Latest view on Business, Property, Rates and Rents that may affect your Business
How easy it is to be lulled into a false sense of optimism with the onset of what looked like a glorious spring at the beginning of May. A number of our clients in coastal/seaside locations have been ruing the foul weather over the Bank Holiday weekend and wondering when summer will kick-in. Our sympathy goes out for those extensive planned outdoor events which should have seen sun cream and short sleeves, rather than brollies and raincoats. Not being overly negative, but a similar false dawn is, to a degree, being promoted by certain agents and analysts who are keen to talk-up the market. We were intrigued to note in the last month from several sectors, that the pub sector is “now in the best shape that it has been for three decades and that there is huge scope to grow and take market share as the overall economy looks up”. If you study this analysis carefully you will note, however, that the optimism refers to Pub Groups. We have taken the opportunity of a careful look at the current market in the first topic heading.
- A Dose of Reality
The Centre for Economics & Business Research (CEBR) announced on the 20th April 2014 that real household disposable income will reverse from the 0.6% fall of last year. Unemployment recorded as falling below the 7% threshold set by the Bank of England is the tipping point for raising interest rates. (A measure that the Bank is now reconsidering, albeit a month later). It was also noted that wages marginally crept ahead of inflation, marking an end to the six year period in which high inflation has effectively caused real wages to shrink.
The macro economic climate should however be balanced with the substantial erosion of genuine spending power that, it is also noted by the CEBR, will take a number of years to be truly re-balanced while the pressure on household budgets still remains in terms of basic costs, utilities and services.
The discretionary leisure spend in the On-trade, has also been recorded as marginally positive in a general sense with pubs increasing their share of the UK eating out market at the expense of designated restaurants (which includes McDonald’s and Burger King). These gains have been largely driven by daytime trade and almost exclusively in Managed House groups such as Harvester, Toby Carvery, Wetherspoon and Hungry Horse. This Managed House sector has been under significant pressure since 2007 to deliver a hot plated food offering at continually lower prices which they have achieved as a result of massive bulk buying power – not available to individual pub outlets.
Allegra Food Service carried out a survey of the 6,000 consumers on its eating out panel and noted that a standard chicken dish in Harvester had fallen in price from £7.95 in 2005, to £7.49 in 2014. Similarly, the standard cost of a Toby Carvery over the same period, has come down from £6.65 to £6.29. Inflation-adjusted prices would have been £10.34 down to £8.65 respectively. Consumers have positively responded to these keen price levels and are still eating out and utilising 2-for-1 price offers, but with continued pressure on the frequency of eating out.
The On-licensed drink trade still continues to suffer in supply-tied outlets, with a continued movement towards the support of off-sales purchases and the price-discounted drinks availability in the major supermarket chains. For example, 20 x 440 ml. cans of Carling were on offer for £12.00 at Sainsburys this week. That’s 60p per can.
A further complication in the macro economic scene is if the economy does continue to grow, the Bank of England (in a move to curb an inflationary spiral) will have no option other than to increase interest rates. This will have a dramatic effect on mortgage repayments that have been held at all-time low levels for the last five years. This could substantially curtail the discretionary leisure spend in the On-trade.
- Where did the Weekday Town Lunch Time Trade Go?
Philadelphia Cream Cheese has teamed up with psychologist Sue Firth to launch the “Love Lunch Again Campaign”. The results of their wide-ranging survey were published in the Bristol Post on the 27th May and confirmed that less than 1 in 10 people take a full hour for their lunch break. The survey of lunch time eating habits found that 93% were bored, depressed or even embarrassed by their lunch and almost a quarter of those surveyed did not leave their office to eat. 1 in 10 ate the same thing every day, whilst over one third of the people take less than 15 minutes on their lunch break.
The old style of popping into the pub over lunch has almost completely died out, not only because of the cost, but also peer pressure of being seen to be committed within the workplace and also – as often as not – a genuine ban by the company concerned, of consuming alcohol during working hours. Indeed one of our clients at the Hart of Duston in Northampton (which sits opposite a large industrial estate), has seen a previously sound lunch time trade that was enjoyed 10 years ago, virtually disappear to nothing, not only because of the large number of foreign workers now employed in the various industries and warehouses, but also because of 45 minute lunch breaks and the directive that no alcohol should be consumed during lunch times.
- Old Habits Die Hard
You would have thought that with the emphasis on strict adherence to Codes of Practice and the lodgement of the Industry Framework Code at the end of last year, the industry would have put its house in order. It would seem that old habits die hard in the following example which – as discussions are still ongoing over the rent concerned – for tact’s sake will be nameless.
Rent review February 2015; current total sales £170,000; current rent £35,000; rent negotiations – lessee (L) with Pubco Surveyor (PS).
PS “We have looked at how things are going and think that you’re doing a great job in fairly hard times. We think there is the possibility of a slight rent reduction down to £31,000 which you can confirm by signing this Rent Review Memorandum”.
L “How do you justify the calculations and the rent reduction?”
PS “Oh, it’s a matter of experience and I’ve been doing the job for years and years. I have a feel for these things”.
L “But shouldn’t you give me a Rent Assessment Form – something that shows how the rent was calculated?”
PS “No need for that, as I’ve had a careful look at the background statistics and I really am pulling out the stops for you with a quick and early rent reduction”.
L “I really do want to see how the reduction is justified and aren’t you supposed to supply me with a Rent Assessment Form under the Code of Practice?”. Anyway, there is still 8 months left before the rent review date, isn’t there?”
