Pubco report says rents "open to abuse

Rental calculations are open to manipulation and should be made more transparent to lessees according to the Business & Enterprise Committee's (BEC) report into the pub industry.

It concluded that lessees were disadvantaged when it came to negotiating their rents as the methods used were subjective and running costs were being under-calculated by pubcos.

It said the method used - based on calculating the amount of profit that a 'reasonably efficient operator' can expect to make, known as Fair Maintainable Trade (FMT) - was the focus of criticism.

Forty-four percent of licensees surveyed in the committee's random survey of 1,000 lessees by research firm CGA, said that they had not seen any form of breakdown of their rent calculations.

The report said: "Without transparency, the valuation process is open to abuse and negotiating a fair rent becomes more difficult. A valuation could be carried out in an aggressive manner by manipulating the inputs into the calculations - in particular by under-estimating the running costs of a pub. If the cost percentage is too low, the divisible balance is falsely high: the landlord gets a higher rent and the lessee less profit."

The committee pointed to ALMR research that found pubcos calculate running costs as approximately 30-35 per cent of turnover. It says the average is 52 per cent.

It has recommended industry guidelines on average running costs be published; figures of rent charged to similar businesses be available to lessees; that improvements to trade caused by a lessees investment in a pub should not be used to increase rent; and that pubcos should provide a pub's trading history to those entering into new leases.

Reacting to the report, Tony Hunter, associate director at property agent Savills said that increases in running costs such as fuel, wage rates and decreased turnovers had greatly impacted lessees profits in recent years, even if rent remains the same.

"There is nothing fundamentally wrong with the profits method of valuation in assessing the profitability of the site run by a good average efficient operator," he said.

Stephen Owens, head of rent review at Christie + Co, said: "The assessment of rent based on the ability to pay must be good for the industry and both tenants and pub companies. The profit method of valuation by assessing rent based on fair maintainable trade and fair maintainable net profit either on a free of tie or a tied basis achieves this aim but only if there is transparency of approach so that opinions can be tested by both sides.

"In our opinion moving away from a system based on ability to pay, without a credible alternative is likely to create more confusion."