Happy New Year to all of our many subscribers in all the different corners of the licensed / leisure property world. Let’s hope that 2014 will genuinely offer some hope of a reversal of the downward trend of discretionary spend in the On-licensed trade which has been witnessed in 2013. This first Newsletter of 2014 contains a very mixed bag of ‘happenings’ in the latter part of 2013.
1. Lass O’Gowrie, Manchester
This is a multi-award-winning, Greene King leasehold that used to be situated opposite the BBC Central Studios and Offices in Charles Street, Manchester. It is a sad and sorry tale (as reported in the Publicans Morning Advertiser) of how a major Brewery Company – although acting perfectly within the law – can be seen by some to turn the Industry Framework Code on its head. The background is essential in understanding the actions of Greene King.
When the lessee, Gareth Kavanagh, took the property over in 2006, the Lass was doing approximately 400 barrels. The lease was granted on the basis of a Minimum Purchase Obligation (MPO) of 360 barrels, with any barrelage over that target level being free-of-tie. In Greene King’s words, the object was to stop the Lass from being turned into a wine bar and ensure that they had a solid level of their own products being sold. Through drive and personality, by 2007 Gareth Kavanagh (the Lessee) increased the trade up to 600 barrels which meant that nearly half of the trade was free-of-tie and largely composed of real ales which is where the personality of the Lass thrived, associated with the BBC and student trade.
It was always appreciated from the start of the lease that the BBC would be relocating at some stage which eventually occurred in the autumn of 2011. This invoked an agreed interim rent review and David Morgan represented Gareth Kavanagh in the subsequent negotiations and ultimate referral to Independent Expert. Since the departure of the BBC, the rent was still running at the original level of £53,000 which then took 19 months to settle, with a rent reduction of 40%. The sting in the tail was that Greene King refused to change the MPO requirement of 360 barrels which by now, represented virtually all of the trade level that could be achieved. Greene King reckoned that the pub should trade at £500,000 rather than the current levels of considerably less. Greene King openly declared that they did not consider that Gareth Kavanagh was of Reasonably Efficient Operator status, notwithstanding the pub being the winner of the Best Community Pub (North West) in the Great British Pub Awards of 2012 and winner of Best Entertainment Pub (North West) in the same awards, culminating in the accolade of Supreme Champion, Best Overall Pub in Great Britain in the Great British Pub Awards of 2012! In Gareth Kavanagh’s words: “things got personal”, with the downturn in trade and associated cash flow problems being finally ratcheted into an untenable financial situation as a result of a threat by Greene King to force an interim dilapidations schedule (still seven years left to run on the lease), with the implication of costs in excess of £85,000.
The lease has now been surrendered and Greene King have secured the departure of Gareth Kavanagh – who had the temerity, with David Morgan’s assistance – to stand up and fight them for a very substantial rent reduction, by referral to an Independent Expert.
The insistence on the same MPO level of 360 barrels as at the start of the lease, was the killer blow. All perfectly legal if the wish was to have an almost completely supply-tied public house selling non Manchester beer in the heart of Manchester. Very sad and if the will had been there, totally avoidable.
2. Transparency – Now you see it, now you don’t
A recent Enterprise Inns’ lease renewal in London was handled by Simon Clarke who gave detailed initial advice with the lessee subsequently settling matters out of Court (by their own negotiation). The rent was reduced from £76,000 to £40,000 (49% reduction), but on the basis of a complete and totally binding Non Disclosure Agreement (NDA) which would ensure that outside of Enterprise Inns and the lessee, no-one would have any knowledge of the ultimate settlement.
The assumption is reasonably made that this lease renewal rent will now not appear in the comparable evidence pro formas of other rent settlements in the general area as, by so doing, that would broach the NDA. So much for transparency!
3. Wellington Pub Company
It has been an interesting exercise to trawl through the Net and download, the representations that have been made to the Business Industry and Skills Committee (BIS) in their efforts of industry-wide consultation regarding statutory control of Pubcos. Wellington Pub Company are the only totally free-of-tie leased pub operator and are the only major pub owner (ownership north of 600 pubs), that are not members of the British Beer & Pub Association. As you may well remember, Wellington Pub Company are also the only pub owners who strictly enforce upwards-only rent reviews which, of course has been banned by all BBPA Members.
It now seems that Wellington class themselves as the same as any other owner of commercial property. They have squealed loud and hard that if statutory regulation does come to pass and that there are upwards and downwards rent reviews, this would lead to less investment and support for its pubs.
Morgan & Clarke are currently handling a significant number of Wellington Pub Company lease renewal cases where the rent can be set higher or lower than the current rent. There has been not one single instance where our Clients have confirmed that there has been any investment or support from Wellington Pub Company who have been more than happy to collect rent and ensure that the lease clauses are dutifully honoured.
One choice comment that has been picked up by journalists, is a classic. Wellington consider that a ban on upwards-only rent reviews, would distort the market and lead to unintended consequences whereby companies alter their behaviour. Well, surprise, surprise! Wellington now feel that they are being discriminated against because they have “a relatively large number of properties that happen to be let and operated as pubs”. It is almost as if they are surprised by what they purchased.
When Wellington bought their estate, they knew full well that the only nationally recognised method of rent assessment was the profits test. That has nothing to do with shops, offices or warehouses that are, of course, rent-assessed on an equated square footage basis. Quite why it now comes as a complete shock to Wellington that pubs are not remotely similar to ‘other commercial properties’, is probably on the basis that they could see the asset value of their estate being decimated in the light of statutory enforced downwards rent reviews.
