The implications of the Brooker pub rent ruling

By | September 25, 2009

 

What the Brooker pub rent ruling means (Extract from the Morning Advertiser)

Charles and Leslie Brooker run the White Horse in the village of Hambrook near Bristol. They had a five-year non-assignable lease, free of tie on cider and a guest beer, which started in August 2001.

The non-indexed rent was set at £16,000 a year in 2001, a reduction of £3,839 from the previous rent. The Brookers and Enterprise Inns couldn’t agree on the new rent on an extension to the five-year lease and the case ended up in front of Judge Iain Hughes QC sitting as a Deputy High Court Judge.

His 11-page judgment makes for fascinating reading. In January 2008, Enterprise suggested the new rent should be £39,000 per annum and in December 2008 reduced the figure to £34,000/£35,000. By July 2009, the Enterprise rent bid had further deflated to £30,800.

In the event, the judge decided the rent should increase by £2,000 per annum to £18,000 (35% of the pub’s £51,000 per annum divisible profit balance), with the Brookers, who bid £9,000 two years ago, ordered to pay what was owed on a back-dated basis. What’s interesting here is the reasoning applied by the judge to come to his verdict. He finds fault, to a greater or lesser extent, with each of the expert witnesses.

Critical

While accepting a lot of his figures, he dismisses the reasoning of the Brookers’ accountant Brian Jacobs, who suggested the current RICS rent setting methodolgy is wrong. He found Jacobs “partisan, disputatious and unwilling to answer all the questions”. There was a complaint that he made “some broad assertions beyond his expertise”.

The judge also wasn’t prepared to entertain the Enterprise counsel Mark Wonnacott’s “hints and nudges” about the unreliability of the Brookers’ evidence on beer and cider purchases at the pub, and the credibility of their accounts. The judge found fault with Wonnacott’s criticisms of a lack of up-to-date accounts.

He noted “the tenants’ accounts are of little relevance” when the whole point in rent setting is determining what the hypothetical tenant would offer to pay in rent. He criticized Enterprise expert witness Peter Taylor for dropping “below his usual standards of objectivity” in suggesting that filling “the void created by the credit crunch” in recruiting licensees would be filled by those with redundancy payments.

And last but not least he found the two comparable transactions offered by Enterprise only of use in showing the degree of support and the increased bargaining power licensees have in the current economic climate. The Swan at Yate, let on 26 March this year, is being supported with a large initial rent reduction, a break clause, incentive discounts and a six-month cooling-off period, for example.

The second “comparable” pub was the King George VI at Filton and the judge decided it was not very comparable because of its suburban Bristol situation. In coming to his conclusion in setting a rent of £18,000 per annum, the judge ruled that the hypothetical tenant would take into account a “number of major factors affecting risk and confidence in the (pub) market”. He noted that beer sales have declined by 20% in the on-trade in the past five years.

At the White Horse, he thought a sensible view would be to assume beer sales would decline from the current 210 barrels a year by 10% rather than 5% suggested by Peter Taylor — giving a barrelage of 189 for 2009. He also thought that a hypothetical tenant would take into account the current gloomy economic climate.

Tenant’s market

On his list on things to make any tenant ultra-cautious were: high unemployment, the prospect of higher taxes on alcohol, the smoking ban, the lack of inexpensive capital in the economy and the 50-a-week pub closure rate. The judge said he was satisfied that the pub trade position is “much worse than anyone can ever remember”. Of 18 pubs identified in the White Horse’s neighbourhood he found 12 to be, or have been, in economic distress.

Nevertheless, the judge insisted he only took into account the long-term decline in beer sales, setting aside the other items that would make anyone cautious. Deutsche Bank analyst Geof Collyer says: “We would suggest that the judgment was a victory for the industry”.

I think he’s right in the sense that pub rents should reflect the state of the market and not exist in a vacuum. In the good times, some tenants over-bid on rent buoyed by confidence.

