MORGAN & CLARKE MAY 2012 NEWSLETTER NO. 6, well worth reading

By | May 1, 2012

Pub Rent and Leases sharp practice???


Pigeon House, The Broadway,

Oakridge Lynch, Stroud, Glos. GL6 7NU

Email:   Phone:  01285 719292

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


Technology can be a wondrous and sometimes dangerous thing if not fully understood and controlled.   Whilst it is truly remarkable the extent to which electronic communication, the internet, Apps, iPads, etc. etc. have now taken over and indeed dominate commercial life, there are still a number of stings in the tail for the unwary.


When informal is not informal

We had a recent case of a Wellington Pubco lease in Essex having a majority sales high-end food content and a turnover of approximately £550,000.   Expenses related to the gastro pub image were very much higher than a standard pub operation, with wages at 32% which in the circumstance, were completely justified.   The existing rent is £62,500 and the Landlord’s proposal was that the rent should increase up to £71,750.   As a negotiating “concession” a Calderbank offer was served on the Tenant at £68,750 which the Tenant mulled over and then, thinking that he had won a good deal as the initial rent aspiration had been reduced by some £3,000, sent the following email which he considered an “informal acceptance”, to the Expert acting for Wellington:

“Further to your email of the 17th February 2012 and the Calderbank offer of 14th February 2012, I hereby accept your offer and the increase of rent to £68,750.   If you require anything further, please do not hesitate to contact me”.


The Tenant had second thoughts and realised that he had perhaps been stitched up in a standard “good cop, bad cop” negotiation and contacted Morgan & Clarke Chartered Surveyors for a free strength of case review, confirming that he had only “informally accepted” the Calderbank offer.   Our view was that he had been stitched up like a kipper and the true rent was lower than the current rent.


We were only supplied with detail of the acceptance email about three weeks later and had to inform the Client that there was nothing “informal” about the acceptance email at all.  It quite clearly constituted an unqualified and binding acceptance, notwithstanding that it was by email rather than standard letter and did not carry a written signature.


There has been a raft of recent case law supporting the binding nature of email correspondence and certainly, in this case, had there been inserted a qualification “Subject to the signing of a formal Rent Review Memorandum” there would have been a breathing space for reconsidering the position until the Memorandum had actually been supplied and signed.


We looked at the case very carefully and concluded that there was a cast iron certainty for the rent not to increase an iota over the existing rent.  How much did this cost the tenant?  If the rent had not increased over that as existing, the “extra” for the newly agreed rent was £6,250 per annum or £31,250 over the five years until the next rent review.  It was an unfortunate and expensive lesson to learn what is and is not “informal correspondence”.


Was it an oversight or a deliberate tactic?

The formality of the process of lease renewal is enshrined in the Landlord and Tenant Act 1954 (as subsequently amended by other legislation), specifically the Landlord’s Notice (Section 25) and the Tenant’s Counter Notice (Section 26).


The Section 25 Notice specifically states in the 1954 Act:


If you are willing to grant a new Tenancy complete this form and send it to the Tenant.  If you wish to oppose the grant of a new Tenancy use Form 2 in Schedule 2 to the Landlord and Tenant Act 1954 Part 2 (Notices) Regulations 2004 or where the tenant may be entitled to acquire the freehold or an extended lease, Form 7 in that Schedule instead of this form.”

All fairly straightforward in that it is the Landlord who has to instigate the process.  The actual notice period is six months.  Herein lies the repeated “oversight”.


Take the example of the Chichester public house, West Street, Chichester.   Standard Punch 10 year lease which expired on 20th December 2011.   Low and behold, Ford & Warren acting for Punch, served the Section 25 Notice by letter dated 9th February 2012 giving six months’ notice that they would grant another tenancy effective from the 16th August 2012.   So what’s the problem?


Quite simply, the existing eye-watering level of rent that is being paid in respect of the Chichester, will still hold until the grant of the new lease.   If, as expected, the new lease rent will be considerably less, then Punch have “earned” an extra nine months’ worth of higher rent.   However, and this little item is often overlooked, you can apply for an interim rent to be set from the termination of your existing lease until the grant of the new lease.   Regrettably, more often than not, this is forgotten.


