Pub Co’s offering 5 year Leases? Some Guidance in this questionable move.

MORGAN & CLARKE AUGUST 2016 NEWSLETTER NO. 54

Pigeon House, The Broadway,

Oakridge Lynch, Stroud, Glos. GL6 7NU

Email: info@morganandclarke.co.uk Phone: 01285 719292 and 01285 760370

www.morganandclarke.co.uk

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

Pub Co’s offering 5 year Leases? Some Guidance in this questionable move.

It has certainly been a hectic couple of weeks since 21^st July when the Pubs Code finally reached the Statute Book. The final document is a mixture of both certainty and confusion, specifically concerning the cross-relating of clauses embedded within the content. So often there is a specific requirement, but this then requires cross-referencing either forwards or backwards to other elements of the content of the new law. At times this is highly confusing and the various skilled practitioners directly concerned with the implementing of the new legislation, are feeling their way gently through its complexitie

The offices of Morgan & Clarke are currently working flat out to process quite a remarkable number of as yet unsettled rent reviews which fall squarely under Part 16 of the new legislation. It is highly recommended that the Statutory Pubs Code is downloaded in full from the Government website. Not that it exactly makes bedtime reading, but it certainly would be very useful to have at hand when references are made directly to paragraph numbers and the various parts of the document itself.

1. Previous Rent Reviews

Part 16 deals squarely with the issuance of undecided rent reviews in what is known as the ‘transition period’. This can work both ways in the interpretation of the stipulation of “rent reviews not decided within the last five years”.

Example 1

Pubco lease with a rent review on 7^th December 2014. The matter was not concluded by negotiation and subsequently referred to the PIRRS’ procedure. That went through the course of standard referral with the required summing up session being held on 9^th June 2016. The PIRRS’ expert was a tad slow in issuing his rent determination which resulted in there being no decision by the 21^st July. On the 22^nd July we served an application for a rent assessment in order that our Client could consider matters before deciding whether they wished to initiate a Market Rent Only – Option on a free-of-tie basis. The PIRRS’ expert’s decision determining the rent was received on 26^th July. The Pubco immediately slapped down the application, but is now in a period of reflection and ‘taking legal advice’.

Example 2

Pubco standard rent review with the previous rent being applied from 26^th June 2011. However, that rent was decided at arbitration with the arbitrator’s award being issued on 10^th December 2012, which is unfortunately less than five years from the current rent review date of 26^th June 2016. Part 16 of the regulations and the five year rule, now makes the 2016 rent review not capable of attracting MRO option.

2. Lease Renewals

As mentioned in previous Newsletters passim, lease renewals are governed by either the issuance by the Landlord of a Section 25 Notice under the Landlord & Tenant Act 1954 or – if that Notice has not been issued – then by the Tenant issuance of a Section 26 Notice under the same legislation.

If a Section 25 Notice has been issued prior to the 21^st July 2016, there is no protection from Part 16 of the new Code as it applies only to rent reviews and not lease renewals. If, however, you receive a Section 25 Notice confirming that your Landlord is content to grant a new lease and that Notice is dated after 21^st July 2016, then MRO option is available for consideration. This is known as an ‘event’ which must trigger an MRO application WITHIN 21 days of the date on the notice.

The whole purpose of Section 16 was concerning rent reviews and in the transitionary period that there should be the opportunity of a catch-up session on previously unresolved rent reviews. One or two of the companies caught within this legislation, have not quite cottoned on to this feature and are still stating that MRO option does not apply to anything prior to the 21^st July 2016. The detailed content of the new legislation – specifically Part 16 – would indicate otherwise.

3. Hostile 25 Notices

This is where your Landlord has issued a Section 25 Notice under the Landlord & Tenant Act 1954, but confirming that at the termination of the tenancy/lease, they will be requiring the property back for their own occupation and use. This is what is known as a Section (g) Opposition. There have, however, been a quite alarming number of situations which run as follows. Once again, ‘no names, no pack drill’ as M’Learned Friends are burning the midnight oil considering the issues raised.

 

In the first instance, a standard hostile 25 Notice is served, clearly stating that the Landlord under Section (g) requires the premises for their own occupation and use. Usually a number of other somewhat left of centre field issues are raised, such as – you don’t pay your rent on time; the property is in a state of disrepair; and sometimes unfounded allegations of buying out of tie. These other issues are relatively straight forward to defend on the basis that they would certainly not be constantly recurrent during the course of a new lease term.

However, returning to the hostile 25 Notice, out of thin air comes the offer “but we don’t really want to do that. How do you fancy a new five year, supply-tied lease?”. Also, the same thing has applied to requests by tenants for a new lease on a supply-tied basis, which has met with return Section 26 Opposition, once again on a “we want to occupy for our own occupation and use”.

We are currently right in the middle of one such example where the open correspondence from the Landlord’s solicitor, specifically rejects the tenant’s Section 26 Notice on the grounds of own occupation and use, yet in separate ‘without prejudice’ correspondence, the door has been opened to a new, five year, supply-tied lease.

We can cite example after example of what is known as ‘gaming the legislation’ in what at times looks like almost a desperate attempt to stave off lease renewals on a supply-free basis.

