|WHO IS THE HYPOCRITE ?|
|Newsletter – RPI & CPI Morgan & Clarke Chartered Surveyors |
WHO IS THE HYPOCRITE ? In recent years, allowing that rent indexation is built into leases, the debate has flowed back and forth over the choice of RPI or the less expensive CPI.
Deep down the pubcos knew that it was downright unfair as the annual increases have nothing to do with profitability. Because each index rises rather than falls it is good for what is known as ‘shareholder value’.
There really is no choice or opt out. “If you want a lease with us, accept the terms or find someone else”.
The vast majority of Pubco leases are the same and have annual uplifts tracking RPI. Things moved on and times change. RPI began to be discredited – see a previous M & C Newsletter RIP To RPI.
Now at last comes the realisation that maybe the market could react adversely to RPI due to the pandemic.
If you care to look at the Stonegate website; new lease/agreements have replaced RPI with CPI linked to the following…. (a) Retail Partnership Tenancy. (b) Beacon Retail Partnership Tenancy (c) Partnership Incentive Lease and (d) Partnership Incentive Lease. To quote… “The rent is adjusted up or down around the anniversary of the agreement each year in line with the Consumer Price Index”.
If you don’t fall into one of the four categories and you have an ‘old’ agreement, well tough. You will still be stuck with the more expensive RPI. Stonegate now have a two tier system.
New agreements, where they need you and are looking for your business, and ‘old’ where you are locked in. As one senior insider told us…. “We don’t need to even things out, just think of all those Deeds of Variation. No way we are going to go to that expense. Anyway who looks over their shoulder at the past detail, nobody is complaining and I don’t think many people realise what the difference is. So we will let RPI keep on running”.
Now let’s turn to Star Pubs & Bars and their nice new glossy brochure “Welcome to the Pub Business of Heineken UK”. Refer to page 4 and “Our Fixed Rent Promise” (again this must refer to new agreements – not that there is any distinction made).
Bear with us because it is worth quoting in full… “None of our agreements have annual rent increases. It’s that simple. Complete peace of mind and one less headache guaranteed. For tenancies and Business Start Up agreements, at the end of the three or five year term we will agree a new rent. For Full Repairing and Insuring agreements, we will agree a new rent at five years. So you can keep planning your business with certainty”.
So there we have it, if you are on an existing agreement, tough luck. You will not get this gesture of realism. You will not be offered any such concessions and are locked in. That is what is called ‘contractual certainty’. You signed your original agreement and devil take the hindmost. Now doesn’t that give you a warm cuddly feeling to know that you are now not sharing ‘peace of mind’ nor for that matter that you can ‘plan your business with certainty’.
What impact does all of this have on rent review? It is a question of desirability. Is an existing lease, with none of the above, any less desirable with or without indexation ? We are firmly of the opinion that it does make a difference if rent indexation remains.
The pubcos will tell you (well they would wouldn’t they) that they have no market evidence that proves that annual rent indexation makes any difference to the decision to take a lease. If you want a particular lease you just go for it and financial fine tuning gets short shrift. True if the new tenant has not taken professional advice.
The rosy tinted glasses viewpoint is only looking at the first year costs. We know different and explaining how indexation over five years can be significant suddenly makes the lights come on. Independent Assessors, determining MRO (free of tie) rents, tend to favour the opinion that indexation does have a negative effect on rent desirability.
But then again a very few do not. None however have actually run a pub or restaurant. Practical experience is thin on the ground but that is almost universal across the professional advice industry.
Peace of mind and one less headache plus the ability to plan your business with certainty neatly sums up what we have known all along.
Thank you Star Pubs & Bars. Rent Indexation steadfastly increases costs year on year. Profitability does not have any certainty of matching those increases. It is deeply unfair and should be abandoned as it is always landlord loaded in their favour. Good that the major Pub Cos are at least now beginning to recognise the fact.
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