It was noted that there was a predictable and tactful silence from Wellington’s agents Criterion Asset Management in any element of the representation that was made by Wellington to the BIS Committee. Whether or not statutory regulation comes to pass is, regrettably, not seen as a certainty as a result of far too many vested interests having an influence. We sincerely hope that the long grass does not beckon to Vince Cable and that the consultation process that started in 2004 (yes, a full seven years ago!), will now finally reach a satisfactory conclusion.
4. Household Debt – The Statistics
Last November, the Bank of England announced that UK household debt had hit £1.43 trillion – quite how that looks as a line of noughts is staggering, but the calculation was that the average adult owes more than £28,000. Not to be forgotten, this is now with interest rates at rock-bottom. The Centre for Social Justice found that more than 5,000 households became homeless last year due to rent and mortgage arrears. It is suggested, however, that this is the tip of the iceberg which will go decidedly wrong if interest rates rise to 5% by 2018. It is estimated that over two million households could be spending more than half of their disposable income on mortgage payments. Factor in the necessity for buying food, paying utilities, clothing, etc., the situation looks far from rosy.
In the past five years, food prices have gone up by 24%, public transport costs by 30%, childcare costs by 37% and social housing rents by 26%. It is also reckoned that over the last five years, a night out in the pub has increased by 35%. Set against those across-the-board increases, wages in real terms, have actually decreased rather than increased. (see our December Newsletter).
The Catch 22 is that as the overall economy is seeing the green shoots of recovery, he only way to keep inflation under control is the raising of interest rates which is exactly the reason why household debt will inevitably increase.
5. Deeds of Variation on Rent Review
Enterprise Inns are market leaders in the insistence on a Deed of Variation to accompany a rent review. This was initially instigated as formal confirmation of the then general variation of old leases in which there was only ever an upwards rent review provision. The Deed of Variation is then binding on both the current lessee and successors in title, to ensure the fairness of upwards and downwards rent reviews.
However, this Deed of Variation has now been considerably expanded and the latest version has now come into our possession. The sting in the tail is in the Third Schedule which starts off with being very user-friendly by offering WI-FI installation to the Tenant at no cost. The second clause concerns the understanding that the Tenant must maintain internet access and hold a current email account and the Company “may require” the Tenant to place its stock orders electronically. The following is the verbatim quote of the Third paragraph of the second clause:
“If the Tenant fails to comply with the terms of this clause then the Company reserves the right to apply an administration charge upon the Tenant (for each and every instance that the Tenant fails to comply) for an amount as the Company may think reasonable in the circumstances as a result of the Company (and/or its nominees) having to manually process any such correspondence, order or payment and such administrative charge shall not be less than £150 per transaction (plus any Value Added Tax) or such greater amount as may be reasonable from time to time”.
So if your broadband packs up and your internet is faulty and you in desperation phone Telesales, it would seem that every transaction now carries an administrative charge of not less than £150 per transaction plus VAT. Very friendly!
The real stinger is clause 3 which again is quoted verbatim:
“Upon the request of the Company (or that of a relevant third party supplier) the Tenant shall agree to receive and pay for utility supplies to the Property (either in whole or in part) on a pay as you go meter system (or some other similar or updated system or arrangement) and to allow such access as may be necessary for the installation, inspection, maintenance, replacement or removal of such equipment as may be reasonably required during the term of this Lease either by Company or any relevant third party supplier (or a nominee) for that purpose and the Tenant (and those under its control) shall comply with any standard terms and conditions in respect of the use and maintenance of such equipment as may be in force from time to time and shall not attempt to interfere or manipulate the proper use of any such equipment”.
We have consulted with ‘Mi’ Learned Friends’ who are quite adamant that an unconnected third party cannot change the contractual arrangements between connected parties – say the Tenant and British Gas or Scottish Power, for example – without the prior, formal consent of the connected parties. Don’t forget that a Deed of Variation is also binding on successors in title. Clause 3 appears to give Enterprise the unilateral right to change utility contracts without the Tenant’s authorisation. It is also a running cert that a ‘pay-as-you-go’ meter system, will have a far higher tariff than a long-term contract, sometimes volume-based.
Can the Tenant refuse to sign? Difficult. Enterprise Inns are requiring the Deed of Variation to be signed before the rent review is formally signed off. If, as in the circumstance of the rent review that sprung this document, the tenant is in for a substantial rent reduction and the payment of back rent, and if it is an absolute requirement that neither the rent will be ratified, nor the overpaid rent be refunded until the document is signed, there is more than a little financial pressure hanging over the Tenant, despite the very substantial legal issues that might be the subject of challenge under Contract Law.
We wonder what effect Clause 3 in the Third Schedule in the Deed of Variation will have on the ultimate saleability of a supply tied leasehold. Would you really want to sign up to a binding Deed of Variation annexed to a lease, that allows your Pubco to apparently have the ability to change your utilities contract if they see fit?
An interesting case for further detailed scrutiny and perhaps clarification in the light of clauses 2 and 3 of the Third Schedule NOT appearing in the very latest Retail Partnership Agreement (RPA) – Why?
The latest RPA on lease renewal is, of course, open to challenge under ‘subject to modernisation’ stipulations of the Section 25 Notice. If clauses 2 and 3 of the Deed of Variation, Third Schedule were not in the previous lease, it is more than difficult to include them in a new RPA. Rent review – with the pressure of a lower rent and a back rental repayment for overpaid rent hanging in the balance – now that’s different!
6. And Finally
“After the first glass of absinthe, you see things as you wish they were. After the second, you see them as they are not. Finally, you see things as they really are and that is the most horrible thing in the world”. (Oscar Wilde)
“The last mosquito that bit me had to book into the Betty Ford clinic” (Patsy Stone, Absolutely Fabulous)
“We had gone there to pass the beautiful day of high summer like true Irishman – locked in the dark snug of the public house” (Brendan Behan)
Best wishes from the Team at M & C
Phone: 01285 719292