MORGAN & CLARKE JULY 2016 NEWSLETTER NO. 53
Pigeon House, The Broadway,
Oakridge Lynch, Stroud, Glos. GL6 7NU
Email: info@morganandclarke.co.uk Phone: 01285 719292
(Also at: London, Cardiff, Braunton, Lewes)
June has certainly been a month to remember, not only with the full publication of the Pubs’ Code, etc., Regulations 2016 with all of its attendant complications, but also the quite unexpected – and would seem fairly decisive – Referendum on the UK leaving the European Union. The latter has been generally well-received by the Leisure Industry on the basis that the knee-jerk reaction in the currency market has, inevitably, made the pound weaker with foreign tourists getting more value for money and thus encouraging tourism from overseas. It also has the knock-on effect of making holidays abroad more expensive with the emphasis of spending more leisure time in the UK. In that respect, the Tourist Industry is in a win-win situation.
However, on the City Centres’ hotels front that depend upon business customers, the short-term result might be seen as being negative if there are less overseas’ business travellers as a result of putting on hold far reaching business decisions. Fundamentally, nobody knows or can accurately forecast what the future holds with the spectre of uncertainty being exploited heavily by negative thinking.
Turning to the Statutory Pubs Code and, of course, MRO – Option, we have a rather telling quote in an email to one of our Client Tenants from a senior member of Enterprise Inns who stated in part.
“as discussed, MRO is a bit like Brexit – you need to be fully informed of all the facts. As we discussed, this is not a simple equation of buying your beer cheaper. I attach a document which outlines some of the things you ought to consider. There are many other considerations in the round, e.g. you may need to purchase landlord’s F&F where relevant (boilers, cellar coolers, bar fittings, etc.). You will also need to produce a Business Plan for five years to the end of the Agreement which needs to be signed off by an accountant. You will need to set up an R & M Fund to pay for any dilapidations’, etc. Ultimately, the decision is yours.”
The remarks made are not in respect of a lease renewal but a standard rent review which happens to fall on 25 July 2016. This may or may not be after the final implementation of the Statutory Pubs Code. Basically it is on a knife-edge as none of the pubcos or brewery companies affected by the Statutory Pubs Code have commented on whether they would backdate the legislation to the intended implementation date of 26 May 2016, or if the new legislation must be backdated as a part of its implementation.
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The Regulations as Ratified in the Statutory Pubs Code
Section 31 (page 25) deals with Terms & Conditions Regarded As Unreasonable in Relation to Proposed MRO Tenancy, etc. Sub-section 2 then states…….
“the terms and conditions of the proposed MRO Tenancy taken together with any other contractual agreement entered into by the tied pub tenant and the pub owning business in connection with the tenancy, are to be regarded as unreasonable for the purposes of Section 43(4) of SBEEA 2015 if they a) include a break clause in relation to the MRO tenancy which is exercisable only by the pub owning business, b) impose a service tie in respect of insurance other than buildings’ insurance with the premises to which the proposes MRO tenancy relates or c) are terms which are not common in agreements between landlords and pub tenancy who are not subject to product or service ties (emphasis added)”
It would seem that Section 31(2)(c) is critical to the content of any proposed MRO tenancy and, to that end, we consulted “M’learned friends” as to the practical implications of 2(c).
The most persuasive guidance to free-of-supply tie leases that effectively took over from previous supply-tied arrangements, is that of Wellington Pub Company who have an estate of something in the order of 700 pubs – all of which are free-of-tie and all of which have been in being for many years. Those leases have no requirement that the tenant should own the landlord’s fixtures, fittings and effects, boilers, central heating systems, kitchen ducting, lavatory fitments, etc., etc. Superficially, it would appear that a very solid precedent has been established with the “common terms in agreements between landlords and pub tenants”. Furthermore, in all of the free-of-tie leases that we have seen with private landlords, there has never been any mention or requirement of the purchase of the landlord’s F&F.
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What are the “Full Facts” that you would need to make an MRO decision?
For a pubco or brewery tenant/lessee to make a considered decision over the option of MRO, it seems self-evident that you must have both sides of the argument on which to make a factual decision. This, by necessity, must mean that the landlord should freely state their considered opinion of the level of free-of-tie rent and, in so doing, justify how they came to that decision
Understandably, before the publication of the precise and revised wording of the Statutory Pubs Code, pubco and brewery Retail Field Staff were reluctant to make any form of considered corporate judgement which was often shielded behind “legislative uncertainty”. That has now disappeared in that we all know the content of the Statutory Pubs Code, notwithstanding that the implementation date has not yet been ratified. What we do not know is whether or not this new legislation will be backdated either by law or voluntarily.
Imagine our surprise when one of our Clients recently requested a Parallel Rent Assessment only to be informed by the pubco Retail Field Staff “I’m not in a position to comment as the Pubs Code has not yet been implemented. I would suggest you go and ask the pubco’s Adjudicator, Paul Newby to give an Opinion”.