In more difficult economic times, tenants are likely to under-bid on rent, given an increased level of caution and the knowledge that there are fewer competitive bids around. Right now, it’s a tenant’s market.

Note:- You may wish to disagree with the writers comments, but they are their views and we need other opinions. 

5 thoughts on “The implications of the Brooker pub rent ruling

  1. Editor Post author

    It would appear it is only a tenants market if you are willing to go to High Court and spend money and time fighting your case. If it were truely the case that it was a tenants market the view of the pubcos would not be take it or leave it and go to arbitration?
    I understand that CODE OF PRACTICE rent reviews have been put on hold or dismissed due to certain pubcos deciding that they are discretionary, so i fail to see how this is a tenants market.
    What is clear from the judgement is that Enterprises rent bid of 39k was unacceptable given the RICS guidelines which one of Enterprises expert witnesses was instrumental in writing.
    What is also clear is that the use of comparables is widely flawed as it does not take into account the viability of the rents. If the Brookers had thrown in the towel in the early days facing a rental uplift of 23k (16k to 39k)the comparables used would have never been seen to be wrong. Thankfully time has shown that the comparable rents were too high to make the businesses sustainable.
    The rental split of 50/50 has been called into question and 35/65 judged in favour of the tenant. What is not known is the profit derived from the tie which is kept by Enterprise and not added into the profit equation.
    Lastly from an investors point of view i would be concerned. Book values are based on a multiple or rent+tie x 8-12. Even based on 10 the book value will have dropped by 210k and with the decline in beer market the value will drop further. Roll this across the estate and the positive comments regarding the outcome for pubcos seem to be misguided.
    I think it is disingenuous to say it is a tenants market, new tenants maybe (if the valuations are correct and take into the amount of profit lost from the tie and directly offset against rent at £180 per BB, the smoking ban, the drop in beer sales, the rising costs, the correct use of viable comparables etc etc )but applying this to existing tenants it is not a tenants market.
    SA

    Reply
  2. Editor Post author

    It very clearly IS NOT A tenant’s market. It is only IF, and ONLY if, a tenant has the reserves, energy, skills determination and will to take a rent review past the wire to arbitration, high court and beyond that there is any hope of them getting a fair deal at rent review.

    That is NOT a tenant’s market – it is unchanged STATUS QUO. That one tenant of hundreds gets what on the face of it appears to be a reasonable outcome means little to the whole (bear in mind the route the Brooker’s took undoubtedly placed an enormous burden of uncertainty and huge financial pressures upon them)unless it can be adopted as a precedent and wash through the whole market at rent review time.
    MD

    Reply
  3. Editor Post author

    Two very important points from the above. Unless you are prepared to fund yourself in a High Court Action you have very little chance of success, logical discussion achieves nothing with these companies.
    The use of Comparables has been seriously discredited legally which has always been one of my main issues with the RICS, they have, I believe realised the degree of misuse by many companies in cherry picking the Comparables to suit an issue.
    Barfly

    Reply
  4. Frank harbourne

    The ‘tie’ is an, outdated but very usefull tool of extortion, most companies Are offering rent reductions, but only for a ‘full Tie’. This for 95% of tennants would be a virtual bankruptcy point. The reasons for the delays are more to do with pigs at the proverbial trough than anything else, get on with it and give them what they want. High rents, Full ties and Empty properties to sell.

    Reply
    1. Barfly

      Frank, certain Pub Co’s are still trying to set the tie against increased rents.
      Some of us have been in discussions with the RICS to reach a satisfactory Valuation System, from my side on current viability.
      The tie in terms of non brewers and very large brewers remains highly questionable because of the frequent abuses and over valuing by these companies.
      It is a highly immotive issue which there are many diversions being made by vested interests to throw it off track.
      We have to reach a balance based on fairness and transparency where a good relationship exists between the landlord and tenant and not a state of armed distrust.
      This may suit some companies, but there are thinking companies out there who want to return to a fair system.
      I wish there were a few more listed on my web site.

      Reply

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