Morgan & Clarke, Monthly Newsletter on Property/Leases and other useful information

 

Well, it’s stopped raining!   It was an unexpected luxury to have a couple of recent full days’ uninterrupted sunshine which tends to remind you of how wet and uninviting the winter period has been and how it has kept people indoors rather than going down to the pub.   Hopefully all that will change.   This March Newsletter is a mixed bag of updates, legislation and news, starting off with a record of a substantial victory for common sense.

 

1.  Enterprise Inns’ Deed of Variation

The full detail of the then new Deed of Variation issued by Enterprise Inns was covered in item number 5 of our January 2014 Newsletter, No.28.   Further progress was also observed last month in item number 4, which has now led to Enterprise Inns confirming that the errant Deed of Variation which had been in place between October 2013 and February 2014, has now been withdrawn and its existence was “an error”.  

 

What should be remembered is that David Morgan only acted on a general moan from Mike Wilkins of the Rose & Crown, Godalming, when the offending, altered Deed of Variation was presented to him as a “must sign” or else he would not be given the very substantial rent reduction that we had negotiated for him and which was confirmed in January 2014.   Indeed, it was confirmed to Mike Wilkins that the Deed of Variation was a very simple affair and under no circumstances would he either be credited  with the back rent, or have the new rent set on his rent account until he signed the document.   Fortunately, a new Deed has now been granted and hopefully we are back to the situation where the Deed of Variation is only issued to confirm upwards and downwards rent reviews.

 

It is still a complete mystery as to why only Enterprise Inns insist upon this little legal nicety.  In any event, it only confirms the upwards and downwards situation for one specific rent review and not subsequent reviews.   Hopefully the Industry Framework Code which has now been adopted, will give further strength to the position that the Deed of Variation is really not required.

 

2.  TUPE Regulations

You may remember that the purpose of the TUPE regulations which were first past in 1981, were formulated to protect employees if the business in which they are employed, changes hands.   This happens on every freehold pub sale, or lease assignment.

 

The last significant overhaul was in 2006 to comply with the European Union’s Acquired Rights Directive.   However, as of 31^st January this year, there have been further reforms which have:

 

1. Made it easier to change terms of employment after a TUPE transfer;
2. Supplied new rules for collective agreements after 12 months from the transfer date;
3. Opened up a wider reason for dismissal on grounds of economic, technical or organisational reasons (ETO);
4. The ETO defence seems to have been widened to cover redundancy as a result of the change of work location.

    

   So, if a small chain of pubs is sold and the new owner requires the chef, for instance, to move 50 miles to another unit within the pub chain, that would now not be automatically construed as being constructive dismissal.   As ever, the devil is in the detail and if you are just about to purchase a going concern and are looking over some of the staff that you are not impressed with, please have a word with your Employment Law Solicitor as the latest TUPE regulation changes, do appear to be wide-ranging.

    

   3.  PIRRS RENT DETERMINATIONS – LIMITED REASONED AWARDS

   Matters are now moving on in that the recent PIRRS referrals that Morgan & Clarke have been promoting, are now reaching the nominated PIRRS Experts.   In every instance, we have been seeking confirmation that a limited Reasoned Determination will be made available.   It now seems that the PIRRS Valuers, on advice from the R.I.C.S. must follow the “full reasons” route and the extra cost would now seem to be £1,500 plus AT.

    

   Worth the cost?   What we are seeking is an understanding of process.   Why?   Very simple really because if you know how the current rent review was calculated and on what basis, you then have a solid template for the consideration of issues that may or may not have changed in a subsequent rent review.

    

   The fundamental error with the PIRRS system as it was originally structured, was that neither party had the vaguest clue as to how the Rent Determination was calculated, so automatically, at the next rent review, the same adversarial contact is opened up like a can of worms, specifically because of the lack of transparency on the earlier review.

    

   Hopefully this has now been resolved and the transparency that should result, will ease the process of future negotiation and cut down the expensive adversarial conduct of some current rent review negotiations.   On that basis alone, the extra cost – particularly if shared between both parties – is well worth it.   Unless, of course, you are Enterprise Inns who currently will have nothing to do with cost sharing, yet want to see the Determination.   Wonder why?

    

   4,  “Oh, what a tangled web we weave, when first we practice to deceive”

   Tipping our corporate hat to Robert Sales and his recent past, very tongue-in-cheek piece on the PMA Forums concerning the ease with which you can manipulate calculations, we thought you might be interested in a truly spectacular example of two Rent Review Notices that were issued by a Pubco regarding the same property and the differences between a summary of the calculation points of interest.

