The unseasonable bad weather is having a knock-on effect, both short and long term, on the resort destinations within the UK with growing numbers of Brits booking holidays both over the Jubilee weekend and for the forthcoming main holiday period. To quote Gillian Edwards of ABTA
“We do seem to have seen a significant rise in demand for overseas holidays. People have been reminded at the end of April and early May that you can’t really rely on the British weather”.
Aside from the weather, we have a strong pound at a 22 month high against the Euro and looking to get stronger.
Visitor numbers to the Thomas Cook website, which is one of the prime sources of overseas package tours, has increased by 20% over the same period last year. In direct contrast, Hoseasons, which specialises in British holidays, has seen a fall of 38% over the same period according to the web information company Alexa.
We have a large number of seasonably based clients who are constantly being told, both that the recession has ended and that the so-called stacation will save their financial bacon. Both factors are included in pub rent review assessments and both should be treated with equal caution.
Long or Short Leases
The pub and restaurant industry has a large number of 20 year leases and some even longer as a bi-product of the leasehold culture in the early 1990’s. Lease renewals are regularly for the maximum permitted under the Landlord & Tenant Act 1954, which is 15 years. Contrast our industry with the commercial market in general and you are in for quite a surprise.
According to the British Property Federation and the Independent Property Data Index in their just published Annual Lease Review, the average length of a commercial lease last year was just 4.8 years. Three quarters of all leases are now for five years or less compared with only 63% in 2010. Taking breaks into account, leases have shortened by three years since 2002. Long leases in the pub and restaurant industry were always justified in the ability to onwards sell attendant goodwill. However, with a vast number of supply tied lessees earning less than £15,000 p.a., there is now virtually no goodwill factor as an asset in an onwards sale of a supply tied lease. Indeed, often the asset is only that of the value of the inventory.
Food for thought on whether or not a responding Section 26 Notice in lease renewal, should now be considering say a 5 or 10 year term rather than the accepted 15 year maximum.
Offers of Assistance
There seems to be a misconception amongst publicans and politicians that the tied model offers some sort of guaranteed assistance to licensees should they run into difficult times.
Tenant help is not enshrined in to the BBPA’s Framework Code codes of practice or even individual company codes.
Pub companies ‘may’ offer assistance if they deem the circumstances appropriate. Contrary to the propaganda, this is not unique to pub companies and brewers operating a tied tenanted estate. They, like any other landlord, commercial or residential, are not obliged to give help – it is a voluntary concession. It follows that this purported offer of help and indeed the level of assistance supposedly already being undertaken, is not some kind of special commercial or financial advantage that should be valued as individually identifiable to the tied tenanted model. No landlord, pub company or brewer, commercial or residential, is required to give help but it would seem to be a sensible business decision to do so rather than end up with a bust tenant and an empty property.
The problem we still face is that the operation of the tied tenanted model has relied on inflating rents by denying the licensee access to the information that they need to enable them to make sound commercial decisions. All too often, at rent review, a rent is simply proposed and then a horse trade of rent proposals results in a settled rent that bears no resemblance to open market rental value, truly compensating the licensee for the disadvantage of being tied. Instead, the rent is a level which the publican thinks they can just scrape by on and is as much as the pub company can feasibly squeeze out of the licensee.
Only when run right to the wire is a true idea of the correct approach seen and comparable evidence submitted to justify a rent proposal. The rent paid for a pub by an ill advised operator is not indicative of open market rental value. The profit and loss valuation method relies on a hypothetical Fair Maintainable Trade (FMT), the comparable evidence required is a level of turnover from other pubs, be that from detailed accounts, made available on assignments, or an estimate based on barrelage figures, not rents of other pubs with differing lease terms and discount levels.
There would be fewer necessities for help if rents reflected genuine open market levels and tied licensees were able to maintain a decent income allowing for reinvestment, maintenance, repairs, staff training and promotions. Appropriate rents should be achievable but the BBPA and company codes only require the pub companies and brewers to follow Royal Institution of Chartered Surveyors (RICS) guidelines which it transpires are unenforceable.
