Thoughts on the RICS Valuation of Licensed Premises
Please Note the Royal Institute of Chartered Surveyors (RICS) failed to respond to this? We would appreciate your comments on the Web Site
I have been asked by a the Editor of a National Publication to write an article on the present RICS Valuation system in respect of Licensed Premises. I have drafted out what I and others, including concerned members of the RICS, consider the issues that are causing serious concern. The Editor thought it only correct to submit them to the RICS for your views and thoughts, which I totally agree since I have no desire to write anything that is incorrect or possibly libelous. My interest is not to cause trouble but to try to put right the things that have been misused or abused by a number of companies and the hardship caused to literally thousands of naïve, honest people, that I have to meet and deal with far too regularly. I would far rather write an article on a new step forward with a fair and transparent method of valuation where all sides are involved, not just what is now perceived to be a heavily biased TRGV in favour of landlords. We all accept that this matter has to be handled very carefully and has to be got right, we are also dealing with a lot of people who have lost everything and companies who will do their legal best to oppose any changes to the present system.
A sudden change in policy by the RICS could be construed as a failure of the system and a number of companies and individuals would be consulting their lawyers because of the financial implications.
A directive from the Select Committee to the RICS would be morally binding and the RICS would be obliged to implement it without leaving themselves open to possible litigation, it would also help the Select Committee resolve a problem from my discussions with the Clerk of the Committee and other comments from colleagues dealing with the MP’s.
My personal thoughts are that rents should be assessed as a percentage of turnover i.e. 4% of turnover excluding VAT with a full tie and discounts and 6% of turnover excluding VAT free of tie. These figures may appear low by the present rental levels, but one very serious fact to be considered. Brewers supply Pub Co’s and wholesalers with discounts in excess of £200 per brewers barrel and make a reasonable profit with up to three months credit, supplying direct to their own pubs with no discount one could assume a profit of £240 per brewers barrel and very limited credit, say fourteen days, on a 200 brewers barrel pub this equates to £48K additional profit to the rent, excluding all other tied conditions, machines etc.
The rental changes should be implemented at the normal lease dates, three or five years. Lessees accounts have to be accurate in this day and age, the argument that they are unreliable is in the main no longer valid, barrelage is always on record with all Pub Co’s and can be used for a reasonably accurate assessment in the absence of audited accounts.
There are of course other legal implications, like the lease variations etc.
I would like to point out that I am not a struggling lessee/tenant but the owner of a reasonably successful business owning licensed and commercial property, I have also written several books on running licensed premises for different companies over the years, my consultancy job with the BII brings me into regular contact with people in trouble, most not of their own making, but due to lack of experience and knowledge through inadequate training and misinformation.
I would appreciate your comments on the following or any action that you may be taking to resolve the problems.
The new CEO of the BII asked me to keep him informed and to let him have a copy of my draft, which he now has, and your comments.
This is purely a draft for an article.
- Trade Accounts. Although it is an established legal principle (Cornwall Coast -v- Cardgrange) that the tenant cannot be forced to reveal accounts that are not in the public domain, all Pubco representatives always ask to see the latest accounts and indeed a large number of leases actually require these accounts to be released. As an example of how the Pubco regime works, one Pub Co appointed RICS expert always automatically steadfastly insists in issues of arbitration, that the tenant’s accountancy information should be excluded and that this fact should be written into the arbitrator’s directions. No accounts, it becomes a guessing game!
- Comparables. There has been an ever-increasing number of so-called comparables advanced by Pub Co’s that give the rent only and unfortunately some arbitrators are giving this system credibility. The original RICS regulations in the Red Book in the 1990s, insisted that if a comparable was not accompanied by full accountancy disclosure, then relying on physical factors alone (and the known rent) could be, in the RICS’s own words “misleading and unreliable”. This seems to have been completely forgotten. One of the main speakers at the BII Rent Road Show at Chepstow an eminent RICS Valuer, stated that his method of valuation using Comparables was to visit the pub to be valued, then visit four or five other pubs within a ten mile radius, ask the lessees how much rent they were paying if he did not already know, discard the worst or the best and assess the rent by the use of Comparables, I pointed out that surely turnover had to be considered and he stressed that current turnover was not to be considered in any rental valuation.
