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 73)

Disastrous impact of process risk and misrepresentation contributing to tied tenant business failure.

Summary

1) RICS expresses itself not to be in favour of standard valuation pro-forma templates for rent valuation purposes "leaving it up to the expertise and discretion of the surveyor to decide how to value an asset".

2) RICS believes "the pro-forma as drafted is overly complicated and likely to give rise to unnecessary disputes" but also says "A small change at each stage of the valuation calculation can have an exponential effect on the end result."

3) We take issue with these statements on the ground of mutual contradiction and contend that it is imperative to develop and enforce standard valuation proforma with calculations, rules, and independently reviewed data which can be consistently applied, diligently audited, by an accountable and unimpeachably independent source.

4) An example is given of the disastrous impact, already being experienced by tied tenants, of negligent, possibly criminal, failure to monitor, audit and control the complex calculations in rent assessments.

5) It is suggested that a more rigorous standard should be required from this profession assisted by ubiquitous and abundant data.

Rent assessment Proforma and Process Risk.

6) Having analysed many rental assessments as a result of the growing support networks among tied tenants, the constantly changing formats and methodologies arising from "the expertise and discretion of the surveyor" preferred by RICS, causes many errors and omissions. The insidious, "exponential" impact of these has potential to be disastrous for both PubCos and tenants alike. Arguably Pubcos are better resourced to mitigate and survive these risks while tenants are not; it is the tenants who bear the main cost.

7) RICS surveyors, who are PubCo employees, must be understood to be acting in accordance with the commercial imperatives of their employer, and only loosely guided by a set of non-mandatory and unenforced guidelines produced by RICS. In PubCos, on the brink of financial meltdown, it is inconceivable that an employee would act against the best interests of their employer. Nor should they be expected to do so.

8) The many assessment models we have seen may not have been subjected to the rigorous control one is entitled to expect from such an important document. They appear to be unaudited, with no apparent testing or control, "errors" frequently can and do occur. Strangely these errors seem rarely to benefit the tenant.

9) We believe that some of these assessments show signs of starting at the "required rent" and being reverse engineered and "force fit" into an FMT and "industry standard" cost profile that suits the PubCo need arising from overleveraged debt.

10) We take issue with RICS suggestion that:

"showing the breakdown of all tied purchases is overly complicated. Few valuers practising in the market have access to such detail on all of the comparables, particularly when one is dealing in the free of tie market."

11) This is quite extraordinary, given that members of the Punch Tenant Network have no difficulty at all in acquiring this information, when required, at almost any level of resolution, from members of the Institute of Licensed Trade Stock Auditors or their equivalents. The problems arise when trying to convince PubCo employed RICS surveyors that they may NOT have the best grasp of the local market.

12) It is unacceptable that RICS seek to minimise the scope for argument by seeking to limit the assessments to untraceable and un-auditable summaries without clear safeguards. Many RICS surveyors known to our members and not involved in the pub trade are very uncomfortable with the practises in this specialised corner of the profession.

13) While no tied tenant should be expected to aspire to the mathematical capability of a city derivatives trader, not having these skills during a rent review frequently results in the tenant being misled into an inflated expectation of profit.

14) RICS has submitted that a small mistake in a valuation can have "exponential effect" on outcomes. In this we wholeheartedly concur, particularly when "errors" result in an overstated expectation of profit, consequent higher rents, which must be paid out of lower than expected achieved profits. The outcome for the tied tenant can be, and frequently is, disastrous.

Exponential effects – an example:

15) We discovered in October 2014 that since 1993 HMRC and cask ale brewers have agreed to a methodology to ensure that beer duty is paid only on drinkable, and therefore saleable, cask conditioned ale. This will not come as a surprise to any brewer or indeed the BBPA, as the methodology is agreed with Trading Standards and HMRC, and BBPA have issued guidance to brewers as to the sampling and record keeping required to satisfy HMRC that no drinkable cask ale passes the "Duty Point" without suffering the required beer duty. The BBPA have also issued guidance that invoices, delivery notes and other commercial documents must not mention specific volumes but only cask descriptions, to avoid being caught by trading standards regulations. To all tied tenants this is very worrying.

16) With cask conditioned ale, there are allowances to accommodate the fact that the ale will not reach its final alcohol content (abv) until it has been fully conditioned in the pub cellar. The target abv is checked, as is the amount of undrinkable sediment that will remain in the cask. This is declared, audited and adjusted from time to time, and beer duty is paid only the drinkable ale.

17) It is a condition of the HMRC procedure that the "Customer- for example the publican be made fully aware" of the amount of drinkable beer that has duty paid and therefore is saleable. HMRC require that these "Customer notifications" are retained on file for inspection.

18) Investigations thus far suggest that some brewers print the "duty paid volume" in litres on their cask labels, the implications of which have only now become apparent to tied tenants. Many other brewers do not do this, and some appear to regard "their customer" as the PubCo, who must have been informed of the saleable volumes.