We have a new Client in Evesham with an Enterprise Inns lease renewal where the Regional Manager verbally confirmed (surprise, surprise, nothing in writing) that Enterprise Inns would not be serving a Section 25 Notice, it would be up to the Tenant to serve a Section 26 Notice if she wanted to stay.   So much for the Codes of Practice and Section 25 requirements of the Landlord & Tenant Act 1954.


Timing is all-important in lease renewal and it is essential that the Pubco / Brewer is reminded to issue the Section 25 Notice in good time and at least six months before the expiration of the existing lease.   If nothing has happened, then the Lessee / Tenant should be pro active and issue a Section 26 Notice!


The ‘Cuddly’ Family Brewers?

Terry O’Neill of the Plough, Sheen, sought to buy his freehold from Enterprise Inns.   At the last minute Enterprise sold to Fullers for £50k less than he had agreed.   Morgan & Clarke Director Simon Clarke delved further.


The Plough previously had 6x hand-pull beers, usually offering Sharps Doombar, St. Austell Tribute, Fullers London Price and ESB, Sambrook Wandle and Wells Youngs Bombardier.  Within a week of purchase, Fullers came in and asked David Keogh to remove all but Fullers supplied products – leaving just two of the original beers.   Fullers offer a limited guest ale selection, none of which are very popular with the customers, but David Keogh is trying to accommodate the changes and has strong customer loyalty, although he is losing custom to pubs with a greater selection of beers.   In the last two weeks, Fullers have even failed to deliver the guest beers ordered and for the first time, the Plough has seen 4 of its 6 hand pumps lying redundant.


David Keogh still sells Fullers London Pride, but believe it or not, he tells Simon, it is more expensive from Fullers direct than it was through Enterprise Inns!


The lease provides that the lessee must sell certain ‘types’ of beers listed.   Beer types not listed can be sold but the lessee must show either the sale in draught form is customary, or that there is sufficient customer demand (there is no requirement to define the reason for the demand).   David Keogh has applied to Fullers to sell Cotswold Wheat Beer.   Wheat beer is not a specified list type, it is supplied in kegs (so custom is to sell it in draught).   A petition demonstrating demand, signed by around 100 customers, collected in only three days, has been supplied to Fullers.


In response the answer came back from Fullers seeking to deny the sale of this beer initially on the grounds that wheat beer is a type of lager (lager is brewed entirely differently).   Fullers supply Hoegaarden Wheat Beer which is listed in their price list under lager.   This in itself is an embarrassing admission by a major UK brewer that they do not know the difference between lager and wheat beer brewing.   Also, they claim that it is not customary to sell in draught and that the petition does not demonstrate sufficient customer demand – why would a lessee want to supply a product if he does not have a demand for it?   More recently Fullers are claiming that if it is not a lager, it must be an ale, both being listed types in the lease.   In other leases and indeed brewing competitions, wheat beer is defined as a specific individual type.   Fullers are simply seeking to deny the lessee any other beers other than those they sell at an extortionate tied price, by claiming that whatever the beer type, it falls within their listed definitions and therefore there is no such thing as an ‘unspecified beer’.


Fullers tenants should ask Fullers to give an example of a type of beer that they consider to be an unspecified beer – fruit beer for example – would that be unspecified?


If Fullers’ plan is to absorb the Plough into their managed estate, they can wait around nine years to expiry at which time they can deny renewal on the grounds that they want to occupy the premises themselves.   This is valid grounds for denying the grant of a new lease under the Landlord & Tenant Act 1954, Section 30(1)(g).   However, (now perish the thought!), it could be alleged that Fullers’ actions might put the lessee out of business by limiting his beer selection and increasing the price so much that his customers are driven away, forcing business failure and allowing them early occupation.


This is not a one-off.   The Cabbage Patch, Twickenham, Frog & Wicket, Eversley Cross, Hampshire, Coach & Horses, Soho and Lamb & Flag, Covent Garden (in addition to the recently acquired 15x pub portfolio), will be suffering similar difficulties.


Two other ‘cuddly’ family brewers that appear to be mimicking Fullers, are Marston’s and Charles Wells.   Food for thought we think!


Two Quotes of the Month

w.c. Fields:                  Once during Prohibition, I was forced to live for days on nothing but food and water”.

Phyllis Diller:             “Health – what my friends are always drinking to before they fall down”.


Best Wishes

The Team at M & C


Phone: 01285 719292

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