4. Reality of Occupation and Use

Again, without naming names and as outlined above, there have been a huge number of hostile Section 25 Notices citing “for our own occupation and use”. By way of background, such occupation is considered as a managed house. To gain some idea as what logically construes managed house occupation, we can but quote from part of an article that appeared in the Publican’s Morning Advertiser on the 14^th January 2015 from the Editor, Rob Willock. The remarks were quoting Enterprise Inns’ Group Commercial Director, Paul Harbottle, with the following being particularly relevant:

“With a typical capital investment of £150,000 up to £200,000 per site, Harbottle revealed ‘an £8,000 a week turnover is our break-even point for an Enterprise managed pub, given annual Headquarter overheads of £30,000 per pub, but our sweet spot is north of £12,000 per week’. Notwithstanding that aspiration, Paul Harbottle then went on to say ‘Our sites are reaching maturity in six months. Those that have been open that long are all in profit, but I’d be lying if I said that all of our sites have been an immediate success’”.

It has to be considered that Enterprise Inns – with all of their considerable expertise – represent a reasonable yardstick of what should or should not be construed as being a managed house. You can wonder at our surprise with a number of our examples that we are seeing within Pubco estates where a hostile Section 25 Notice has been issued on quite small establishments, generally incapable of further physical expansion with total ex VAT sales of less than £150,000 p.a. ….. yes, you have guessed it – after the Hostile Section 25 Notice came winging in on a ‘without prejudice’ basis, an offer for a five year lease on a supply-tie “to ensure that you keep a roof over your heads”. Draw your own conclusions.

 

5. Five Year Leases

We always look at the world pragmatically and it is quite understandable – using our old phrase ‘might versus plight’ – that a number of tenants with leases less than 14 years (it’s a Landlord & Tenant Act compensation thing), knuckle under with grudging bad grace and have to take a new five year, supply-tied lease. Whilst this option almost looks inevitable, there are a number of issues that must be considered:

• You have to pay stamp duty;
• At the termination of your current lease, you will be served with a terminal Schedule of Dilapidations which is all quite legal, but inevitable, but from past experience is hugely detailed, over-costed and in part asks for full replacement rather than repair. Examples include, complete car park surfaces and historic roofs.

That is all very well, but should the taking of a five year lease only, carry the same future repairing responsibility?

• It is highly likely that a lease for ten years or more, or even previous five year agreements, will still contain a repairing obligation to ‘put and keep’ in good and substantial repair for the whole of the property.
• You will still be required to be responsible for, and maintain, an authorised guarantee agreement.
• Opting for a new five year lease, you would lose the right for compensation which would have applied in a previous lease for, say, ten years, as the compensation based upon 1 times rateable value, applies only to occupations over seven years.
• There is no chance of ever having a free-of-tie lease.
• Some of the new five year leases are contracted out of the protection of the Landlord & Tenant Act 1954 for renewing purposes. That means that there will be no guarantee of having a further five year lease as you have no right to even apply for that extra lease term.
• It would seem that the general market opinion of five year leases is that they have little or no premium value with the only value being associated with that of the in-situ asset of the trade fixtures, fittings and effects, plus, of course, the value of stock and consumables on departure.
• There has been a threat – and at this stage no more than a threat – that you may be required to produce a new Business Plan in support of the new lease which must be signed off by an Accountant.

However, the whole issue could so easily be covered by a Deed of Variation which would guarantee the status in years of the existing lease. That would not satisfy the ‘cost scare’ tactics of a new (only) five year lease.

6. The Unknown

When and if free-of-tie relationships are created in the conversion of a current supply-tied lease, the opportunity arises for the creation of a new lease document on a commercial basis. There have been a large number of genuinely Draconian threats in this respect, which may or may not see their way to the printed page. The threats concerned – in certain instances – (again, no names), come from “friendly conversations” at Retail Field Staff level. We had several phone calls from distressed Clients asking “can they really do this and can they threaten me like that?”/ It may well be that in a few instances, the definite desire to retain the supply-tie, linked with a “you’ll be very sorry” regime, could easily be counter-productive, but only on the basis that the tenant concerns gets genuinely independent, level-headed, professional assistance in the decision-making.

7. Result

On a lighter note, we have had a gratifyingly large number of successful PIRRS’ referrals confirmed this month, one of which was as follows: current rent £30,236; previous rent review notice served at £36,000; the expert for the Pubco tabled a rent of £37,500; Morgan & Clarke for the tenant suggested that the rent should be £22,300; the PIRRS’ expert found at £24,200 with the rent review being 7^th December 2014; result – a substantial refund for overpaid rent.

Second example, but not a PIRRS’ referral with this case being a south coast resort town. Client quotation as follows:

“We have just spoken but I wanted to repeat our thanks for all of your advice in respect of this review which I know has been frustrating at times! We are delighted with the result and I have made sure that my colleagues are aware of your services for when their licensed/leisure premises come up for review”.

 

8. “Pigs Might Fly”

We may be old fashioned but we have always believed in good, sound, estate management. That is the simple premise of ensuring good relationships between Landlord and Tenant. Not being seen to gain an edge over some of the less informed (and some could say ‘vulnerable’) lessees. This would logically lead to informing lessees that when a new rent assessment form is issued, they have only 21 days (which is no time at all) in which to activate MRO – otherwise the opportunity would seem to have been kicked into the long grass for another three or five years.

Oh well, we can but dream!

8. And Finally

As we have been dealing with the politics of new legislation, a few quotes from the heart of politics:

• “90% of politicians give the other 10% a bad reputation” Henry Kissinger
• “ – shred that document! No-one must ever be able to find it again! – in that case Minister, I think it’s best that I file it” Jim Hacker and Bernard Woolley in ‘Yes Minister’.
• “politics is supposed to be the second oldest profession. I have come to realise that it bears a very close resemblance to the first”. Ronald Reagan.

Best Wishes from the Team at M & C

Email: info@morganandclarke.co.uk

Phone: 01285 719292 and 01285 760370

Click on this LINK for the questions that you need Answers to before you spend any money on considering a Pub Co Tied Lease.