To accept the BBPA and company codes and not to have them enforceable is to authorize the very thing we seek to prohibit and as such the epidemic of over inflated tied rents continues.
What is needed here is a re-balance of risk and reward, not for a few tied licensees here and there, close to business failure, but for all tied licensees. Re-balancing risk and reward should not rely on seeking a concessionary arrangement in troubled times, it is ensuring a fair and reasonable rent that reflects the circumstances of an average tenant in the particular pub in question. The rent level must be seen as being affordable until the next big rent review, usually in five years’ time.
For every tenant receiving some concessionary assistance there are hundreds of others contributing to it – it is those tied licensees on over-inflated rents with little if any discounts from false inflated tied product prices who are paying for the concessions of the few. Pubcos like Enterprise Inns aren’t paying, they are simply redistributing a tiny portion of the income they receive from the suppressed masses to keep those pubs open that they can find no other sucker to run.
By all means we should highlight that codes have no ‘guarantee’ of assistance but the admission that none in London are under concessionary treatment is rubbish – we have two choices on that, prove its wrong or use this statement to demonstrate that Enterprise Inns have admitted in reality concessions are non existent. I think the latter is more useful. They cannot claim that London pubs have not suffered – otherwise there would be no closures. What it demonstrates is that where they cannot sell a pub for alternative use (I would think most in London could and have been sold), they have to offer a few crumbs from the table to avoid an empty pub and them paying for upkeep, security, utilities and rates.
However much you feel aggrieved at the treatment that you receive from your Pubco or Brewer, the temptation to withhold rent as a gesture of discontent, should at all costs be avoided. In simple terms, the payment of rent is SACROSANCT. There is a specific and totally binding obligation contained in every single lease that has ever been issued, that you have to pay rent. The non payment of rent can swiftly lead to forfeiture proceedings which in themselves are almost impossible to defend, specifically because you either have or have not, paid rent. It’s the same as being “well, sort of pregnant”. You either are or your aren’t!
The Courts have little if any flexibility in this respect. If you have not being paying rent, there is an automatic route to forfeiture.
An exact example of this has happened to Kirsty Valentine of the Alma, Newington Green Road, London N1. She has a justifiable list of issues with Enterprise Inns and in our considered view, every justification for the strongest possible complaint. However, as a method of fighting back so-to-speak, she then paid only part rent. Enterprise Inns have, not surprisingly, taken forfeiture proceedings on the simple premise that they can prove that the full rent has not been paid.
We have had four other cases this month where clients have said “I’m thinking of withholding my rent”. In every single instance our firm advice was – always pay rent and ensure that it’s paid on time. There are other ways that you can fight back against perceived injustice.
The PICA–System has yet to get into full swing. We do, however, know of several complaints that have now been lodged within the system and of a number of others that are pending. The M & C Chartered Surveyors’ take is that the Board of PICA-System chaired by Rodger Vickers of Brownill Vickers, will we hope be squeaky clean and factually specific. We sincerely hope that they will look at the cold hard facts of a case of Code of Practice breach and make a judgement accordingly.
We are, however, deeply worried over not giving PICAS specific facts to chew on. Our concern is centred upon discretionary product discounting and advice that is being handed out by Phil Dixon of the BII who understandably wants PICAS to be seen to be working properly.
To be specific, discretionary discounting is anything that is not confirmed either by Deed or by “binding commercial side letter”. A discretionary discount can melt away upon the sale of either the freehold interest or the supply tie leasehold. The successors in title to either would never be bound by the current discretionary discounting.
The case of Lorraine Wager at the Hart of Duston, Northampton is of concern. The rent review which we undertook on behalf of Lorraine included a gross profit margin that was substantially dependant upon continuing discounting. Spirit, who own the freehold, have now decided that they will withdraw all of that discounting. Phil Dixon advised that a formal complaint could be made to PICAS on the basis of the “spirit of the agreement had been broken”.
