M & C MARCH 2017 NEWSLETTER (More Vagaries by certain Pub Co’s to avoid the Legislation)

By | April 8, 2017

Morgan Clarke Logos copy

MORGAN & CLARKE MARCH 2017 NEWSLETTER NO. 57

Pigeon House, The Broadway,

Oakridge Lynch, Stroud, Glos. GL6 7NU

Email: info@morganandclarke.co.uk Phone: 01285 719292 and 01285 760370

www.morganandclarke.co.uk

(Also at: London, Cardiff, Braunton, Lewes)

Welcome back gentle reader. It has been a while and in fact too long since our Newsletter No.56, but there have been one or two matters that have diverted the team’s attention – not least the continuing frustration of the new Pubs Code and also the Heineken/Star takeover of Punch, of which more later.

The continuing frustration of the ‘due process’ surrounding the Statutory Pubs Code has not been assisted by a major barrier within the system called ‘the Caseworker’. We have made a formal request concerning the qualifications of the people concerned which has been batted away on the basis that they satisfy the criteria of the Pubs Code Adjudicator. We are no further forwards to having any confirmation that the people concerned are in fact qualified or have any background whatsoever concerning arbitration procedure. It would seem that there are four active Caseworkers or rather complaints handlers, namely: Stacy Rigby, Walleta Hamilton,Sunita Kumar and Dav Tennant with the Head of Policy & Operations being Kathy Lee-Cole.

There seems to be a major problem within the PCA of the acceptance of a referral under Regulation 50. In order that there is no misunderstanding, Regulation 50 states: “A Pub Owning Business must not subject a tied pub tenant to any detriment on the ground that the tenant exercises or attempts to exercise any right under these Regulations”. There have now been a number of responses from the Caseworkers indicating that for some reason, Regulation 50 referrals are being used (so they tell us)to circumvent the Code. This has resulted in endless frustration, delay and also the increasing of associated costs with seemingly a never-ending stream of barriers being put up to the logical process of having a Regulation 50 case arbitrated upon.

We even had the curious situation of a case being stopped midway through the process of arbitration for the following reasons:

This office made the Claimant’s Statement of Case, setting out very clearly the financial detriment in a Punch-related new lease and pointing out again, with great clarity, how a Deed of Variation would very cheaply satisfy the requirement of a free-of-tie relationship between the tenant and Punch. The Solicitor acting for Punch who had been assigned to the case, then issued a formal response which naturally held the opposite view. Then, all of a sudden, the Caseworker, Stacy Rigby considered that the Claimant’s case had not been “sufficiently argued” and that the whole process would have to start all over again. The Punch tenant and Stacy Rigby are still exchanging emails and a new referral form has been submitted, together with a three page letter, re-stating precisely the items that were set out in the original Statement of Claim. Basically, we are now back to square one, having to fill the referral form which is, after all, limited to 500 words, with a fully arguable case as required by the Caseworker. Regrettably, there are several other precisely similar cases, some linking with Enterprise Inns that have hit the same barrier, with the Caseworker acting as Judge & Jury and constantly re-stating that in her considered view, an application under Regulation 50 was an attempt to circumvent the Code.

Paul Newby as Pubs Code Adjudicator and being a Fellow of the RICS

Paul Newby has an obligation to follow RICS Guidance Notes where relevant. RICS GN108/2013 “Surveyors Acting as Arbitrators in Commercial Property Rent Reviews” is the overriding requirement for Chartered Surveyors in the responsible position of being an Arbitrator. Two areas of contention have arisen which have not been resolved:

Statement of Agreed Facts [“S0AF”]

In the initial confirmation of the Proposed Order & Directions No.1, there is an automatic provision in the numbered paragraphs requiring the SOAF to be submitted within seven calendar days of the concluding submission of documentary evidence – the documentary evidence being the statement of the Claimant, the statement of the Respondent and their subsequent views on the statements made. However, in RICS GN108/2013, paragraph 12.1…….. “to this end (agreeing facts) The Arbitrator should direct (if rarely the parties do not agree) that a statement of facts should be agreed at the earliest possible opportunity, together with a list of those matters of a factual nature that cannot be agreed and the reasons for the disagreement”. (Emphasis added).

It seems to the team at M & C that the distilled wisdom of the RICS is both perfectly logical in that the early settlement of the SOAF cuts down considerably the areas of contention and also that this should happen before the statements of case have been made. The response from the Solicitor acting for the Pubco was as follows: “Not agreed. The referral under the Pubs Code is not a rent review and the Guidance Note referred to is therefore not relevant. In a rent review there are relatively few facts in contention. In the present case, the parties are unable to identify the ‘facts agreed’ or ‘in dispute’ until there has been an exchange of submissions”. Our view is that rent reviews can be very complex indeed and the settlement of the SOAF cuts out a huge volume of otherwise arguing a case.

We, of course, fundamentally disagree in that it is a fairly straightforward matter to identify areas that are or are not in dispute and to tabulate the items concerned. Putting the SOAF at the end of the entire process does nothing to try to short-circuit the extent of the cases made by both parties. There has been no answer from the PCA to our request for clarification.

