The Vagaries of Arbitration, and the need for a switched-on Stocktaker and Surveyor acting for you.
Arbitration should be a logical resolution to any dispute, sadly with rental disputes it would appear not, from a recent case.
It is assumed that the Arbitrator is totally knowledgeable on all aspects of the subject in dispute.
With Pub Rent Reviews, it would again appear not. It is alleged that we have three apparent factions of RICS Arbitrators.
- A Surveyor who has dealt mainly with Pub Co’s as major clients:
he is not going to bite the hand that feeds him, since the majority of Pub Co’s view of rent reviews is to take the broadest interpretation of the situation that suits its best financial interests, which is pretty well corporate policy across the board.
- A Surveyor who deals solely with tenants and lessees:
there are very few, since corporate fees are far greater and are more likely to get paid, if losing at arbitration.
- A Surveyor who has little, if any, practical knowledge of either:
therefore he has no knowledge of the manipulation of RICS guidance notes and Industry Benchmarking that now exist.
A frightening scenario for those that have, little or no understanding of the subject and have a rent review pending.
The recent case that landed in my lap was a serious example of an Arbitrator in Category 3.
Reasonably high profile in the commercial property market: sadly not a regular pub rent review man.
The Protagonists were a Pub Co. and a lessee of rare talent and ability, running an excellent business.
The rent had been agreed at an acceptable level for a Competent Operator, after much negotiation, at the last review some three years previously.
The lessee had spent a substantial amount of his own money on upgrading various parts of the building, backed by a commercial repayment loan against the remaining years of a ten year lease.
First disaster – the Arbitrator would only allow the interest to be factored in to the rental calculations on a simple interest, no repayment basis (not the whole loan repayment), bearing in mind that the enhanced value of the property is to the Pub Co’s benefit as the freehold owner, at no cost to themselves.
Being a very smart operator and enjoying the benefits of a much enhanced business, the turnover was about 40% higher than guesstimated for a Competent Operator, likewise his overheads and staff wage bill.
The Arbitrator in his wisdom, or lack of wisdom, decided (in spite of many arguments to the contrary), to ignore the facts and use the Industry Benchmarking Figures, reduced by 2%. Another complete disaster, setting the rent with an 85% increase on the last rent review three years ago.
The Industry Benchmarking figures are, I am reliably informed, up to two years out-of-date, but set for a property purpose-built for providing food and drink. Fine you might think.
As any licensee knows, the majority of pubs were originally built to sell beer, not quality food. From the late sixties onwards, the ones that were built were designed to sell food and alcohol: consequently the supply of both were given great consideration as to the most economic way of achieving this – we hope.
Having owned a number of pubs, my wages bill fluctuated substantially depending on the layout of the kitchens – kitchens upstairs, kitchens downstairs – bars, proximity of beer cellars, snack food, restaurant food, tourist areas, town centres, community locations, the permutations are endless.
Yet this Arbitrator appeared to apply one set of Benchmarking, knowing absolutely nothing about the vagaries of running a pub, apart from leaning on the bar in his local, possibly unlikely. He also seems to have swallowed the Pub Co. valuer’s version of the RICS guidance notes. Another disaster!
My first lesson in a pub was watching a barmaid take a food and drinks order at the bar. By the time she had run to the kitchen with the order, she could have served five customers.
From then on, a separate member of staff took orders in the bar, not behind it. Customers were served quickly and the whole operation worked like clockwork. That was a specific arrangement to my pub, not some Benchmarking “average wage bill”.
If your kitchen is upstairs, it’s a nightmare, even with a dumb waiter – your staff costs immediately escalate. Not a factor the Benchmarking is capable of recognising.
If the staff have to run down any form of corridor from a kitchen – another nightmare! The list is endless and costly staff-wise.
The kitchen should back onto the main eating area, ideally with two doors.
The beer cellar should back onto the main bar, not forty yards away through a succession of locked doors, which many are, as with food there are many permutations.
You cannot simplify costs to a set of numbers based on an ideal situation. You need a good, switched-on Stocktaker who understands the vagaries of your individual system and can advise you if you have a lease or a tenancy. Likewise, a freehouse, though you are not subjected to the rigours of justifying your wage bill with a genuine freehouse.
The Stocktaker should, in the case of arbitration, be able to justify your wages and overheads to an Arbitrator. The Stocktaker is a specialist. He understands the vagaries of the operational costs of buildings that were designed to sell beer and not food as we know it today, with all the legislation.
The alterations to an aged establishment required to meet the needs of supplying food, drinks in a modern day, and accommodation if available.
The legislation from the EHO, Fire and HSE can be draconian to say the least in a quaint building of dubious age, as any experienced operator will tell you, the Roses round the Door count for nothing in the cost of wages and overheads.
Every pub is different, the business are different, the layouts are different and far too many are non user-friendly, despite our best efforts to make them so. Every pub is a compromise, unless purpose-built and even that will have problems.
Arbitration should be a realistic consideration of the facts specific to the pub under scrutiny, not a guesstimation that will destroy a good operator.
The views expressed are not necessarily the editors and www.buyingapub.com accepts no responsibility for them, we do try to avoid offensive or litigious statements being made. They are written by concerned professionals in the industry who feel that these issues should be raised to ensure that all licensees are made fully aware of many hidden pitfalls.