Monthly Archives: July 2015

M&C July News letter, well worth reading on the vagaries of leases.

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There is nothing worse than an air of uncertainty and planning ahead for both summer trade and for the formality of lease renewal is currently still anybody’s guess. Whilst it is hoped for the much-heralded ‘barbecue summer’, it is always a risk as to the certainty that it will actually happen.

Gearing up for the full use of external trade facilities is, of course, a given and the application of Miracle Gro to those hanging baskets will do wonders!

Rather than dwell on the economic uncertainties that will stem from the absolute ‘horlicks’ that those in financial power have made of the possible Greek exit from the EEC and associated fall-out for interest rates Europe-wide, we have chosen to concentrate on a few specifics that need highlighting.

  1. READ YOUR LEASE

The last thing any successful licensee would do, is to constantly refer to the lease document which, to all intents and purposes, once signed, was consigned to the pub safe and/or returned to the lawyer. Certainly constant referral to its content, rarely, if ever, happens.

There are a large number of Enterprise Inns’ leases which contain in Schedule 8, an option to renew. Please remember that a lease is a specifically binding contract that is as evenly binding on you as it is on Enterprise Inns. Whilst quite legally, Enterprise Inns can enforce any and all of the stipulated lease provisions, so can the Enterprise Inns’ lessee enforce the option to renew.

Regrettably, we have recently had four clients who have just slipped past the lease termination date before they involved us in the provision of advice. Having now past that vital date, they find that they are now being offered only a five year lease on renewal, when two of the leases were for 10 years and the other two for 20 years.

The Enterprise Inns’ view of lease renewal is that due to ‘legislative uncertainty’, they are minded to confirm only five year lease terms. However, the option to renew contains some very powerful tenant options which cannot be refused.

Clause 3 states that: “the renewal lease may have a length of term of 5, 10 or 15 years at your discretion” (emphasis added). Quite simply, it is not at the discretion of Enterprise Inns to arbitrarily reduce you lease term, but at the choice of the lessee.

There are various other items contained in paragraph 4 which starts off “the renewal lease shall be on the same terms as the previous lease granted” (implying the same number of years of the term) “immediately before the renewal lease is granted” and there are a number of exceptions such as – the rent and volume target can be renewed; there will be five yearly structured rent reviews; no prohibition on assignment; no cooling-off period; a deposit of 25% of the renewal rent or, if higher, the amount of the deposit held under the previous lease.

Clause 5 is very time-specific and states that to qualify for a renewal lease, the following conditions must be satisfied:

“You must serve a written notice upon us (which may not be served during any cooling-off period) at least six calendar months before the expiry of the term of the previous lease and this notice cannot be withdrawn.

Your notice must specify your chosen length of term which must be in compliance with the earlier stated paragraph 3” (emphasis added)There then follows a number of other provisions, not least that you must not be in material breach of any of your obligations in the previous lease and that all accounts with Enterprise Inns must be up-to-date.In all four of our recent examples, none of the lessees were aware that they had an option to renew and all of them are deeply concerned that they have been offered only a five year term.

ALWAYS READ YOUR LEASE BEFORE RENEWAL! 2. Civil Procedure Rule Changes – Experts “The joint statement should include a brief re-statement that the Experts recognise their duties (or a cross-reference to the relevant statements in their respective reports). The joint statement should also include an express statement that Experts have not been instructed to avoid reaching agreement (or otherwise defer from doing so), on any matter within the Expert’s competence”.In our considered view, the corporate attitude (certainly shown by Enterprise Inns) – that their expert is only there to ‘present our case’ – now cannot stand up against paragraph 80 of the new Civil Procedure Rules. On the 27th November 2014, David Morgan did, in fact, alert the three then licensed trade valuers in Enterprise Inns, advising them that the new regulations would come into force from 1st December 2014. No response was ever received.

