MORGAN & CLARKE SEPTEMBER, NEWSLETTER, a very interesting read for tenants/lessees

By | September 12, 2012

MORGAN & CLARKE  SEPTEMBER 2012 NEWSLETTER NO. 12

Pigeon House, The Broadway,

Oakridge Lynch, Stroud, Glos. GL6 7NU

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

www.morganandclarke.co.uk

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

 

 

 

So where did the regular summer go?  At no time has there been a more uneven year for weather which has had a dramatic effect on “the extra bar”, if you are fortunate enough to have outdoor trading space.  Areas of seasonality or tourist based trade, whether inland or by the coast, have also taken a hammering.  Great pity that the current Indian summer has come too late.  Never has the old adage “not so much a profits’ forecast more a weather forecast” held so true.

 

1.  43% Rent Reduction

The Sausage Tree pub in High Wycombe is an iconic food outlet pioneered by Paul Campion whose USP is a choice of fifty different types of sausage served with mash and beans.  The pub also has “contractor standard” letting bedrooms which were created for his predecessor by the freeholder, Enterprise Inns. The cost of the development was added to the previous rent as a “commercial return” to Enterprise Inns.  This had nothing to do with profitability because the rooms created were far from successful as they were not en suite and none of the bedrooms even had a wash hand basin.

 

The Sausage Tree had an annual rent rise in accordance with the Retail Price Index (RPI) and standard five yearly full rent reviews.  The current passing rent was £45,655.  Enterprise Inns proposed that there should be an increase of some 7% up to £49,000 from 2 August 2012.  It was assumed, from earlier discussions, that if pushed, Enterprise Inns would generously consider a nil uplift.

 

Paul Campion referred the matter to Morgan & Clarke Chartered Surveyors.  David Morgan produced a detailed Rental Report and Valuation which, in complete form, was sent to Enterprise Inns’ Divisional Director, Stephen Burns.  Despite numerous requests, Stephen Burns dodged the issue of a face to face negotiation and the rent was finally confirmed at £28,000 being a 43% reduction from the proposed rent.

 

            “We reached a commercial compromise that was satisfactory to both parties.”

 

said David Morgan.

 

“Although we thought that the rent could have been slightly lower still, based on detailed analysis, Paul Campion, our Client, was happy with the deal and a reduction of £17,655.

 

David Morgan also said:-

 

“There are quite a number of similar cases where the chickens are coming home to roost on the freeholders, so called, ‘commercial return’ being added to the previous rent that then bears no relationship to the continuing falling market and the on-going recession.  The usual offer of a nil increase from Pubcos must be put into perspective with the achievement of very many reductions well over 25%”.

 

 

2.  Development Potential – do you or don’t you spend the money?

As outlined above, in the case of the Sausage Tree, Enterprise Inns created “contractor standard” letting bedrooms above the Sausage Tree and in its annexe.  The conversion itself was a cheapskate job as the bedrooms were not en suite and did not even have wash-hand basins, as mentioned above.  Enterprise Inns, however, sought a “commercial return” on their expenditure and added 14% of that expenditure to the then rent.  This addition had no relationship with either on site profitability or, as with the situation of the Sausage Tree, any relationship to the actual trade achieved.

 

What do you do?  It seems to us that there is every sensible reason for doing any form of development, however minor, with borrowed cash which will surely cost you less than 14%, even on an interest and capital repayment plan.  Do not allow your freeholder to undertake the work themselves.  Aside from the basic fact that you will probably get the job done considerably cheaper, you also have a hidden advantage in that the works are assumed of a structural nature and thus, under your rent review disregards contained in your lease, those works shall be disregarded from the rent calculations.  It’s a double win which, of course, is never explained by your freeholder who always offers the incentive of “we will dip our hands into our pockets, you don’t have to find any of the development expenditure.”  The rent add- on is always glossed over but follows as sure as night follows day.

 

3.  Compromised Deals

Again, reflecting the Sausage Tree, the ultimate rent deal was a compromise on a purely commercial basis.  Although it was felt that, in technical terms, the rent should have been even lower still, Paul Campion decided that he was satisfied with the compromise and the certainty of going forwards with a huge rent reduction.  Although he was perfectly prepared to take the whole issue to arbitration, achieving virtually all of his objectives was satisfaction enough for him.

 

Paul was able to push as hard as he did, specifically because he had the back-up of the full Rental Report and Valuation which explained in great detail all of the relevant RICS Guidelines, attendant Case Law and, of course, a line by line accurate breakdown of how the profits test valuation was put together.  When the Report was finalised, there was minimal further involvement from Morgan & Clarke Chartered Surveyors as the document itself spoke loud and clear.  Exactly the same occurred with an equally impressive rent reduction at the Old Crown, Sheffield.