PS “Look, if you don’t want to sign the Rent Review Memorandum, I’m more than happy to go the distance but at the rent review date, I shall be pushing for a substantial increase which I can easily justify. It really is in your best interests to allow me to make a rent reduction and to square away the paperwork as soon as possible”.
Not surprisingly, the Client refused to sign anything, with the above being a virtually verbatim record. We have now undertaken our standard initial free-of-charge strength of case rent review, with the conclusion that the rent should be somewhere in the region of £16,500. So much for “the regulations”.
- Sales to Developers
It has been noted recently that there have been a number of high value sales to development companies of pub freeholds subject to leases that were outside the core estates of the various Pub Companies. Several recent examples have had the disturbing feature of the new owner turning up unannounced to inform the hapless lessee “I’m your new owner – things are about to change”.
Firstly, this creates a terrible image of a complete lack of liaison between the outgoing Pubco and the lessee, not even being given the chance to bid for the freehold, or even being informed that the freehold was being sold. The new owner is most certainly not a “pub person” and is, for sure, a property developer of one of the shades of grey. A large number of these sales are for leaseholds with less than seven years to run, which enables the new owner to sit on the asset until the lease expires and then refuse lease renewal on the basis of either the firm and settled intention to re-construct, re-develop or demolish, or to shift the user within the current flexible Use Class Orders, to something other than a public house.
The danger here is that there is such wide scope for movement within the current Use Class Orders that a formal applicant for change of use (almost always to residential in London) is not always necessary in order to winkle out the current lessee.
Finally the new owner will give an almost automatic tie release notification. Why? Firstly it will trigger a rent review and the new rent demand will be massive with the implication of expensive Third Party referral. Secondly, such action takes them outside the proposed Statutory Regulations (announced 3rd June) which shall only apply to Tied Tenants.
- Compensating Business Tenants for New Lease Refusal
Under the Landlord & Tenant Act 1954 a tenant has a statutory right to renew their lease provided that they are in occupation for the purposes of their business at the relevant time. A landlord can stand against such a renewal, but only in certain specific circumstances. These can be found in Section 30(1) of the 1954 Act. They are either on ‘fault’ grounds or ‘non fault’ grounds.
The ‘fault’ grounds are if the Tenant has been in persistent breach of lease clauses (generally a constant failure to repair or a failure to pay rent) and it is considered by the Court that those breaches of lease clause will be recurrent. If the Freeholder cannot prove beyond doubt that the breaches will be recurrent then the ‘fault’ grounds fail.
The ‘no fault’ grounds are commonly known as ‘Ground (F)” which is that the landlord has a firm and settled intention to re-construct, redevelop or demolish the property. “Ground (G)” is where the landlord intends to occupy the premises himself and again has to show both actual ability and a firm and settled intention. This Ground, however, can only be relied upon if the landlord has owned the freehold for more than five years. So if the Freeholder runs a Managed House Estate then they can show ‘ability’.
Where there is a successful opposition to the grant of a new lease, but only on a ‘no fault’ basis, Section 37. of the ‘54 Act requires that the tenant should be compensated, which is calculated by a multiplier of x1 of the Rateable Value if occupation has been for less than 14 years. If it is over 14 years, then the multiplier is x2. So don’t go for a rates reduction if you know you can be given your marching orders!
Something that is often forgotten, is that the doubling of the compensation is available where the identity of the tenant has changed, but the tenant and its predecessors have been in occupation for more than 14 years. To qualify for this extra compensation, you have to have been in the same business and when you purchased the leasehold interest, there has to have been some transfer of goodwill between the vendor and the purchaser – hence it is essential that if you are buying a current ongoing lease, you do declare that the goodwill has at least some value, even if it is notionally only £1. If you declare that there is no goodwill, you have automatically excluded the theory of double compensation.
There are the times when English law can be curiously Draconian, linked to time constraints. Checking back through our law books (with the help of Google), we were amazed to find the case of The Department of Environment v Royal Insurance 1987 that remarkably declared (by the Judge) that the 14 year time span was not achieved within that case and the time of occupation was 13 years and 363 days. Case dismissed!
As a final note, compensation is not available where the lease is for a term of less than five years.
- Rent Reductions
There is now a solid degree of consistency in almost all of the rent reviews that pass through our hands. We are looking at reductions of over 30%. There are, of course, exceptions with some being as high as almost 50% and a very small number being only 15%. We have yet to find any solid background for an increase in rent, save of course for any number of pub rent assessments that have an aspirational rent sometimes substantially in excess of the current rent. More often than not that is based upon a complete illusion over how trade can magically be increased over current levels.
It is always heartening to receive comments from Clients such as:
“Wonderful result. We could never have done it without you”
“It was so reassuring to have your help and support through such a stressful period”
“Please accept our sincerest thanks for such an excellent rent reduction”.
- Tax Higher than Living Costs
The Taxpayers’ Alliance has produced some interesting and telling results from the Office of National Statistics on family spending for 2013. It would appear that the average family spending at £7,600 p.a. is surprisingly lower than the average family tax burden at £9,300. The tax burden includes income tax, national insurance, council tax and VAT. The cost of living expenses are estimated at £3,400 – housing, fuel and power; £1,200 – clothing and £3,000 – food.
- Statutory Regulation
As mentioned above the full detail, all 157 pages, was published on the 3rd June. When we have had the chance to fully consider the implications a detailed overview will be given next month.
“I don’t drink any more. But then again I don’t drink any less” (George Burns).
“I only drink to make other people more interesting” (Peter Cook).
Best wishes from the Team at M & C
Phone: 01285 719292