Pub rent RPI: the softly-softly approach

Recently, I used this slot to argue that it was unrealistic for those who felt unable to back the new British Beer & Pub Association (BBPA) Code of Practice governing the pubco-tenant relationship to ask for existing Retail Price Index (RPI) rent increases to be removed from existing contracts.

It would deprive the tenanted pubcos of the increases they're entitled to, thanks to the contracts that hosts willingly signed at many pubs where trading was buoyant. But I also stressed that the tenanted pubcos will need to tread carefully when inflation returns.

One tenanted pubco calculates that cost increases combined with 20% or so plus beer volume declines have caused licensee earnings to drop by 32% in a pub with takings of £5,000 a week, in the past year. We've reached a kind of historic pinch point where defending last year's earnings is a victory. It's a victory, though, that won't have been achieved by a large majority of tenants.

This year, as RPI went negative, the pain of an RPI rent increase was absent. It's unlikely to remain that way, with RPI widely expected to turn positive in 2010. The wider context is that more than half of the country's tenanted pubs have RPI increases written into their leases. In the past, these automatic RPI increases have been a guaranteed engine of growth for tenanted pub companies. The newish straight-talking Punch tenanted boss Roger Whiteside has stated this year that rental growth can't be counted upon if pubs themselves are not producing profit growth for licensees.

Yet, the RPI provision contained within so many tenanted leases amounts to a kind of automated rental accelerator, which theoretically kicks in regardless of what's happening to licensee earnings. In a benign rental environment, the annual RPI increases will be affordable by the vast majority of licensees for a longish period.

In the large pub battalions, annual RPI increases applied according to contractual rights but unthinkingly will cause increasing pressure in pub estates. Sometimes, you hear senior figures in tenanted pubcos claim that some tenants actually like RPI increases because they mitigate against the shock of the all-at-once increase at review. It's like arguing that some turkeys like to be plucked at Easter.

It's worth noting that Enterprise Inns certainly wasn't offering RPI rent increases on the six freehold pubs it undertook sale-and-leasebacks on at the Allsops auction last month. JD Wetherspoon declines to offer RPI rent increases on the leases it signs and the current trend of five-yearly rent reviews is for broadly flat rents.

Current forecasts suggest that with beer volume declines levelling out, tenants may be lucky enough to see their earnings broadly flat in the coming two or three years. But nothing on the horizon suggests that it needs to be anything other than softly-softly on RPI rent increases.