Fees and Costs

The question of the fees and costs has now arisen in the two cases that have, in part, resolved themselves since last August. Once again, quoting from GN108/2013, it states in paragraph 6.9 “Establishing the Arbitrator’s fees and charges”……………unless the fees were agreed at the time the appointment was accepted (which cannot apply in a Presidential appointment), the Arbitrator should state in writing to the parties in the initial letter following the appointment, the amount of any fees or charges or the basis on which they are to be calculated. The parties’ written agreement to the Arbitrator’s fees and charges is desirable, but cannot be required”.

Once again it came as some surprise that, understanding that Paul Newby is being paid £130,000 as his annual salary, to be the Pubs Code Adjudicator and Arbitrator and that his entire staff is Government-funded, there should be any charges raised. Certainly there is no mention of any such charges in the Proposed Order and Directions.

When this was raised with the PCA, the Solicitor acting for the Pubco subsequently stated……. “Not agreed. We are not sure which paragraph 6.9 is referred to. The Guidance Note is not relevant. The Pubs Code (Fees, Cost and Financial Penalties) Regulation 2016 apply. We believe the PCA is intended to be funded by levy on the industry and the fees/costs charged”.

Curiously, there is no such mention of the PCA being funded by levy on the industry contained anywhere within the regulations.

On the issue of fees when challenged over the RICS Guidance Note, the PCA caseworker response ducked the issue with the following comment: “We confirm that the PCA is aware of Article 41 of the CI Arbitration Rules in connection with the Arbitrator’s fees. This is to be read in line with Section 51(6) of the SBEE Act 2015 and Regulation 3 (3) of the Pubs Code (Fees, Costs and Financial Penalties), Regulations 2016 (The Fees Regulations) and required the Pub Owning Business to pay the reasonable fees and expenses of the Arbitrator subject to certain exceptions. The Arbitrator’s fees for 2016/17 are charged at a rate of £160 an hour to reflect the actual time and expense incurred in respect of the PCA undertaking arbitrations”. (Emphasis added).

So there we have it – nice and straight forward, isn’t it? And we all naively thought in July 2016 that the passage towards consideration of a free-of-tie rent would be simple and straight forward. How totally wrong we were!

PROPOSED ORDER & DIRECTIONS NO.1

Since last November we have been trying to change the wording of this initial communication from ‘proposed’ to ‘Draft’ but with no success. This initial communication requires comments and reaction from the parties within 14 days, otherwise the automatic assumption is made that the content of the Proposed Order & Directions is accepted by the parties. We have had a number of Clients and indeed Solicitors not understanding the purpose of this initial letter and thinking that they automatically have to lodge their Statement of Claim within 14 days of the date of issuance of the letter. No so as this is a preliminary communication and definitely does not require the full statement of case to be made by the Claimant/Tenant in such a very short space of time.

It also is a matter of contention that the Final Order & Directions does not quote specific dates for the formal documents to be lodged with the PCA and only states “within 14 days of the date of this letter” for each of the various formal stages. There is no allowance for extended holiday periods which was why there was such great confusion over the extended 2016 Christmas holiday break which severely impacted upon the strict timings of elements of the Code, not least the appointment of independent assessors. This then neatly leads onto the vexed question of the identity of independent assessors[“IA”].

IAs

The PCA role of the IA is very much linked with the RICS and the initial requirement that such individuals must be currently registered on the RICS President’s Panel of qualified independent experts. That being said, the invitations to become an IA must have originally been canvassed by the RICS and it was at RICS Headquarters on 30th September 2016that the initial induction courses were held. It was by total chance that David Morgan happened to be at RICS Headquarters on the same morning and bumped into a number of the prospective IAs which was the only reason that the date for the induction course could be so accurately placed.

In early January, the team contacted the RICS (Gemma Beasley) for confirmation of who was on the list of IAs. The major problem facing both Pubcos and Tenants was that there was no direct knowledge as to who was on the list, yet there was the requirement for the settlement between parties of the identity of an IA after the 56 day negotiating period was drawing to a close. All quite hopeless if there was no published list. So we badgered the RICS who took until 11th March 2017 to eventually confirm that they had been given authorisation by the PCA to release the names. The full list is available on the RICS website, but curiously has not yet been published openly by the PCA.

There are 17x IAs with, in our considered view, at least 9x heavily compromised with either themselves or their firms being in receipt of current instructions from the Pubcos that are the subject of the new Code. Rather than waiting for the PCA we set out below is the full list, 8x of whom are London based and nobody located either west of Heathrow or in South Wales.

