I have just viewed two pubs where the lessees are under pressure yet again, both Pub Co’s demanding rent increases of twenty and thirty three and a third percents yet again, do these companies not read the press, do they not realise that the writing is on the wall in very large letters.

In the latter case the BDM is allegedly intimidating the tenants, having thoroughly inspected the premises, the business has fallen substantially through local business closures and local large amenity closures through the recession.

The nearest pub is on a £1 per week rent and that is surrounded by some chimney pots and struggling, in a small neighbouring village.

The pub is neglected and has been for years, the site is large and would be far better converted to housing apart from 21 years remaining of a 30 year lease with a limited tie.

It would be a destination pub in buoyant times, but the particular area is going to struggle for at least five years economically in my opinion.

The rent is already 26% of the existing turnover and totally non viable, the BDM has demanded that the pub should be converted to fine dining, there is no market and the kitchen has limited access to the eating area and is 11ftx7ft with the kitchen equipment inside and space for one person to work.

The tenants have no experience of fine dining, if a Pub Co wants to change the nature of a pub they should instigate free Gourmet Cooking Courses and guidance and research the areas as to the suitability of drastic changes to the business, they knew when they accepted them as tenants that they had only done a one day course.

It reminds me of a story ten years ago in a Marstons managed house.

The Manager was a good operator running a very popular community pub in Bracknell.

He had a new Area Manager appear, looked round and went away, some months later he returned with a hand full of papers.

After looking at various sheetshe told the Manager that he was not making his quota on food, he was doing over £10K  a week on booze, what was he going to do about it, which he replied “Nothing”.

The Area Manager shuffled his papers and twiddled with his calculator and demanded “Why not?”

The wise old Manager looked at him and shook his head and said “I don’t have a kitchen.”

Surely these Pub Co’s should get BDM’s, Area Managers etc that understand the business, that can help people.

I meet licensees every week that I have never seen before, the leased and tied ones with a few exceptions in the thinking Pub owning companies, say that absolutely nothing has changed and possible the situation is worse.

The main offenders are desperately trying to push through rent increases of around 20% on fictitious FMT’s before the RICS and any other changes come into the industry.

They know that any change to a lease made now will be binding until the next rent review  when any RICS Guidance will come into effect.

It was a point that I raised to the RICS on any change and the legal opinion was that any changes could only come into effect at a review time.

I had a lengthy discussion with a lady lessee yesterday, her Pub Co are trying to force her into an 18.5% increase and they will not move, regardless of the fact that they are offering leases on closed pubs for £5K.

Her business is static in terms of growth being a community pub and the turnover has been reduced following the smoking enforcement and the recession from some years ago.

The major Pub Co’s will not sign a deed of variation on any rent reductions, which effectively means that should they sell the pub, the old rent comes back into force with a very good chance of killing the sale.

The whole trading operation of all the major Pub Co’s is short term which is wholly detrimental to the industry.

The training is totally inadequate, a one or five day course does not produce a long term licensee, we have far too many desperate people, many totally unsuitable for the industry, inadequately trained and their only criteria was the ability to raise enough cash to effect a supposed low cost entry into the business, which everyone knows is totally incorrect.

I hope Peter Luff can expose the sham that really exists when he meets the Government.

RICS to make pub rent changes

David Rusholme and his team have taken remarkable steps to improve the anomalies in the Industry and if this progress can be continued, it will be appreciated by thousands of people involved in the Licensed Industry.

The tied tenant should be financially no worse off than the free of tie tenant — that is the key finding of the Royal Institute of Chartered Sureyors (RICS).

The RICS report also said that it had never endorsed a 50/50 split of profits and that the recent Brooker case had provided “timely guidance”. In the Brooker case, the rent was set at 35% of the divisible balance (High Court gives hope for rent cuts).

It has vowed to undertake a review of its valuation paper, which provides guidance for rent setting. “This follows the principle of the tied tenant being no worse off than the non tied tenant; a position which is arrived at with a correct interpretation of RICS guidance,” it said.

The review will focus on:

• What comparable evidence can be used.

• The concept of “the reasonably efficient operator” making a clear distinction between what a tenant can afford and value.

• Advice on whether key data such as industry average statistics, for example on turnover, can provide a check and balance to the profits method.

It said: “RICS does not, and has never has endorsed any particular split of divisible balance; RICS guidance seeks to address the factors to be taken into account to assess an appropriate division of profit and reflection of risk.

“The Forum suggests that the recent Brooker v Unique Pub Properties Ltd. case has provided timely guidance on this point.”

Perception of bias

RICS also said it would look at the make up of its Trade Related Valuation Group, which sets the guidance on rent setting, as “representations to the Forum showed that there was a perception amongst some interested parties that this Group has a bias towards pubco landlord interests”.

RICS will draw up a new code of practice, which it hopes the while industry will adhere to at rent review and lease renewal time.

It calls for:

• The method of how rent is to be calculated is to be drawn up at the start of the lease using the profits valuation method. It will state which items are to be rentalised and excluded. It will also deal with tenants’ improvements.

