Monthly Archives: September 2009

The implications of the Brooker Case on the misuse of Comparables in Rental Valuation

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 The implications of the Brooker Case on the misuse of Comparables in Rental Valuation

The Judge exposed the total inadequacy of the use and misuse of Comparables as a method of rental valuation.

If anyone is having a rental revaluation, Comparables will doubtless come into the equation, because of the ease that convenient information of other rents can be obtained by the larger Pub Co’s, it makes a relatively easy job for the Pub Co Valuer to assess a rent based on a pub that is owned by the Pub Co that he is working for, rather than one that requires in depth investigation which he has no prior knowledge.

However by a valuer Cherry Picking high rent pubs, ignoring the viability of those pubs and the one being reviewed, it effectively ratchets pub rents even higher which only serves the landlord not the tenant.

If every tenant/lessee consulted all the neighbouring pubs within a ten mile radius with a similar business and property, by doing the converse Cherry Picking the lowest rents it might just help in bring the rents down at any sort of mediation, avoid properties within the ownership of the landlord, unless you are sure that their rent is considerably lower than your own.

The failure by valuers to accept the current trading figures and true viability will always leave the system open to abuse and misuse.

The argument that the figures are not reliable or not available is a spurious one, VAT figures are always on record and any stocktaker worth his salt would give a very accurate record of viability and profitability in respect of the individual property.

I am as always extremely grateful to the learned Barry Gillham’s excellent presentation at the BII Rent Road Show which made me realise how  the RICS Valuation Guide Lines were being abused and misused and started my studies into these abuses, resulting in an extensive meeting with the RICS, which I hope we both found constructive.

I would also like to offer him the opportunity to be one of the first commercial property agents to be allowed to advertise his company on this site.

Returning to the issues of rental assessment, the continual failure by valuers to accept that business is finite  and not infinite will always cause problems. Any increase in business is at the cost of another business and not newly generated business, especially in these recessive times.

The BDM should, if he knows his business realise that any potential growth will be at the cost of possibly another of his businesses and should advise the valuer accordingly.

In fact logically speaking, if a valuer insists on raising a rent based on a perceived increase in future profitability, bearing in mind that all the available business is static and possibly falling, there should be an immediate reduction in rent in the nearby pubs that will be losing the supposed increase in business by the new assessment.

This will not happen but it could make a very interesting argument if all the pubs colluded together.

They are then in a position to Cherry Pick ones that suit their guesstimated assessment

The implications of the Brooker pub rent ruling

 

What the Brooker pub rent ruling means (Extract from the Morning Advertiser)

Charles and Leslie Brooker run the White Horse in the village of Hambrook near Bristol. They had a five-year non-assignable lease, free of tie on cider and a guest beer, which started in August 2001.

The non-indexed rent was set at £16,000 a year in 2001, a reduction of £3,839 from the previous rent. The Brookers and Enterprise Inns couldn’t agree on the new rent on an extension to the five-year lease and the case ended up in front of Judge Iain Hughes QC sitting as a Deputy High Court Judge.

His 11-page judgment makes for fascinating reading. In January 2008, Enterprise suggested the new rent should be £39,000 per annum and in December 2008 reduced the figure to £34,000/£35,000. By July 2009, the Enterprise rent bid had further deflated to £30,800.

In the event, the judge decided the rent should increase by £2,000 per annum to £18,000 (35% of the pub’s £51,000 per annum divisible profit balance), with the Brookers, who bid £9,000 two years ago, ordered to pay what was owed on a back-dated basis. What’s interesting here is the reasoning applied by the judge to come to his verdict. He finds fault, to a greater or lesser extent, with each of the expert witnesses.

Critical

While accepting a lot of his figures, he dismisses the reasoning of the Brookers’ accountant Brian Jacobs, who suggested the current RICS rent setting methodolgy is wrong. He found Jacobs “partisan, disputatious and unwilling to answer all the questions”. There was a complaint that he made “some broad assertions beyond his expertise”.

