MORGAN & CLARKE JANUARY 2013 NEWSLETTER NO. 16
Pigeon House, The Broadway,
Oakridge Lynch, Stroud, Glos. GL6 7NU
Email: email@example.com Phone: 01285 719292
(Also at: London, Cardiff, Matlock, Braunton, Lewes)
Speaking as current and previous licensees, both Simon Clarke and David Morgan can well understand the relief of our Clients in having survived both New Year’s Eve and the trade pressures of the lead up to Christmas. Well-deserved holidays are now being taken to recharge the batteries and, hopefully, the seasonal downturn of January and February will not be too harsh.
Looking ahead, we are trying to be as positive as the current state of the economy rolls out for 2013. The discretionary leisure spend, with the exception of Inner London, seems to be taking a further knock with even more pressure being placed on the On-licensed trade. Currently there is a degree of recognition of this simple but self-evident fact in that Pub Companies and, indeed, Brewery Companies, are recognising that substantial rent increases are a thing of the past. However, having rents either stay the same or drop by 5-10% really isn’t enough and we are seeing a continual stream of 30-40% rent reductions nationwide now becoming much more commonplace. However, the devil is always in the detail which we tend to tease out into the open through our continuing use of the free of charge Strength of Case Rent Review, which is always in strictest confidence.
We have two major issues to air in this January 2013 newsletter: 1) details of Surrender of Lease Procedures; and 2) The Wellington Catch 22 conundrum. Both are important in that Enterprise are market leaders (sad really!) in issues of Surrender of leases and there are a surprising number of Wellington leases up for renewal.
1. Enterprise Inns – Lease Surrenders
As mentioned in Newsletters passim, there are no “rules of engagement” over the thorny and regular occurrence of lease surrender. No modern lease contains anything that sets down the basic rules and assumptions which we had hoped would have been somewhere mentioned and defined in the constantly revised (and long awaited) Industry Framework Code.
Clarity, to a degree, has now surfaced in the case of the Enterprise Inns owned Dolphin Inn, Bath, which is currently going through an urgent lease surrender following the serious ill health of one of the lessees.
Enterprise Inns’ in-house solicitor (that speaks volumes in itself – no other Pubco has an in-house full time solicitor and team!), one Loretta Togher, confirmed to our Clients on 6th December that Enterprise Inns were willing to consider the surrender of the lease, due to personal circumstances, and “the usual Heads of Terms are set out below”. For the sake of completeness, all eighteen of those terms follow.
1. Delivers up full vacant possession of the premises (including any domestic accommodation) in a clean and tidy condition on surrender date together with all Health & Safety statutory compliance certification.
2. Delivers up the original agreement and all licensing documents and signed consent to transfer the Premises Licence.
3. Allows such items of the tenant’s trade inventory as Enterprise shall select to be valued and purchased by Enterprise on departure.
4. Confirms and warrants that the agreement and/or the inventory is not charged, mortgaged or otherwise encumbered.
5. Provides information on all staff currently employed. Although Enterprise Inns will not take a TUPE transfer of any staff as they will not be taking over the operation of the business.
6. Remains responsible for all antecedent breaches of covenant, including but not limited to, rent, repair and tie obligations.
7. Agrees in relation to the balance of arrears of rent or trade and any other payment due up to and including the date of surrender (as set out in the Departure Statement) will be paid in full upon vacant possession.
8. Discharges all outstanding utility charges, council tax and business rates and advises all service providers, including the council of departure and closing account meter readings.
9. Provides confirmation from the Local Authority that all annual fees payable in respect of the Premises Licence have been paid and are up-to-date and pays costs associated with transfer of Premises Licence of £85.00 plus VAT which will be collected on departure statement.
10. Allows Enterprise, prior to surrender date, to erect a To Let Board, advertise the pub to let on their website and allows access for inspection for prospective tenants.
11. Pays Enterprise Inns a sum equivalent to 3 months’ rent at the date of surrender by way of a surrender fee.
12. Pays any costs associated with de-registration of the lease, if registered at HM Land Registry. As part of surrender Enterprise would deregister the leasehold interest at a cost of £150.00 + VAT which will be collected on Departure Statement.
13. Completes, if required, the ID1/ID2 forms and have them verified correctly by a solicitor or Land Registry Office to enable the cancellation of any registration.
14. Makes good any dilapidations prior to surrender date or makes payment on departure for them to be made good by Enterprise Inns after departure.
15. Indemnifies Enterprise, or their predecessors or successors in title or any companies which are parent or subsidiaries of or associated or connected, with against each and every claim, liability, costs, expense or demand which relates to any claim or claims by employees or any claims made under the Occupiers Liability Act 1957 or Defective Premises Act 1972 or other statute or otherwise in relation to an event occurring during period of occupation.
16. Accepts the surrender in full and final settlement of all or any claims of whatsoever nature, past, present or future, they have, or may have had, against Enterprise Inns, or our predecessors or successors in title or any companies which are parent or subsidiaries of or associated or connected with the landlord.