Tony Hunter, Savills, 12 Booth Street, Manchester M2 4AW

Duncan Lillie, Shelley Sandzer, 7-10 Chandos Street London W1G 9DQ

Daniel MacKernan, Savills, 33 Margaret Street London W1G 0JD

Tim Munden, Davis Coffer Lyons, 52 Portland Place London W1B 1NH

Stephen Owens, Christie & Co., 12 Greek Street, Leeds LS1 5RU

Neil Richmond, Neil Richmond & Co., Gilmoora House, 57-61 Mortimer St. London W1W 8HS

John Spacey, Cobb Consultancy, 10 The Square, Lenham, Maidstone ME17 2PQ

Peter Taylor, Christie & Co., Whitefriars House, 6 Carmolite Street London EC4Y 0BS

Barry Voysey, Voysey Ltd., 16 Bishearne Gardens, Liss GU33 7SB

Michael Walton, Walton Goodland, 10 Lowther Street, Carlisle CA3 8DA

Michael Westlake, Westlake & Co., The Estate House, South St. Gargrave, Skipton BD23 3RT

Anthony Alder, AG&G, 8 Exchange Court, Covent Garden London WC2R 0JH

Andrew Crease, Andrew Crease & Co., 4th Floor, 4-12 Regent St. London SW1Y 4PE

Barry Crux, Barry Crux & Co., 20 Castlegate, York YO1 9RP

David Gooderham, AG&G, 8 Exchange Court, Covent Garden London WC2R 0JH

Stephen Hattley, Eddisons Taylors, 4 Basset Court, Northampton NN4 5EZ

John Houston, John Houston Consulting, 82 King Street, Manchester M2 4WQ

It would seem that the Pubs Code Adjudicator has left the setting of fees to the RICS who have published the following scale:

The IA fee basis is banded based on the current annual rental value of the pub:

Rental value is £25,000 or less the IA will charge no more than £3,000

Rental value is between £25,001 to £50,000 the IA will charge no more than £4,000

Rental value is between £50,0001 to £75,000 the IA will charge no more than £5,000

Rental value is £75,001 or greater the IA will charge no more than £6,000

Our view is that it is just the same in terms of the IA’s direct involvement whether the current rent is £20,000 or £100,000. If the maximum fee of £6,000 were charged and, say, the IA hourly rate were £250.00, that allows for a massive 24x chargeable hours.

There is no clarity as to when the fees should be levied or indeed if the scale fee includes or excludes VAT. It is appreciated that it is more than likely that the scale fee excludes VAT, but it would have been so simple and straight forward just to have mentioned the fact.

IA RESULT

We cannot, of course, name names, but suffice it to say that this first concluded case was a free-of-tie rent offer made by Greene King to a supply-tied tenant. The Independent Assessment went ahead by private agreement between parties with the IA’s assessment of maintainable trade being £450,000. The free-of-tie rent award was £57,500, representing 12.78% as a ratio between free-of-tie rent and fair maintainable trade. The original rent assessment proposal for supply-tied was £49,000 and the free-of-tie rent offer £85,000. The parties’ original free-of-tie gross profit levels for wet sales was 64.64% for Greene King and 62.2% for the tenant on a very sizeable level of wet sales. The IA finally adopted 63.3% gross profit margin for all wet sales. The other telling feature was the tenant’s rental bid on the divisible balance with Greene King being at 55%, the tenant at 50% and the IA confirming that 50% was appropriate.

THE TIME IT TAKES

On 12th September 2015 a client of ours – a Marston’s lessee – sent a referral form to the PCA. On 22nd September Marston’s objected to a judicial point. That judicial point was decided in favour of the lessee by the issuance of an Award on the Preliminary Issue dated 10th March 2016. Only now can the original referral grind its way through the process. It only took six months to get this far!

PIRRS AND THE EI GROUP PLC (previously Enterprise Inns)

The previous Code of Practice that was adopted by the then Enterprise Inns shadowed the Industry Framework Code. However, since the introduction of the Pubs Code, the EI Group plc have utilised the entirety of the Pubs Code as their new Code of Practice. Unfortunately, there was a degree of uncertainty over the application of PIRRS which led to a number of cases last autumn and early this new year, being forced to go down the more expensive and cumbersome route of arbitration. Matters have now been resolved in that the EI Group plc have finally come round to recognising the cheaper and more time-effective route of PIRRS and the costly threat of automatic arbitration has now finally been lifted.

HEINEKEN/STAR PURCHASE OF THE PUNCH ESTATE

It is accepted that the finality of the takeover still has to pass the stricture of the Competitions Committee. However, it looks highly likely that after due scrutiny, everything will then be confirmed. The estate will effectively be split into two with Punch A being eventually under the control of Heineken/Star and Punch B reverting to the current Punch personnel. This has not always been openly confirmed to the current Punch lessees. However, on the purchasing invoices, if there is the Code ‘PTL’, you will go to Heineken/Star and if ‘PML’ then you will revert to your current Punch personnel. How that pans out eventually for estate management control is quite another matter as the current Star Pubs & Bars’ estate personnel have a totally different attitude to rents and leases than the current Punch estates’ personnel.

AND FINALLY

Relating back to the Pubs Code and all the tribulations and ups and downs:

When life hands you lemons, make whisky sours………. W C Fields

In Greek mythology Icarus flew too high and his wings melted. What is the moral? Don’t fly too close to the sun! or is it – as I choose to believe – build better wings……..” Stanley Kubrick

Best Wishes from the Team at M & C

Email: info@morganandclarke.co.uk

Phone: 01285 719292 and 01285 760370

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