19) That the PubCos have chosen not just to fail to pass this information on to their tied tenants, but to assert in training courses and rental assessments that the saleable volume of ale in a 9 gallon container is 72 pints when they knew that this is not the case is a major scandal, possibly even criminal according to barristers opinion. Trading Standards have been notified, but have not yet signalled what they propose to do.

20) This revelation has come as a shock to tied tenants, whose rents have been set via the RICS "profits test" method on the universal and erroneous assertion that 72 pints could be sold from a 9 gallon firkin of cask conditioned ale if the operator was "reasonably efficient".

21) In reality, the volume of drinkable beer in a "72 pint firkin" is more likely to be around 68 pints as agreed between BBPA and HMRC and Trading Standards.

22) The impact of this revelation on the net profit after rent of a benchmark wet led pub is that the expected tenants share of net profit from a leading firkin of cask ale will be as much as 33% lower than planned, at £19.88 compared to £29.92. This amounts to a £40.20p reduction in the tenant’s net profit per brewer’s barrel of 36 gallons.

23) To be clear, this is not an "operational risk" such as wastage, spillage, testing , spoiling or other hazards dependent on the skill of the operator, his staff and the quality of the dispense equipment onsite. These risks still exist and must be funded out of wastage allowances provided for in the profits test method.

24) The tied-tenant’s loss of £40.20 expected profit from a barrel is a 100% certainty, arising from the "error" in assuming that 72 pints, not 68, can ever be sold from a firkin. This error may be included in every rent set by RICS surveyors applying the profits test method in every pub in the industry.

25) The logic of the RICS profits test method means that this £40.20 per barrel loss is entirely borne by the tenant’s side of the divisible balance calculation. In a number of typical tied pubs consulted in a rapid survey, this amounts to a loss of profit in the region of £3,100 per year for a pub selling around 70 brewers barrels of cask conditioned ale, the unique selling point of the Great British Pub.

Tenant response to the unexpected loss

26) The only truly variable overhead cost that can rapidly respond to lower than expected revenues and profits in a tied pub, is the wage bill. This unexpected loss will immediately impact the Tenant’s potential drawings, the only mitigation option available is for the tenant to reduce the wage overhead by shedding jobs and working longer hours him/herself. This is because the only resource available that can legally be paid less than the minimum wage is the tenant as he/she is deemed to be self-employed.

27) It is unsurprising that a very high proportion of tied tenants are doing exactly that, and multiple research reports have found that a very high proportion of tied tenants, for example 80% in a recent survey, are earning less than £15,000 per year, less than the minimum wage for the statutory maximum 48 hour week. No one suggests that a tied tenant works anything like as little as a 48 hour week, so the hourly earnings are significantly below the minimum wage.

28) These "exponential effects" weaken the finances of the pub and deplete the tenant’s reserve, and an increasing proportion of tied tenants become dependent on government benefits and tax credits.

29) The value of tax credits allowed to tied tenants is a direct government subsidy to sustain the beer tie, perhaps as an ongoing penalty imposed on the state by practitioners of the tie for daring to interfere with the industry in the first place, and having botched the job so badly.

Conclusion

30) Serial Select Committees have found that the PubCos are exploiting and abusing the tie and taking too much profit from the trade. In the process they continue to ruthlessly extract value from the British Pub as a consequence of exponential effects of flawed RICS valuation methods resulting in excessive borrowing and exploitative pricing to the detriment of the consumer, tied tenant and Britain’s Pub Heritage.

31) For the government to continue to rely on the OFT response to the CAMRA super complaint as evidence that the consumer has not been negatively impacted by the beer tie is contemptible.

32) We now discover that, despite years of protest and calls for the excesses to be curbed, we did not know the full story. The PubCos, in conjunction with the RICS, appear culpable of basic errors of misrepresentation and negligence.

33) Barristers opinion is clear, considering recent revelations every tied pub in the United Kingdom since 1993 has been rented on overstated profits amounting to several thousand pounds per pub per year. This may help explain some of the bankruptcies and closures. There are clear implications of corporate criminality which must be investigated.

34) As one of the least rewarded, but universally appreciated callings, that contribute significantly to British Culture and Community wellbeing, it is submitted that the abuse of the tied tenant must stop, and compensation paid to tenants both in occupation and defeated by this spectacular and negligent misrepresentation.

35) The Great British Pub is a unique cultural icon envied worldwide, but perversely, and in a uniquely British way it is under attack from our own institutions from all sides. It is clear that this must end and the most appropriate way for this to happen is for the tied arrangement to be exposed to the reality of the market reality as envisaged in the "Market Rent Option" supported by a wide spectrum of bodies who have considered the matter in detail.

November 2014

Prepared 6th November 2014