17. Pays the costs incurred by Enterprise in preparation of a Deed of Surrender, estimated at £500 which will be collected on departure statement.
18. Keep the terms of the surrender confidential.
Most of the above is pretty standard stuff with the exception of No. 3 (totally one-sided), No. 5 (very few pubs are shut down – the majority go to management companies which would ensure that the TUPE Regulations kick in), No. 11 (if the pub is automatically re-let fairly rapidly, why the need for a three months’ rent “fine”), No. 17(it’s a standard document which can be topped and tailed for less than £100!).
We have alerted the powers that be in respect of the inclusion of some or all of these eighteen points in the intended Industry Framework Code. It would seem logical that there is some openness and honesty in advance of surrender in order that lessees have an idea as to what they are letting themselves in for
Enterprise Inns’ initiative is to be welcomed as there is now clarity of intention rather than no “rules of engagement” which allows for an ever-changing confusion in detail from other Pubcos.
Enterprise Inns’ take on the situation is that if you don’t accept the eighteen terms as above in full and final settlement, then they won’t ratify the surrender. Oh, and you will have noticed No. 18. It seems that they are trying to keep these inflexible terms quietly hidden from their general estate. Wonder why?
2. Wellington Pub Company
You will all be familiar with the principle of Catch 22. The latest and, quite unacceptable, version is what we now call “Wellington’s smoke and mirrors”. This concerns lease renewal and works as follows.
A. Under the Landlord & Tenant Act 1954, the theory is that the freeholder should give the tenant Notice of their intention as to whether or not to grant another lease not earlier than twelve months and not later than six months before the lease termination date. This falls to either Gosschalks, solicitors acting for Wellington Pub Company or for Criterion Asset Management who look after their 700 odd plus estate. REALITY – nothing happens.
B. Technically, the lessee should serve their own Notice of Intent within the period not later than six months before the termination of the lease as the corresponding Section 26 Notice has to have a six months’ lead in period. REALITY – the lessee isn’t aware of the legal niceties and nothing happens.
C. The lease termination date passes and the lessee suddenly wakes up and contacts Criterion Asset Management. The mantra is that the rent should stay approximately the same, notwithstanding that, in our experience, there should be anything up 30-40% rent reductions. RESULT – nothing happens.
D. The lessee contacts his solicitor and asks them to liaise with Gosschalks, Solicitors, acting for Wellington, in the drafting of a new lease. RESULT – nothing happens as Gosschalks’ instruction are that they can only enter into those negotiations when the rent has been settled.
E. The lessee contacts Criterion seeking a substantial rent reduction and a revision of the lease to reflect “modern terms”. Don’t forget that Wellington Pub Company are the ONLY Pubco that still insist on upwards only rent reviews. Everyone else in the industry has woken up to the reality of upwards and downwards rent reviews but no matter. RESULT – nothing happens on the basis that Criterion won’t negotiate any form of rent reduction until the new lease is settled.
The whole affair has now come full circle with no draft lease and no substantive rent review negotiations.
David Morgan did, however, try to force the pace in respect of the Charcoal Burner at Sidcup with David Holme of Criterion Asset Management who steadfastly refused either to reveal his rent calculations or enter into any form of meaningful negotiations despite the lease termination date being well past. No Section 25 Notice was served and the eye-watering rent still continues to be paid. The lessee finally decided that enough was enough and that he would not be taking up a new lease and a three months’ Termination Notice has now been served. Since the lease termination date, Gosschalks have confirmed that they had no instructions in respect of the issuance of a new draft lease and Criterion Asset Management, without telling the lessee, finally sought expert advice from another Chartered Surveyor which was confirmed in early January. All too little and too late with the question of lease affordability now being paramount with the ultimate conclusion that a further delay of three-six months was not worth a candle.
So why did this happen? Wellington Pub Company rents are generally seen, nationwide, as being eye-wateringly high on the basis that previous rent reviews have always been on an upwards only basis. It is not in Wellington Pub Company/Criterion’s interests to hasten any form of lease renewal procedure as the stark fact of rent reductions would seriously undermine the Wellington Pub Company’s book values.
Forcing Wellington Pub Company/Criterion Asset Management is also, to a degree, a ‘no brainer’ as to force the whole issue to Court for specific performance is looked upon by informed solicitors as incurring a minimum cost of at least £15,000. Quite naturally, that is not an option for cash starved lessees in the current economic climate unless they are multiple operators. Even then, it should not be necessary.
Is it legal? Considered legal opinion is that there is nothing specifically illegal in Wellington Pub Company’s actions as, technically, the lessee has the option of serving a Section 26 Notice and it is not Wellington Pub Company’s fault if that Notice is not served in good time. The County Court system is still available for pursuing a case against Wellington Pub Company to force their hands. The question of associated and expensive cost is not something that can be readily held as being other than the cost of the process involved. All quite legal!
3. And Finally
“Warning: The consumption of alcohol may lead you to believe that ex lovers really do want you to phone them at three in the morning!”
The Team at M & C
Phone: 01285 719292