MORGAN & CLARKE DECEMBER 2015 NEWSLETTER NO. 49
Pigeon House, The Broadway,
Oakridge Lynch, Stroud, Glos. GL6 7NU
Email: info@morganandclarke.co.uk Phone: 01285 719292
The Vagaries of Rent Negotiation
(Also at: London, Cardiff, Braunton, Lewes)
Fully back in harness, the New Year beckons with great anticipation, not least in respect of the establishment of the Statutory Pubs Code, technically no later than the end of May. The consultation document “Pubs Code and Pubs Code Adjudicator – a Government Consultation – Part 2” was issued in December. The deadline for responses is 18th January 2016 with the 23 questions contained in a 95 page document. However, the Department of Business Innovation & Skills has been very helpful in the summarising of the questions from page 93 onwards which hopefully should reduce the volume of the paperwork that they will receive from interested parties.
- The ‘B’ Word (Episode 2)
Rent review of a West of England Pubco tied lease due in the autumn of 2016. Detailed negotiations have been underway between the tenant and the Pubco retail field staff which were described as ‘being an effort to settle matters amicably well in advance of the review date’. There was obviously considerable concern over the tenant’s ability to actively consider Market Rent Only – Option (MRO) at the autumn 2016 rent review date. The incentive for an early rent settlement went something like this:
Pubco: “Do you think you will be taking up MRO as in all probability, should you decide on that course of action, it would not be worth us keeping the pub.”
Tenant: “Well, I might not take up MRO if there was enough incentive for me to stick around with you guys.”
Pubco: “Well, we have a firm option that we could put the freehold on the open market with a number of other similar pubs and sell the freehold off to a brewer or such like with less than 500 pubs. That would be attractive for them as they would then keep the supply-tie.”
Tenant: “That’s pretty serious stuff. What are you proposing?”
Pubco: “If you sign a new lease well before any MRO decision then there would be no need for us to sell the freehold as we would have a solid investment with rent reflecting our current position”.
Tenant: “Does that mean that the free-of-tie lease – as I have been told by other people – would have upwards-only rent reviews and be index linked? That would mean that the rent would constantly be going up even if the market turned downwards.”
Pubco: “Well the devil is always in the detail and all I was trying to achieve was your willingness to accept a completely new lease rather than a rent review.”
Tenant: “Is that it then? Is that the only option?”
Pubco: You are not that far from the end of your lease and our other option would be to take the place back as a managed house. Things are picking up in that direction and it is a distinct possibility, despite the fact of being a few years away.”
Tenant: “You must be joking!”
Pubco: “We do have a number of other options I suppose, one of which is a turnover-related lease or you could have a franchise, but we really do need to make some early decisions.”
Tenant: “I think I will wait until after June when we will all know what’s in the statutory Pubs Code.”
Pubco: “Would you mind signing the attendance notes record to record that the subject’s been raised.”
Tenant: “My writing hand seems to have gone to sleep.”
- Progress of Rent Reviews
We are constantly being told that the green shoots of recovery are evidenced right across the pub trade. Not so! The area that is concentrated on genuine small increases in trade is, without doubt, the branded, high street, food-led establishments that are certainly recording minor but real rates of growth generally less than 4% year-on-year. Despite the fact that there has been no comment on whether or not their overhead costs have increased more than their growth rate, this feel-good factor has not percolated into suburban or rural outlets on a general, nationwide basis.
As recorded in the November Newsletter, paragraph 3, the BBPA national statistics are still recording decreases in the On-licensed trade on a volume basis. This has seen a consistent reduction in rents at rent review which is reflective of either a three or five year cycle that has still not bottomed-out from the previous years of solid recession.
It is always comforting to receive commendations from Clients for whom we have been successful and a couple are set out below:
- North West of England supply-tied, stand-alone unit in a small village with wet and dry trade being split 50/50 on a £700,000 turnover. Rent proposal was £61,000 which was reduced by negotiation rather than third party referral, to £51,000. Tenant comment: “Once again, thanks for your help and support. You richly deserve the reputation you have for representing publicans’ rights”.
- Home Counties supply-tied pub, again with the rent review settled by negotiation rather than third party referral. Pubco rent assessment on total trade of approximately £300,000 being £34,000 with only 10% food content. Rent settlement £19,500 on a five year rent review cycle. Tenant comment: “Thank you for making our Christmas special. Hopefully we can find further leaseholders and tenants that we can forward on to you. The bullying culture at …………. cannot prevail”.