 

4.  Comparables

As we keep on telling anyone that will listen, the prime route for the assessment of open market rental value is the full detail of the profits test.  As far as possible, this should always be based on accurate accountancy information of on site circumstance but adjusted in accordance with the RICS Guidance Notes.

 

It is amazing, however, the extent to which Pubcos and Brewers are fixated by comparable evidence.  Reliance upon physical factors alone, in the absence of detailed accountancy data (hardly ever made available), is considered misleading and unreliable.  However, a further little twist has entered the arena via Marston’s on a case of ours in Ullswater.  The discussion earlier this year between our Clients and Marston’s’ Regional Estates Manager focused on a comparable that, to Marston’s, “was in a very different location with a much less affluent and acceptable catchment population”.  As a direct result, the subject property was held as a much less attractive proposition for an operator.

 

It is profitability not the attractiveness of the comparable property that is the major factor of influence to the hypothetical tenant being fully and properly, professionally advised.  All too often the so-called attractiveness is wrapped up in quite unachievable future potential which has the overall effect of elevating the hoped-for Fair Maintainable Trade (FMT) and as a direct link, an unsustainable rent, often linked to annual increases in RPI that has to hold good for the next five years.

 

5.  Evidence supporting Comparables

We have always held that comparable evidence is only ever of much use if the rent agreed is supported by the tenant’s actual accounts.  The RICS takes a fairly sanguine view of the situation and, as recorded in newsletters passim, if accountancy information is not available, (and it very rarely is), reliance on physical aspect alone is both misleading and unreliable.

 

We are currently involved in a lease renewal case with Wellington being the landlords of a pub in Bath.  Evidence was entered in the landlords’ Statement of Case introducing Enterprise Inns’ in-house opinion on the profit and loss scenario supporting some of the rents confirmed in the comparables.  Surprise, surprise!  We have now had it confirmed by Rob May, National Rent Controller of Enterprise Inns that, if asked, Enterprise cannot stand against the production of the full detail of their take on the profit and loss forecast that should underpin the rent agreed.

 

Okay, so it is not the tenant’s actual accounts but it does put into perspective one view of FMT which might be considerably less than a ramped up Expert’s Opinion based upon pure fantasy.

This begs the question, why ramp the FMT figure?  Some Arbitrators are not as robust as others and, indeed, some certainly not as skilful when it comes to putting together a profits test valuation.  The easy way out might be to split the difference between the parties’ variously held views.  So if you ramp up the FMT, you then elevate the mid-point if that route is accidentally taken.  Not very clever.  However, it does sometimes work.

 

6.  Planning News

There is nothing to stop the freeholder of a pub just closing it down.  Furthermore, there is not a lot that the local Planning Authority can do.  The established pub Use Clause Order – A4, slips into a A3 – Restaurant, A2 – Financial Services such as banks and estate agents or even A1 which is retail.  There is, however, a strong set of rules concerning change of use, specifically to residential.

 

A pivotal case is the Phene Arms in Chelsea.  Morgan & Clarke are acting as Expert Evidence for the Royal Borough of Kensington & Chelsea at the Planning Inquiry which will be held next month which has fundamental issues being watched very closely by a large number of other planning authorities nationwide.  Such a great deal is riding on the outcome of this case that CAMRA will be reviewing their legal position on current planning regulations following the case itself.  The follow-on case, also in Chelsea, is the Cross Keys which we know is hugely emotive as it was one of the most popular pubs just south of Kings Road, Chelsea.  A full report on the outcome of the case probably won’t be made available until at least November at the earliest.

 

7.  Stop Press

Just had the result published (Interim Arbitrator’s Award), on the Livingston Inn, Livingston Village, Livingston, which is midway between Edinburgh and Glasgow.   We acted for the Tenant, Billy Ferguson, Spirit were the freeholders.  Current rent £74,667.  Spirit wanted £79,500.  Arbitrator’s Award….. £46,500.  42% reduction from what Spirit wanted.  RESULT!!

 

Yet another member of our now growing list of the “Forty Per Cent Plus Club”.

 

8.  And Finally.

  • Ø  “The human brain can only operate as fast as the slowest brain cells.  It’s said that the excess intake of alcohol, as we know, kills brain cells.  But naturally it attacks the slowest and weakest brain cells first.  In this way, regular consumption of beer eliminates the weaker brain cells making the brain a faster and more efficient machine.  That’s why you always feel smarter after a few beers!” (Richard Pryor)
  • Ø  After a few drinks those that say that they “sleep like a baby” haven’t got one! (Phyllis Diller).

 

Best Wishes

The Team at M & C

Email:  info@morganandclarke.co.uk

Phone: 01285 719292

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