3. Living Wage We cannot name names, we cannot even tell you where the property is, but suffice it to say that this is on the edge of a major town just north of the M4 which happens to have a very big railway station. The basic numbers are as follows:Wet-led boozer with a recent and openly accepted chequered history which is now on the straight and narrow, turning over something around £200,000. The current rent is £44,750 and the Pubco rent proposal was £50,000 based upon their estimation of Fair Maintainable Trade of £456,100. No explanation of even remote credibility was offered as to exactly how the trade would suddenly jump that high. The PIRRS’ Expert’s Rent Determination, which was also confirmed confidentially to both parties in terms of calculation, was £29,600, i.e. £20,400 less than the Pubco rent proposal, or 41% less. The rent review date was 1st August 2013 and it does not take a mathematical genius to work out the amount of rent rebate. The Pubco did not contribute to the cost of the helpfully stated calculations, but nonetheless insisted that they were given them “in the interests of natural justice

Yet another solid PIRRS’ Result

      We cannot name names, we cannot even tell you where the property is, but suffice it to say that this is on the edge of a major town just north of the M4 which happens to have a very big railway station. The basic numbers are as follows.

        Wet-led boozer with a recent and openly accepted chequered history which is now on the straight and narrow, turning over something around £200,000. The current rent is £44,750 and the Pubco rent proposal was £50,000 based upon their estimation of Fair Maintainable Trade of £456,100. No explanation of even remote credibility was offered as to exactly how the trade would suddenly jump that high.
        The PIRRS’ Expert’s Rent Determination, which was also confirmed confidentially to both parties in terms of calculation, was £29,600, i.e. £20,400 less than the Pubco rent proposal, or 41% less. The rent review date was 1
        August 2013 and it does not take a mathematical genius to work out the amount of rent rebate. The Pubco did not contribute to the cost of the helpfully stated calculations, but nonetheless insisted that they were given them “

in the interests of natural justice

5. Sobering Drink Statistics

Once you lose the habit, the habit has gone and rarely returns. We have been emphasising this solid little point in Newsletters passim which links into the latest report of influence published by Institute of Economic Affairs in early June.

Since the introduction of the Licensing Act 2003, alcohol consumption has continued to fall in the On-trade, year-on-year. It is estimated that since the 2003 Licensing Act was introduced in November 2005, the fall over the last ten years has been approximately 17% overall, but 26% in On-licensed premises. The report quite rightly states that some of the culprits have been: the recession; the smoking ban; the Alcohol Duty Escalator; and the change in direction of the drinking habits of the under-25’s (see the ‘Z’ generation in previous Newsletters)

These sobering statistics seem to have completely eluded a large number of Pubco/Brewery rent assessment forms which, surprise, surprise, almost always show a future and automatic increase in Fair Maintainable Trade and very rarely even acknowledge that the current trade evidenced in accounts, will stay either flat or continue to decrease slightly

When this was pointed out to a chirpy member of a Pubco’s retail field staff, with some very hard local statistics supporting a negative trade trend, all he could say was: “It’s my duty to see the rent going up”. It was pointed out that duty has got nothing to do with viability, or indeed Reasonably Efficient Operator status. The response was; “I don’t think you heard me the first time, it really is my duty”.

It would be wonderful to be hugely positive about volume drink sales in the On-trade. Looking forwards as far as would be sensible, we see little if any evidence of a sustained increase in wet trade that is dreamed up to support rent rises to individual operators (rather than High Street, high-profile chains). This occurred in the PIRRS’ example set out above.

6. Dilapidations

Terminal schedules of dilapidations are always emotive matters, either at the time of lease surrender, or if a landlord has refused the grant of a new lease on any of the three legally specified grounds under the Landlord & Tenant Act 1954. The RICS and Law Society have been constantly updating their various protocols concerning dilapidations which effectively is the best practice that should be observed by Chartered Surveyors in the service of a schedule of dilapidations. Set out below are some of the current basic principles that have evolved over the last few months, which will be further expanded upon in a future separate Newsletter dealing exclusively with dilapidations.