- Future Potential. Great play was made of the change in the RICS Red Book Regulations in 2003 when significant emphasis was placed upon the valuer “having regard to future potential” in Rent Review and Capital Valuation. This allowed the Pubcos to substantially over-rent properties saying that the lessee would bid a spectacularly high rent geared upon future potential. This is absolute nonsense from every respect as a lessee would sensibly not pay for his own goodwill / future potential and a bank loan would never be based upon anything other than the current trading performance of the premises. I have never yet known a bank loan heavily on unknown future potential. There are any number of arbitrations where Valuers have argued the case for the inclusion of future potential as a straight forward method of hyping rent valuations. In each instance, they were acting for major Pub Co’s. A number of high profile Valuers often try to pull the same trick on rent review negotiations.
- Goodwill. In the eyes of the Pubcos and their in house or retained valuers, goodwill is not a concept that is either accepted or recognized and thus never ever enters the valuation forum. A prime example is Mike Bell at the Portobello Gold having been in occupation for over 20 years and has to have established some form of personal goodwill or following. Another prominent Valuer flatly denied that this could exist and the Arbitrator accepted it. The RICS lays down no guidelines whatsoever in the assessment of genuine on site goodwill.
- Structural Works. It suits the Pubcos to infer that the treatment of structural works that should be ignored in rent review, should be only on a cost-related basis. No rent review disregard clause actually states that this is the only method as the rent review clause always states that it shall be the effect of such works that shall be ignored. A major Pub Co Chief Negotiator has steadfastly refused to accept that the effect on fair maintainable trade should be considered, as he knows full well that it would generally have a far larger influence on rent reduction than the cost assessment guesswork that he promotes and that the other retained Valuers slavishly follow his instructions after all he is the client!
- Profits Test. If the tenant’s accounts have been successfully excluded, very few valuers (with a few exceptions) actually bother to undertake a full accountancy based profits test following national accountancy standards. The limited few Valuers who act wholely for lessees and tenants feel that they are almost alone in this respect and battering their heads against a brick wall as the RICS have been quite happy to condone a three or four line “summary” almost entirely based on guesswork and almost entirely supportive of massive rent rises.
- TISC 2004 Regulations. Not surprisingly, the RICS Trade Related Valuation Group under Rob May would have appeared to ignore the objectives and recommendations of the TISC 2004. It has probably caused the RICS’s image to be tarnished within the industry in allowing the subversion of such an important series of recommendations to be completely eased out of existence.
- Trade Related Valuation Group. Why did the RICS allow Rob May to be Chairman of this Group for five years and only when they received a letter from a member of the BII raising serious questions about certain issues in the Valuation system did he stand down, to be replaced by Martin Willis of Fleurets, who claimed to act for both Landlords and Lessees at the Select Committee, however his fee structure could well put him beyond a licensees purse, further questions as to when he last wholly acted for a licensee on a rent issue remain unanswered. How did the RICS actually allow Rob May to constantly conceal his true employment as National Rent Controller of Enterprise Inns when any reference to him and his job function as Chairman of the TRVG always stated that he was a “pub expert” with no mention of Enterprise Inns. Martin Willis as current Chairman is heavily dependant upon the Pubcos for fee income so he is hardly likely to stand against their hopes and aspirations. This also applies to a number of other members of the TRVG who although not specifically representing Enterprise Inns or Punch, are still supporting the freeholder rather than the lessee. There is at this moment of time no equal balance on the TRVG of surveyors who act wholly for licensees and ones that act for landlords, consequently there will always be the danger of bias, whether intentional or unintentional. In addition they are dealing with business trading conditions which none of them have any first hand experience, by discarding any turnover information this aids their lack of knowledge of the market and pubs individual market share, which is essential in any rental calculation. This was highlighted in one of the Trade Publications recently where a senior member of the RICS gave details of his trading calculations for a tied pub, his percentages of gross profit and overheads caused serious complaints and considerable laughter from the majority of readers about the total lack of awareness of the realities of the pub business. Regrettably the Editor of the publication was equally at fault for not getting the figures verified by an expert in running a pub or a stocktaker.
