Posted: 17 Dec 2012 12:00 PM PST
MORGAN & CLARKE DECEMBER 2012 NEWSLETTER NO. 15
Pigeon House, The Broadway,
Oakridge Lynch, Stroud, Glos. GL6 7NU
Email: email@example.com Phone: 01285 719292
(Also at: London, Cardiff, Matlock, Braunton, Lewes)
The year ends with a mixed bag of conflicting emotions. From one side we hear constant chatter about the green shoots of economic recovery, yet from the other side it appears that the discretionary leisure spend in On licensed premises, is under further stress. However, even that element of the overall equation is far from clear.
For example, Adnams, the Suffolk brewer, “had a good six months” and reported a 5.1% rise in turnover and a 5.5% increase in operating profits. Butcombe Brewery, however, reported a 3.7% rise in full year, pre tax profits in “an extremely difficult set of trading conditions”. Brakspear and the Peach Pub Company both report over 50% rise in pre tax profits. On the negative side of things, Ernst & Young sold off the Town & City Pub Company package of leased pubs through Fleurets and DTZ. Waverley TSB has firmly hit the buffers and we have said goodbye to Churchill Inns and Clementines Tavern businesses that recently went into administration.
So it’s a mixed bag to end the year on, with the South East definitely head and shoulders above the rest of the country.
The new dilapidations protocol came into force on 1st January 2012 and has been adapted as a Pre Action Protocol under the Civil Procedure Rules (CPR). The 59th update of the CPR in relation to dilapidations, was confirmed by Government as being officially in being from 1st October 2012. Basically any Dilapidations Schedule upon which reliance is placed after that date, should be compliant with the relevant CPR. The Landlord has to now provide further details in respect of the dilapidations issues which are as follows:
Confirmation that all works are reasonably required to remedy the tenant’s breaches.
A statement making clear what the Landlord’s intentions are at the end of the term, whether the Landlord intends to seek change of use, or demolish the property, or undertake a significant internal development / refurbishment.
A statement should be made available that the Landlord’s surveyor has taken into account the Landlord’s intentions. This is obviously to avoid stating that items need replacing if, in fact, the Landlord will be removing these items at the end of the term.
Confirmation that any costings are reasonable.
Finally and aside from the CPR Protocol as above, we also have the issue of the realistic extent of any damage to the value of the Landlord’s reversion.
The CPR specifically applies to any ongoing dilapidations issue concerning the termination of a business tenancy. It does not matter if the original Schedule of Dilapidations was served say, last year, if the issue is still ongoing, full compliance must be observed.
The boys and girls at M & C would be delighted to give an overview if required on any such dilapidations issues that almost certainly do not comply with the CPR. As far as we are aware, none of the Pubcos or brewery companies have even woken up to the fact that the CPR came formally into being only as recently as 1st October 2012.
2. Mandatory Annual Rent Increases
Not a happy state of play, but we now have confirmation that inflation is on the up rather than the down. Currently the Retail Prices Index has increased from 2.6% up to 3.2% and the Consumer Prices Index from 2.2% up to 2.7%. It looks probable that further increases are on the way. Yes, it goes without saying that the hike in rent linked to either RPI or CPI (rare), has nothing whatsoever to do with profitability. So much for the abolition for upwards only rent reviews!
Think of a world where complete strangers do your marketing for you before you’re even open. Some of the marketing luminaries are now saying that email marketing won’t even be around in 10 years time. Why? Very simple – social media.
Marketers have figured out that customers are not overly interested in lengthy, text heavy, hour long story stuff. They simply want to see what you sell, where you sell it and who can recommend you. Add videos and links to your social media platforms and you’re streets ahead of the standard market.
It is estimated that around 25% of your current web traffic is via a smart phone. Next year that could easily be nudging 50%. Scary! Users want the information faster and your content has to be quick, snappy and easy to find. It is essential that your website is optimised for mobile (particularly Apple’s operating standards). Quite simply, you will be invisible to a large portion of your target market if you are not.
Data bases are all very well, but why should the punters sign up to your site if they can get the news and exclusives via social media. One thing that is absolutely plain as a pikestaff is that the UK has an insatiable appetite for social media, which means Twitter, Facebook and Linked In.
Strangely enough it is estimated that 80% plus of strangers to you are willing to try something specifically because it is recommended to them by another human being rather than an advert. Track into the restaurant sites of Byron, Gale, Tortilla or Pho and see what we mean.
4. Cheap Air Conditioning Units
One of our clients was offered what seemed like a staggerlngly cheap air conditioning system with all the associated kit and caboodle. Being the inquisitive sort, he undertook some research and clarified that the refrigerant in the air conditioning system was Category R22. Whilst it is not illegal to operate equipment that works with R22, the use of R22 for maintenance and repairs is in fact illegal.