A Schedule of Dilapidations (SoD) records all breaches of repairing and decorating covenants relating to the condition of the property. The SoD does not necessarily establish the landlord’s direct loss. The pre-action protocol of the latest version issued by the RICS, states:

“and set out and substantiate the monetary sum sought as damages in respect of the breaches detailed in the schedule as well as any other items of loss for which damages are sought”.

This also links into the specific confirmation of the landlord’s intentions for the future of the property which then cross-references with either continued occupation, or cessation of occupation an outright sale. In the above quotation, damages equals the reimbursement of loss suffered.

What is the quantified demand?

This also links into the specific confirmation of the landlord’s intentions for the future of the property which then cross-references with either continued occupation, or cessation of occupation an outright sale. In the above quotation, damages equals the reimbursement of loss suffered.

“and set out and substantiate the monetary sum sought as damages in respect of the breaches detailed in the schedule as well as any other items of loss for which damages are sough.

It would be wonderful to be hugely positive about volume drink sales in the On-trade. Looking forwards as far as would be sensible, we see little if any evidence of a sustained increase in wet trade that is dreamed up to support rent rises to individual operators (rather than High Street, high-profile chains). This occurred in the PIRRS’ example set out above.

When this was pointed out to a chirpy member of a Pubco’s retail field staff, with some very hard local statistics supporting a negative trade trend, all he could say was: “It’s my duty to see the rent going up”. It was pointed out that duty has got nothing to do with viability, or indeed Reasonably Efficient Operator status. The response was; “I don’t think you heard me the first time, it really is my duty”.

We always maintained – at times without success – that a motivated, highly skilled staff, is the solid reason why Clients of ours achieve the trading successes that they do because they do not pay minimum wages. Pubcos would tell you otherwise and basically, we do not buy that logic.
Time and again, we are being told that the average hypothetical tenant must follow either the BBPA or ALMR statistics concerning wage costs. Almost all of these wages costs are at minimum levels where at all possible.

There is now a requirement for a declaration to be included in the joint statement (in a PIRRS or Arbitration sense – the Statement of Agreed Facts), to comply with paragraph 80 which states:
The stage is set for guaranteed adversarial contact. There is now no established platform for any form of further negotiations, despite the fact that a new (independent) mind has been brought to the negotiating stage.
Our deep concern has been – and continues to be – the complete lack of on-going negotiation with the Pubco expert who might just have a completely different viewpoint from the Pubco/Brewer client. Well that’s the theory anyway.

There have been a number of detailed changes in the CPR Rules which were adopted from the 1st December 2014 which are now filtering through the system and being adopted as ‘best practice’ for Chartered Surveyors. This is particularly relevant for our Clients who have been provided with a fully detailed Rental Report & Valuation and have decided to take matters to a PIRRS Expert under their own steam. Do not forget that the Pubco retail field staff will not be handling the PIRRS’ referral, despite the fact that they have been the only point of contact for meaningful negotiations thus far. At the whiff of PIRRS they just disappear!. The Pubco/Brewer will automatically hire in a specialist Chartered Surveyor to present their case. There will be no further negotiations.

Redevelop
Convert
Refurbish
Repair

These and other matters will be considered in some detail in a future, dedicated monthly Newsletter, not least the black art of market-driven super cession. If you think the above was complicated, this one is even worse!!

And Finally

It always brings a wry smile as to the marketing efforts for new or re-vamped drinks products. We are grateful to the publicity surrounding the recently-launched Corona Sunset Sessions which is a series of music events sponsored by Corona Extra Beer throughout the UK. One of the major strap lines confirmed that:

“Corona the beer brand is synonymous with the beach. Music is a passion for our customers – along with travel, food and culture” – (covered the bases there) (Ed). “The Corona Sunset’s platform gives us an opportunity to combine all four in an immersive experience”.

We do not think that they meant bathing in the stuff, but who know

Best Wishes from the Team at M & C

Email: info@morganandclarke.co.uk

Phone: 01285 719292

 

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