- PIRRS’ Abortive Costs
We had a case recently where, rather than going the distance to a full PIRRS’ referral, the matter was settled by negotiation. Both sides, however, had paid the PIRRS’ Expert fees which is normal practice as the full fees have to be paid in advance of starting the process of direct involvement with the PIRRS’ expert.
This was a rare occasion where genuine negotiations proceeded between parties rather than the standard mantra for some of the Pubcos who flatly refuse to negotiate at all. A request was made to the Independent Expert for some consideration of a fee refund, considering all that effectively happened was email correspondence and the issuance of standard format directions which are commonplace to experts being involved in the PIRRS process. However, all was not quite that simple with the PIRRS’ Expert citing rule 14 of the PIRRS’ engagement regulations which we quote as follows:
“The obtaining of all necessary documentation and payments by PIRRS at an early juncture is intended to allow the Independent Expert to supply the parties with procedural directions as to how the PIRRS process will operate without delay…………………… It is important to understand that if the parties agree the rental between them, or they request that the Independent Expert does not proceed for any reason no refund of the charges paid to him will be made subsequent to the procedural directions having been submitted to the parties.”
So there you have it – even if you want to negotiate further – you will not have any refund from the PIRRS’ Expert if he moves with reasonable speed and immediately issues out the directions letter upon payment of his fees. Then his fees are guaranteed and non-refundable, even in part.
Rules are rules!
- The Comparables Conundrum
The rent review and lease renewal market is populated by a very large number of influential people, be they Pubco and Brewery retail field staff, valuers, Chartered Surveyors and others, the majority of whom have never actually run a public house or restaurant. As sure as night follows day, the opinions of rental value will be backed up by “comparables”.
The major problem is that if the other rental transactions are not supported by detailed financial information or barrelage statistics, reliance on physical aspects alone can be hugely misleading and misguided. More than likely, the detailed financial information will be held private to the lessee concerned and that information is heavily protected by the Data Protection Act. This, however, does not stop the wide and varied use of virtually useless other rental transactions in support of the general concept of rental value. Our start-point in setting REO status is to analyse what has happened on-site first – however good or bad. Whatever they may say to the contrary, the Pubco leases in modern times all have the right to obtain tenants’ accounts and VAT records. This also enables them to undertake the same process as us. Strange how Pubco FMT is almost always higher than the tenant’s recorded total sales!
But we digress. We have just concluded a six month market survey which involved a substantial number of our rent review and lease renewal clients as to what form of reliance they place upon the so-called comparable evidence. The results were almost uniform in that particular regard was placed on the style and level of trade competition, special offers, 2-for-1 discounted food, etc. with the main focus point being the ability to stay competitive. Nobody was the least bit interested in the amount of rent that was being paid, fundamentally because of the wide disparity of discounting which made comparison difficult – if not impossible.
There was a general level of price-consistency in a given area for drinks products that meant that free houses were earning a far superior level of profitability by charging the same general price level as the supply-tied pubs. Generally the gross profit margin was a variable of 10% between supply-tied and supply-free. The only great exception in central urban locations was the likes of Wetherspoon who deliberately caught market share by being considerably cheaper than supply-tied opposition.
So where does this leave the thorny issue of comparables? We have always worked on the basis that if you can prove financial viability, then that goes a long way towards attempting to interpret levels of rent in other public houses in the general vicinity. However, if you do not have that vital financial data to underscore financial viability relating to rent, we still have the considered view that other rental transactions are right at the bottom of the scale of usefulness in trying to prove a case for rental valuation.
- And Finally
We thought that you would like a laugh with the following quotation that was contained within a supplementary report at third party referral by the Enterprise expert in support of the landlord’s contention of what we considered was an eye-wateringly high rent proposal. No names of course, due to the confidentiality which is standard in third party referrals / arbitrations.
“The Arbitrator will be fully aware of the impending Market Rent Option (MRO) that will be introduced into the UK pub market in the near future. Enterprise Inns as one of the UK’s largest Pubcos will be directly impacted by this as will their tenants. If anything, having a lease from Enterprise Inns with the potential to become completely free-of-tie in the future, will be an added attraction to the hypothetical tenant. This is an improved position since the original Expert Reports were issued. As with the economy, the general circumstances surrounding this review have, if anything, improved in the intervening period.”
So that’s why after five years of recession the rent should go up substantially!
Very best wishes for a thoroughly successful and enjoyable 2016 from the Team at Morgan & Clarke
Best Wishes from the Team at M & C
Email: info@morganandclarke.co.uk
Phone: 01285 719292