Our concern is, in the absence of any documentation proving the point, how do you prove or pin down what the spirit of the agreement actually was and how it affected either party? Our further concern is that it would appear that the same advice is being spread far and wide in that a complaint in similar circumstance can be made against “the spirit of an agreement”.
The team at M & C have always been very factually specific. We track and follow relevant case law and we follow to the letter, the RICS Valuation Guidelines. We don’t, however, subscribe to a vague general understanding or ‘spirit of an agreement’. Why? The issue is so vague that you cannot expect any logically thinking Tribunal to speculate on what the spirit of an agreement actually means or what should then be enforced.
If complaints of this nature are made, it would seem to us inevitable that the Pubco or Brewer will be vindicated in justifying their interpretation of the “spirit”. That would then send a message that further actions of that nature would be seen as being quite acceptable. Worrying!
The most accurate method of judging or analysing market value is comparing what effectively is adjusted net profit or EBITDA, with the amount paid. EBITDA is earnings before interest, taxes, depreciation and amortisation. Generally as a rough yardstick, freehold public houses in the current economic climate sell for between x8 – x10 EBITDA. So why then are the likes of Fullers paying as high as x13 EBITDA and a whole horde of other regional breweries paying in excess of x12?
Wind the clock back a little and a quote from Ted Tuppen after Enterprise Inns had sold some 36 exceptional and highly desirable pubs for £49m, or an average multiple of x14. These pubs were not necessarily in central London and took in cities such as Bath.
Regional Brewers are canny people and not necessarily the lessee-loving stalwarts that the BBPA would like you to think. There are a large number of 20 year leases entered into in the early 1990’s. It makes perfect sense for a Regional Brewery Company to buy the freehold of such a property, given that the EBITDA excludes the tenantable income. What Enterprise Inns are selling is the rent and wholesale contribution. If you then subsequently add in the tenant’s income if you refuse the grant of a new lease because you want the place back as a managed house, the EBITDA multiple then often comes back under x10. This echoes our “cuddly family brewers” piece in the May newsletter.
Beware of any of the bullying tactics that might be employed emphasising that at the end of the lease “you are out, we will have it for a managed house”. Under the Landlord & Tenant Act 1954, Section 30 (2), in order for the landlord / freeholder to stand against the application for a new business lease where they intend to occupy the premises themselves, they have to have owned the freehold interest for at least five years and one day prior to the expiration of the current lease. So if your lease has under five years to run and you have had your freehold interest purchased by a family brewer, you have the opportunity for the creation of a maximum further 15 year term if you hold, say, either a 15 or 20 year lease – forewarned is also forearmed!
Kevin Roberts, late of the Old White Horse, Bingley, finally threw in the towel at the beginning of May in the face of a continuing and crippling level of rent. Enterprise Inns are now re-offering the shut pub at £18,000 rent set against the previous £35,000 rent and with discounts of £83 per barrel. No, you really couldn’t make it up!!
Kevin logged into his Brulines on line account on the 21st May and despite the pub being closed and abandoned for over 14 days, his Brulines account showed that he had dispensed 60 gallons of beer. (Kevin reported the matter to Trading Standards with no response).
Say It Like It Is
Noticed on the back label of a New Zealand Waipara 2010 Riesling penned by the winemaker Matt Dicey:
“Juicy tangerine flavours intermingled with stone fruit while the residual sugar and vibrant acidity skip hand in hand down the path of vinous amicability”.
Could it be that Matt had been sampling too much of his product at the time?
Noel Coward: “I am not a heavy drinker – I can sometimes go for hours without touching a drop”.
Frank Sinatra : “Alcohol may be man’s worst enemy but the Bible says love your enemy”.
The Team at M & C
Phone: 01285 719292