- Costs. Virtually all central London RICS arbitrators now charge over £300 an hour plus disbursements and VAT. The RICS Dispute Resolution system, specifically arbitration, is now so heavily cost weighted against the lessee that it is only the exception rather than the rule that arbitration is seen as a system of dispute resolution. As often happens, the lessee is cash starved out of this avenue of so-called justice. The main speaker at the BII Rent Road Show at Chepstow stated in one of his two presentations, that he informed any lessee or tenant that wished to take the matter to Arbitration of his costs (£330+ per hour) in addition to the Arbitrators costs, could he afford it for a rent increase, he said that they normally withdrew. I pointed out that this was not justice but intimidation, in addition the more lessees that capitulated in fact ratcheted the Comparables rent norm to a continually higher level if turnover was not considered.
- Mediation. Professional mediation does seem an avenue of genuine dispute resolution. The average hourly charge rates are £150 and a professional mediator usually only expends four hours, i.e. £600 split between parties. I understand that the success rate espoused by the Mediation Service is almost 70% although the irony is that it does not include many RICS members. There are accountants, lawyers, management consultants, etc., i.e. anyone that can achieve the qualifications. The RICS would hate this as under all existing leases in existence, it is only the RICS that is able to appoint either arbitrators or independent experts, in other words they have 100% stranglehold on the dispute resolution system. Mediation ends that monopoly situation.
- The assumption by all Valuers acting for landlords using the “The Future Sustainable Earnings Potential by a Competent Operator” method is that the market is infinite and that whatever rent is placed on a pub, the lessee will immediately increase the business to that level to sustain the rent, this is complete eyewash and again expresses the ignorance of these Valuers in running what is now a complex business. It takes two to three years to reasonably increase the business if the market is there. The Market Share is finite and falling with the recession and the existing turnover is that particular pubs market share at that moment of time, any increase beyond 15% per annum is wild speculation and the business is increased at the expense of a neighbouring pub, not a new influx of customers.
- The definition Competent Operator which has been down graded slightly to a Reasonably Efficient Operator, this has never been discussed with the BII. A number of senior members of the BII when asked for a definition all agreed that three years profitable trading with advanced qualifications or five years profitable trading with minimal qualifications, not a one days course or at max a ten days course using basic BII qualifications, which is what happens with the Pub Co’s at present and no quantifiable managerial experience. Consequently these people take these leases with very little chance of satisfying the hypothetical trading levels set by these valuers, experienced operators face the same problem. Caveat Emptor is frequently used as a reason for their failure, this is not acceptable. One Solicitor that I deal with has not had a business plan queried or rejected in five years from any Pub Co, in a number of cases the Pub Co BDM has filled in a substantial part of the Business Plan form consequently the new lessee assumes that the plan is viable and signs the lease. One lessee that a solicitor asked me to speak to last year would have had to increase his turnover by three and a half times to break even, his business plan was accepted by the Pub Co.
- Rob May stood down as Chairman of the TRVG after my first letter and I believe is now no longer serving on the TRVG, his alleged conflict of interests and apparent lack of disclosure of these interests were supposedly acceptable to the RICS and not a cause for concern, yet he stood aside after my first letter and should have been the one to face the Select Committee as the long standing influential Chairman for a number of years. He is now no longer serving on the TRVG is this as a result of further questions being raised or are the RICS finally addressing the problems facing all retail property industries, some far worse than others.