Ducking the issue in this manner is more than a little curious as Paul Newby would have no idea of on-site circumstance or any of the factors that would affect the specific rent calculation. To have “all of the facts at hand”, you have to have a solid and reasoned view from your landlord as to what they think the free-of-tie rent should be and also, formal confirmation of precisely what they consider should be in the MRO future agreement that does not wholesale change the current agreement.
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Trigger Notices and Timescales
There are a number of trigger points that start the process of the consideration of MRO. These include a) the service of a Section 25 Notice, b) the service of a Section 26 Notice in the absence of any notification from the landlord, c) the service of a Rent Review Notice and Rent Assessment Form, d) either the lease renewal date or rent review date if the earlier mentioned items have already been served.
It is essential that any of these trigger-notice dates are closely followed and it would be so easy to let the restricted timescales slip by. It is not entirely clear in the new Statutory Pubs Code as to whether or not it is a specific requirement that the landlord must remind the recipient of the various different Notices of the tight timescale and if that timescale is not followed, that the opportunity for seeking the consideration of MRO would then be lost.
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The Subversion of Business Plans
There is no dispute and, indeed, no question that a prospective lessee, either of a new lease or on the assignment of a current lease, must give appropriate reassurance to the landlord through the substance of a carefully prepared Business Plan. The applicant must confirm that they know what they letting themselves in for and that they have the capability and experience, either practical or through recent training, to take on the business concerned. Indeed, a Business Plan is a vital and essential tool for concentrating minds in many different directions.
However, there have been a number of examples in recent time where a previously ratified Business Plan has been utilised by pubcos and major brewery companies in the justification that the current passing rent should not go down. The following is a direct quotation from just such a senior member of the landlord’s staff which illustrates the mindset.
“The existing level of rent is that quoted by the proposed assignee in the Business Plan recently supplied to us which I would contend represents a view of the market rental level (assuming that a premium is being paid)”.
So we did some further digging and found out the following…..
In this case there was an open and frank discussion between the proposed Assignee and the Pubco Retail Field Staff. The initial Business Plan, which was undertaken on the basis of the current rent, was surprisingly without the knowledge that a rent review was due within nine months. When this fact was revealed, the intention of the assignee was to insert a lower rent than the current level to reflect what they thought should happen and also, to underscore future viability. It was emphasised very heavily that the Business Plan could only mention the current rent and, if it did not, then that Business Plan would not be signed off as being acceptable. Fundamentally, the only rent possible to use for an acceptable Business Plan is the current rent. If you don’t use the current rent, the Business Plan will not be accepted and the assignment will not take place. It is a ‘Catch 22’ situation which should not be construed as implying that the current rent is the correct level of rent if there is a rent review within the next twelve months
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MRO Rent Calculations.
In this case there has been some ill-informed and negative press commentary recently that in valuation terms, the free of tie rent should reflect the market rental levels for free-of-tie public houses, not via some “arbitrary tinkering to the shadow profit and loss account”. Furthermore, heavy regard should be given to current market evidence. It is contended that this will lead to a larger than expected increase in rent than would otherwise be anticipated and that if that is true, then the costs can be off-set against reduced beer costs which may produce a negative shortfall between the two.
We fundamentally disagree.
The free of tie rental market – as outlined earlier in this Newsletter – is dominated by Wellington Pub Company. The leases, which are now free-of-tie were, to a large extent, the original Inntrepreneur leases which generally have no requirement that the lessee has to reveal private accountancy data. That being the case, even if evidence is made available of free-of-tie rents, in all probability you will never know the link between rent and total sales or the split between wet and dry. Fundamentally, you cannot make a reasoned comparison. Thinking that you can is just so much hot air. In very basic terms, the difference between supply-tied and supply free is the difference in gross profit margins on wet sales alone. In the majority of cases, the current supply-tied lease has a requirement that accounts must be revealed. This enable the re-assessment of the free-of-tie situation to be carefully considered by both landlord and tenant. There is no effect on dry sales. The increase in monies available for either lessee income, or for the landlord as rent, is reflected in the increase in gross profit. That increase is then reflected in the increase in divisible balance which is shared, generally, 50:50 between landlord and tenant. It is that simpl
And, finally……bearing in mind the events of the 23 June, the following tickled our fancy!
* Politics is the art of looking for trouble, finding it everywhere, diagnosing it wrongly and applying unsuitable remedies (Groucho Marx).
* A politician never believes in anything he says so he is always amazed when other people do. (Charles de Gaulle).
* Politics are almost as exciting as war and quite as dangerous. In war, you can only be killed once but in politics – many times. (Winston Churchill).
* I have orders to be awakened at any time in case of a national emergency even if I am in a Cabinet Meeting. (Ronald R
Best Wishes from the Team at M & C
Email: info@morganandclarke.co.uk
Phone: 01285 719292 and 01285 760370