• A list of minimum information presented by the landlord at rent review time.

RICS found, however, that there should be no national rent register for pubs because it is not a “realistic” or “achievable” goal.

But RICS does suggest establishing a database of key financial variables to estimate Fair Maintainable Trade and the divisible balance.

“This database will only be successful if both landlords and tenants are prepared to cooperate fully and submit sufficient accurate data, so that a critical mass of data can be achieved,” it said.

“RICS and the Forum believes that benchmarking by the industry will give greater knowledge and improve the transparency in the calculation of rental value at review.

“Data would be available to benchmark and substantiate the components of the FMT calculation. It will help define more readily the concept of “a reasonably efficient operator”.

“It would also provide a basis to demonstrate the rental difference between tied and non-tied tenants and allow for an evidence-based approach to the appropriate split of the divisible balance.”

Fair Pint reaction

“Our campaign has been instrumental, along with the ALMR and others, in lobbying the RICS to respond pro-actively to the findings of the Business & Enterprise Select Committee,” said Fair Pint founding member Karl Harrison.

“We’re pleased that RICS has put in so much effort to look at the issues.

“It now appears that the RICS, and a leading property lawyer, agree with the Fair Pint Campaign that a rent review should leave the tied tenant no worse off financially than the non-tied tenant.

“This is the prime principle. It’s so important to pub tenants to see that the RICS does not endorse the 50/50 split of the divisible balance, as so often claimed by landlords to be the norm.

“It’s very important also that the RICS has attached weight to the ‘Brooker Case’.

“This judgement makes it clear that the tenant’s rent bid will be effected by all of the risks facing the tenant, and that the landlord’s share of profit ought not to exceed 35% at this time.”

The newly formed Independent Pub Confederation (IPC) fully supports the findings.

Taken from the Morning Advertiser

Ignoring my previous article about key staff wages being a justifiable expense.

If the divisible split for rental calculations is taken on the perceived profit from the goods purchased from the landlord or through his auspices and any others, against the hypothetical costs of the pub . The rent is supposedly set at 50/50 or in the Brooker case somewhat different set of figures.

There is absolutely no inclusion of the landlords discount as a supplier or whatever, in fact it could be argued that the Pub Co’s are out of the generosity of their boardrooms taking no discount whatsoever, certainly there are no figures confirming as to whether they get any discount at all, only speculation.

I would like to give them the benefit of the doubt, that they only take a nominal handling charge.

It would therefore seem obvious that if the tie was removed with the exception of small brewers with limited estates, the discounts would go up to all and the retail prices would fall because of local competition and pricing.

The additional profitabilty would be unlikely to reach 10%,  it probably would be around 5% across the country at the outside.

The rental calculations would continue in the same way with a very slight increase in profitability where the landlord would get his share in the disible split.

But since the landlords assumed discount has always been so low that they considered it not necessary to factor it into the divisible profit, I would argue that rents should logically stay the samer or marginally higher to allow for the discount, say 2.5%.

It sounds like the stories that have been given to me on buying a business on many occasions, you have the turnover and the vendor says that he puts £50K in his back pocket that makes the business worth far more, my answer has always been that I’m not buying his back pocket, I was aiming to buy the business on audited figures not fiction.

If the Pub Co’s are not prepared to factor in their profit from discounts into the divisible split, they cannot expect to have rent increases to accommodate a hypothetical discount which has never been disclosed.

I am a totally supportive of the regional and family brewers with pubs and small well run Pub Co’s.

But these thoughts do raise a spectre that may have evolved over the years with these smaller tied estates. 

The valuation system stems from the old Brewer Tenant Agreements when discounts were negligable and the difference between a tenant and a freehouse’s purchasing prices were little cause for concern.

However with the pressures by certain companies for excessive discounts and the small brewers being obliged to comply with the discounts demanded, yet leaving their own estates on minimal or nil discount and to a certain degree, uncompetitive price wise, it would seem logical that a more pragmatic approach to discounts for their estates. They do after all want the best operators and like all good operators they need incentivizing, we are losing too many good operators out of the industry through total disillusionment or enforced financial hardship by companies with short term views.

Those are my thoughts as always and are not cast in stone.

Barfly

For some extraordinary reason a lessee and his wife or partner are not allowed to include their basic drawings in the running costs of the business and are therefore not considered an integral part of the divisible profit..

The immediate answer to that is that the amount they draw could wipe out the whole of the perceived divisble profit.

Now supposing that the up to date running costs are brought into the equation, rather than wild speculation and over guesstimation so that the figures are accurate, all the wages etc are all correct and acceptable and an accurate figure is then used to work out the divisible profit.

What if that particular pub is run wholly under management and the lessee draws nothing until the divisible profit is declared, are the valuers going to remove the manager and his wife’s salary from the costs, to raise the level of divisible profit, I think not.