The judge also wasn’t prepared to entertain the Enterprise counsel Mark Wonnacott’s “hints and nudges” about the unreliability of the Brookers’ evidence on beer and cider purchases at the pub, and the credibility of their accounts. The judge found fault with Wonnacott’s criticisms of a lack of up-to-date accounts.

He noted “the tenants’ accounts are of little relevance” when the whole point in rent setting is determining what the hypothetical tenant would offer to pay in rent. He criticized Enterprise expert witness Peter Taylor for dropping “below his usual standards of objectivity” in suggesting that filling “the void created by the credit crunch” in recruiting licensees would be filled by those with redundancy payments.

And last but not least he found the two comparable transactions offered by Enterprise only of use in showing the degree of support and the increased bargaining power licensees have in the current economic climate. The Swan at Yate, let on 26 March this year, is being supported with a large initial rent reduction, a break clause, incentive discounts and a six-month cooling-off period, for example.

The second “comparable” pub was the King George VI at Filton and the judge decided it was not very comparable because of its suburban Bristol situation. In coming to his conclusion in setting a rent of £18,000 per annum, the judge ruled that the hypothetical tenant would take into account a “number of major factors affecting risk and confidence in the (pub) market”. He noted that beer sales have declined by 20% in the on-trade in the past five years.

At the White Horse, he thought a sensible view would be to assume beer sales would decline from the current 210 barrels a year by 10% rather than 5% suggested by Peter Taylor — giving a barrelage of 189 for 2009. He also thought that a hypothetical tenant would take into account the current gloomy economic climate.

Tenant’s market

On his list on things to make any tenant ultra-cautious were: high unemployment, the prospect of higher taxes on alcohol, the smoking ban, the lack of inexpensive capital in the economy and the 50-a-week pub closure rate. The judge said he was satisfied that the pub trade position is “much worse than anyone can ever remember”. Of 18 pubs identified in the White Horse’s neighbourhood he found 12 to be, or have been, in economic distress.

Nevertheless, the judge insisted he only took into account the long-term decline in beer sales, setting aside the other items that would make anyone cautious. Deutsche Bank analyst Geof Collyer says: “We would suggest that the judgment was a victory for the industry”.

I think he’s right in the sense that pub rents should reflect the state of the market and not exist in a vacuum. In the good times, some tenants over-bid on rent buoyed by confidence.

In more difficult economic times, tenants are likely to under-bid on rent, given an increased level of caution and the knowledge that there are fewer competitive bids around. Right now, it’s a tenant’s market.

Note:- You may wish to disagree with the writers comments, but they are their views and we need other opinions. 

Enterprise reduces pub’s rent by 38%

Enterprise has agreed to reduce rent by 38% for 12 months at a South Wales pub on advice of a valuer chosen by the pubco.

Temporary concesion: the reduction will last for 12 months.
In a rare move, Enterprise agreed to pay in full for the surveyor to assess rent at the Open Hearth in Sebastopol. The firm said around a dozen cases have been settled through an independent valuer in the past year, “and in the majority of cases the costs were shared 50:50”.

However, the lessees questioned why the rent reduction is only temporary. Phil Jones, Open Hearth licensee and son of lessees Don and Angela Jones, has reported Enterprise to the BII for alleged breaches of its lease code of practice.

Enterprise agreed to reduce the rent from £56,455 to £34,750. The figure was proposed by valuer Stephen Parker of Nuttall Parker,

who was paid for by Enterprise. Surveyor David Morgan of Cookseys DMP had said £28,360 would be a suitable rent.

The reduction is backdated to 12 February 2009 and will return to normal on that date next year.

Phil Jones said: “What’s the point of putting the rent back up to £56,000 in February? It’s going to put us back where we were, and in the middle of winter.”

He said he believed it was a code of practice rent review and questioned why it had become a rent concession. He wants a permanent reduction backdated to February 2008, when he claims the first request for a cut was made — this is disputed by Enterprise.

Enterprise’s chief operating officer Simon Townsend said: “Any adjustment of the contractual rent outside the rent review cycle is an entirely discretionary concession, and we have chosen to exercise our discretion here.”

Townsend said the period of concession “is also at our discretion and depends on the individual circumstances”.