R22 is one of the most widely used refrigerants in air conditioning systems since the early 1960’s. However, since concerns were raised over the ozone depleting qualities, the gas has begun to be phased out. European Regulation 1005 / 2009 clarified the position and in 2010 the use of virgin R22 has been banned in the maintenance of all air conditioning systems. From 1st January 2015, the use of recycled R22 will also be banned. So to put it simply, if your equipment contains coolant R22 and it fails in such a way that it needs to be decanted or topped up, repairs will soon be illegal.
The last thing that you want is for your air conditioning systems to fail when they are most needed, i.e. in the summer months. Naturally the best time to refurbish or replace air conditioning kit, specifically the chillers, is when you have the central heating on as the air conditioning systems are either not in demand, or not being used, so either do the planned maintenance and verification of the coolant that you use this winter, or the winter of 2013 / 2014. It would not be prudent to leave it to the last minute in the winter of 2014 / 15.
Perhaps this is us being cynical (yet again), but if you are either entering into a new lease, or taking over an existing lease with air conditioning, you really should insist on an existing R22 system being replaced with an alternative refrigerant.
5. The Illusions of Double Speak
Did you know that you can now consider running your under-threat local pub as an owning co-operative. Dear old Department of Communities and Local Government, under the auspices of Locality and Co-operatives UK, have set up a Community Shares Unit which will use community owned shares as a way of raising finance to buy under-threat local pubs. Despite there being no key data over where the finance will come from, the terms of the finance, or even if any guarantees are linked with the money, Dan Foster MP, who is the local Government Minister, had the following to say:
“across the country communities are showing they have ambition and determination to secure ownership of important local assets and get new projects off the ground.
We want to create the conditions in which social investment and community finance can flourish to make this happen. This new unit will give them the helping hand they need to take advantage of the opportunity and do things their way in the best interests of their area”.
I hope you are still with us at this point as the inference is that the Community Shares Unit will underpin the Community Right to Buy Scheme. Our concern, however, is over two vital items:
- You need a strong hand or a governor to run a pub. The worst thing in the world is to have a pub run by a well meaning band of committee members.
- What if it all goes wrong? Somebody or a group of people will have to guarantee or underwrite the loan and have full responsibility for repaying the money if things don’t work out.
It seems a great shame that the Government, rather the Department for Communities & Local Government, doesn’t itself act as the guarantor for well put together schemes.
6. A Review of the Enterprise Accounts 2012
The following are the thoughts of Trade Accountant Brian Jacobs who is one of the most experienced forensic accounts analysts in the Industry.
Provisional figures dated November 2012 are available on the internet. It is acknowledged that there have been some high value pubs sold and leased back which may marginally distort the following.
Below is an analysis of some important elements that need consideration.
- The number of pubs  have fallen from last year  but the apparent average property value appears to have fallen from £736k to £708k. Since it is a fact that Pub values reflect their profitability, and the fact that trade and profitability at retail level has generally fallen, then asset values should be reflecting a fall.
- The average debt per pub is now about £402k against £478k last year.
- The average 2012 debt, compared with the average pub is just under 57% of their stated value. But is the stated value a fair value?
- Net income of the group for 2012 was £374m before admin and equates to £61.7k per pub which compares with £64.5k per pub for 2011. That is a 4.3% drop.
- As a generality Enterprise assume that rent and tenant income equate. As a result of the economic climate decline over the past five years with the rent being generally linked to R.P.I. increases, income for the tenant will have fallen lower. Average income is more likely to be £20k per annum or less [the BISC survey revealed £15k per annum]. The Enterprise aspirational “average income of £45,000 to the Tenant” is thus questionable.
- The average 61.7 per pub generated for Enterprise includes the exceptional wholesale profit from bulk buying, which probably averages say £18k per pub. So Enterprise collect as lease rent, wet rent and royalties £43.7k per pub [61.7-18] and 18k as a wholesaler. Wholesale profit should not reflect in freehold values as it is not classed as tangible income, but intangible as it can vary upwards and downwards.
- It is fundamental that any balance sheet should show a “true and fair view”. Tangible assets, freehold property, should not be valued on the basis of alternative value [unless vacant] or reflect the price of that of a special purchaser, such as a wholesaler. It is only the tangible asset that gives security to a lender, as an “intangible asset” has no substance as security.
- Auditors have a duty of care and need to verify and validate financial statements to certify that the accounts show a “true and fair view”. That includes checking the basis of valuations and the relationship between borrowing and security given to bondholders and lenders.
7. and Finally
“Alcohol and calculus don’t mix. Never drink and derive”. (Anon.)
“I personally stay away from natural foods. At my age I need all the preservatives I can get” (George Burns)
“This rock salt is over 200 million years old, formed through ancient geological processes in the German mountain ranges. Best before 01-04-2013”. (Label on a box of salt)
Best Wishes for a profitable year end and a fulfilling New Year.
The Team at M & C
Phone: 01285 719292