An acceptable figure should be allowed for the lessee and standardized across the industry as a proportion of the turnover and put in the costs, There is absolutely no way that any wife or partners realistic earnings should be discounted to raise the divisible profit to suit the landlord.

My wife has never been a partner in my business and her earnings have always been totally separate,  and if I had a lease would not be included in the divisible profit.

Why should the assumption be that a lessee and his wife effectively work for nothing, when a sole operator can justify the employment of staff and also a pub run under management can justify the whole wage bill.

I know the figures used in rental calculations are pure speculation and based on flawed Comparables, but the move is towards using authentic accounts to assess a businesses potential.

Let’s have some common sense and logical thinking about a fair figure to be allowed for a lessees basic earnings, and a wife or partners earnings should not come into the equation, assuming that they are realistic and will stand up to scrutiny depending on her position in the business.

If you have no wife or partner then additional staff have to be employed and are a legitimate cost.

Food for thought and discussion.

A colleague of mine at the Road Show told me that he had been negotiating a rent with the Estates Manager with a national pub company who was being extremely difficult and it was pointed out that they had signed up to the BII Codes of Practice which he replied “Oh f..k” and conceded, in the same week a lady BDM was doing the same and her comment was “Oh s..t” and conceded. I think these companies should inform their staff what actually has been said within these codes, if you are a lessee or tenant within any of these companies get a copy of the Code of Practice for your company.

Rent assessment:- I had gone to the Road Show expecting a convoluted calculation on rent assessment to be put forward which would leave my tired brain completely confused. There was a presentation by the alleged top Rental Valuer in the country, who came out with an interesting presentation on rent valuation etc, where I kept waiting for the complex calculation to be revealed and nothing transpired, he was due to speak at smaller more specific meeting, which I went to. We were then told that all figures of turnover were to be ignored as unreliable or inaccurate in any rent calculation, viability was not an issue to be considered in respect of turnovers. I sat and listened in total incredulity at the method used to calculate rents. The word comparables had been referred to in the previous talk which I naively assumed would be a guide, not so. He would visit a pub to be valued or reviewed, he would then visit three or four other similar pubs within a ten mile radius he would discount the worst and the best and ask the landlord how much rent he was paying. He would make comparisons and assess the rent of the pub in question. He did say that he may well have records of the rents in a number of pubs or details of their rents when put up for sale. Whatever, knowing landlords as I do, they would not divulge their rent to a total stranger or if they were on an unsustainable rent mention it to highlight their disaproval, if they were on a fair rent certainly not, if they were on a percentage of turnover rent definitely not. I raised the issue of the aim of the Road Show was to achieve openness in these calculations and should there be a better method of calculation based on viability and he declined to reply. He pointed out that if any lessee wished to take his case to arbitration that his time was charged £335 per hour plus all the other costs against a rent increase of a few thousand a year. His minions charge around £165 per hour plus all costs, no wonder lessees and tenants give in before getting to arbitration. The whole rental system is a joke and needs changing, I have made my submission to the Select Committee Enquiry raising these issues and methods since they are not based on any justifiable facts and are wide open to abuse and misuse.

Note: If a stranger walks into your pub and asks you what your rent is tell him any figure, below £5600 per annum, not a round figure and you have a minmal tie to draught beer only or free of tie whatsoever.

We had an excellent presentation by the Divisional Director of Enterprise Inns on what they are going to and are doing. I spoke to him afterwards and asked which Enterprise Inns he worked for, he asked why and I said that what he had said bore no relation to the Enterprise Inns that I dealt with. We then had an extended talk and I raised issues on over renting on certain pubs and temporary rescue packages, to be fair he emailed at 8.00am the next morning about getting a permanent reduction on one of the pubs on a rescue package, I just hope that he does.   I also raised the issue of people signing leases because their business plans had been accepted, a solicitor having told me that in five years he had never had a business plan queried or rejected. The RICS and selling agents hide behind Caveat Emptor and he said this was unacceptable. I quoted a phone call from a lessee whose rent was £32K, turnover £120K and had signed his lease because his business plan had been accepted, which he has agreed to investigate. If he does and is successful he will get my backing and all my Enterprise problems, which appear to stem from over zealous BDM’s and old corporate strategy, which is costing them dear, though in these tough financial times they do not have too much financial leeway.

Having listened to the Road Show speakers these comments would appear to be irrelevant but it is worth trying, some companies do use figures.
If you have a rent appeal always insist that the calculations used for the original rent calculation are produced, the same if you are taking a new lease or an existing lease. The rent calculation should be based on business viability i.e. turnover etc unless it is a bricks and mortar valuation, which is unlikely unless it is being sold for an alternative use. Far too many people are being caught out by accepting an existing rent as being viable without seeing the basis of the calculation, you could and in many cases find that the Pub Co calculations if they exist, assume a turnover far in excess of what you are doing, yet they are insisting on increasing it. People are terrified of questioning these companies, ask questions and don’t take “No” for an answer. Sadly out of a vast number, around 1800, of people emailed they were collectively unable to get a single calculation or break down of how their rent was calculated?