICS perspective,"

As RICS will only investigate complaints about non observance of Mandatory Practice guidelines and GN 67/2010 is not mandatory, there is no disciplinary offence in ignoring them. This is taken to mean that an RICS surveyor can fully comply with the requirements of the GN 67/2010 by deciding not to do so.

24) This might explain the lack of a "flood or even a trickle" of complaints to RICS but is not evidence of widespread compliance, that RICS should suggest it did, is entirely disingenuous.

25) Apart from some utility in providing a forum to develop some kind of methodology RICS has no role at all in enforcing its use for its intended purpose. The impression that it does is another of the many elegant illusions which have kept the "PubCo Problem" unresolved for so many years.

26) The real issue is the assumption in commercial law that each party has equal access to resources, expertise and information to allow an adversarial process to be effective. This is acknowledged not to be the case in the PubCo / Tenant situation the negotiating power is stacked totally one way. The aspiring tenants, who may be taking their first steps into the enticing world of "Running your own business" will have a very limited understanding of the complete absence in commercial contract law of the notions of "Consumer Protection" with which they have been familiar hitherto. They will be much more likely to trust in offers of "partnership" and support. This leads to a worrying hypothesis that Pub Companies cannot be trusted to recruit their partners fairly.

Conclusion

27) There seems to have been an assumption in BIS and BISC that under the self-regulatory system somehow the RICS guidelines imposes a duty of care on RICS surveyors to not utilise their skills and training on behalf of the organisation that employs them. This is absolutely not the case, and in the cold light of day one might be surprised that anyone might think otherwise.

28) PubCos must be permitted their right to "enjoy" their property but in the wider public interest this "enjoyment" must be carefully controlled, unless they are prepared to expose their "wholistic package" to the ultimate test of the Market Rent Option that is the preferred option of BISC, CAMRA, FDFYL, FairPint, JFL, GMB, FSB, LSL and PTN and the other main political parties who stand in opposition to the status quo.

Appendix 1


Rent Comparables and the Reasonably Efficient Operator.

Without Prejudice – prepared October 2010 for the Sun Inn, Dunsfold

We have conducted a survey of Punch Pubs on offer on the market as evidenced by their website. www.punchpubs.co.uk.

We have analysed the "earnings", FMT, costs and rent figures provided there. All this information is in the public domain data and therefore easily available to the Reasonably Efficient operator. (REO)

On the Punch website the REO will note that the barrelage FMT quoted is, on average, 176% of trade in the past 12 months and 138% of average trade earlier than 12 months. This indicated that Punch is signalling a huge growth in beer consumption in the immediate future. The REO might reflect that there might be considerable of risk in this forecast.

If the Sun Inn were marketed on this same website the FMT Barrelage would represent a 5% increase over the past few years. This will signal to the REO that the Sun Inn is operating near or at its capacity at the present time and therefore the current operators of the Sun Inn are more than reasonably efficient.

The REO would take a view as to the likelihood of achieving high double digit growth in barrelage in the light of the industry body BBPA signalling a continuing double digit decline in beer and general alcohol consumption nationally. He would probably conclude that a 5% reduction in barrelage would be minimum for this site.

The REO’s analysis would continue to ascertain the cost profile presented on the Punch website and would discover that the overall cost to revenue profile of the Sun Inn is given as 76%. He will further note that the average cost to revenue profile of 14 Pubs marketed on the Punch Website is 82%. He will reflect that if this is a true reflection of cost / revenue at the Sun Inn then costs are under exceptionally tight control and would probably adjust his view of cost revenue to 82% to reflect his reasonable efficiency as opposed to the exceptional efficiency exhibited at present.

The REO would then continue to consider the proportion of divisible balance that he might offer in his bid. He would note from the Punch Marketing website that the average proportion of divisible balance on offer is 45% to Punch and 55% to the operator, he would reflect that what Punch are offering on their website is presented as a "Rent Guide" suggesting that more favourable divisible balances would be available on negotiation. Reviewing the situation of the Sun Inn FMT he would reflect that the 50% divisible balance on offer was significantly out of tune with the rest of the Punch Pubs on the market.

The next analysis the REO would make is to consider the validity of the turnover profile for the Sun Inn in comparison with other properties. His analysis will disclose that the underlying revenue model used by Punch on its marketing website differs from the model provided by Punch for the Sun Inn in that the Sun Inn revenue is overstated by 14%. The REO will reflect that the real revenue potential of the Sun Inn will probably be closer to the Punch website model.

Having conducted this analysis he might take the view that his bid should be based on:

1) Barrelage at 5 to 9% lower than the past 12 months as indicated by BBPA

2) An overall cost to turnover Profile of 82%

3) A share of divisible balance over 45%.

4) Revenue should be about 86% of the Punch model for the Sun Inn.

These considerations arrive at the following conclusions:

Turnover £ xxx,xxx wet, £xxx,xxx dry 0 machines £x,xxx other
Overhead £xxx,xxx (82% of Turnover)
Divisible Balance £ xx,xxx max
Share 55% tenant – 45% Landlord

This calculation would set the opening realistic negotiating position for Punch rent without any particular consideration of the site characteristics or other risks.
Including: Construction, state of repair, Structural Issues re heating, etc..

November 2014

Prepared 6th November 2014