    

   The first Rent Review Notice which was served in all seriousness for the acceptance of the lessee, was in November 2013.   The second Notice “after due consideration” was served in February 2014, again in all seriousness for the acceptance of the lessee.   On both occasions the author of the two Rent Review Notices, had taken over from a predecessor and had not even bothered to inspect the interior of the property which further compounds the weight of opinion evidence that should be attached to the calculations.   No prizes for spotting the difference!

    

	November 2013		February 2014
Wet	262,063		222,217
Dry	161,980	(GP 62%)	190,667	(GP 58%)
Accommodation	97,505	(GP 90%)	92,820	(GP 100%)
Other	94,293	(GP 95%)	236,954	(GP 100%)
Total Sales	615,841		742,658
Total GP	416,737	(67.7%)	560,772	(75.5%)
Total Costs	258,268	(41.9%)	389,110	(52.4%)
Wages	133,001	(21.6%)	203,008	(27.3%)
Repairs/Maintenance	12,500	(2%)	29,167	(3.9%)
Rent Bid	79,500	(52.8%)	84,000	(52%)
Interest on Capital	8%		10%

 

The rent negotiations are still on-going, so no names!   You just couldn’t make it up, could you?

 

5.  RPI / CPI

The Bank of England has confirmed that inflation has now fallen below the 2% target for the first time in four years.   The new inflation rate of 1.9% in January 2014, was somewhat unexpected and has been contributed to such items such as DVD films, recreation, culture, furniture and household goods, together with alcoholic beverages and tobacco which appear to have recorded their smallest month-on-month percentage price increases since February 2010.

 

The old Retail Price Index which is still utilised in a large number of automatic annual rent rises in Pubco leases, actually rose in January 2014 to 2.8% from 2.7%.   It would also seem that the Consumer Price Index now stands at 1.9%.   Surprisingly, there were very few quotable quotes from either Government or the Opposition, with the one exception of Cathy Jamieson, the shadow Treasury Minister, who welcomed the small fall in inflation, but said that prices still continued to rise much faster than wages:  hence the squeeze on disposable income in the On-trade.

 

6.  The Planning Loophole

One of the major contentions in the planning use reference of a public house, is the ease with which you can transfer within the same Use Class Order, for something completely different.   The main area of contention is that you do not require planning approval for Change of Use, to change a pub into a local convenience store such as is being offered by Tesco Express, Sainsbury, Budgens and of course now, Morrisons.

 

Morgan & Clarke have had a disturbing number of ‘flyers’ from the major retail groups, seeking big pubs that are “probably not doing terribly well”, specifically for change of use to neighbourhood retail outlets.

 

This disturbing trend impacts on the ease with which properties can come out of a Pubco’s core estate, if the offers made on an unconditional basis for such a change of use, substantially exceed book value.   We have seen a number of deals recently where freeholds have been sold over the head of lessees, on the understanding of the current lease having less than five years to run.

 

The downside of this tactic, which is entirely legal, is that the new owner who is a nominee company of a major supermarket chain, at lease renewal then (and again quite legally), stands against the issuance of a fresh pub lease on the basis of requiring the premises for redevelopment for retail use.  

 

There is an element of this tactic in the disclosure last week that the figures from the latest CGA-CAMRA Pub Tracker which confirms that net pub closures have now reached 28 per week.   Of those 28, free-of-supply-tie pubs accounted for 11 closures per week, which is precisely the area that our earlier comments focused on, in that the supermarket nominee would have allowed the lessee of the previous Pubco property, to trade free-of-tie and then at lease renewal, brought down the shutters.   It is understood that CAMRA are pressing the Government to act to close this alarming planning loophole.

 

7.  Minimum Wage Rate

The current minimum adult wage rate that came into effect on 7^th March 2014, is now £6.31p.   Higher fines have now been confirming, having risen from 50% to 100% of under-payments with the maximum penalty going up from £5,000 to £10,000.

 

8.  And Finally

“That’s your third brandy and it’s only nine o’clock in the morning”

“It’s Norma, she’s left me”

“That was 35 years ago”

“Yes, but I still miss her”  (Jack Benny and George Burns)

 

“He puts down half a bottle of whisky a day and has two convictions for drunken driving, but otherwise he is a pillar of society”.   (Alan Bennett)

 

 

Best wishes from the Team at M & C

Email:  info@morganandclarke.co.uk

Phone: 01285 719292