New RPI leases can damage your wealth

None of the experienced operators that I know will have them. The advisors all warn "Beware!" Phil Dixon is warning the trade against them. Even Enterprise will not accept them in its freehold sale and leasebacks.

I refer, of course, to leases where the retail price indexation (RPI) applies to the rent. This is my bête noir and I am not going to bore you with the details, save to remind you that RPI has no relationship to pub rent and out of the 744 indexes published since 1948, it only went down on 16 occasions and that by a maximum of 2%.

Now the fashion is to completely remove rent reviews and apply RPI only. Batemans started it, Punch plans to do it, as does Enterprise. Fuller's limits its indexation to 3% a year, and Enterprise has intimated that it will consider capping.

But let's be clear on the maths. RPI today is 5.3%. If the rent increases are limited to 5%, then in year five your rent will be 25% higher and will double by year 15. That is OK — unless you find that you cannot increase all of your prices by 5% per annum, plus pass on any other beer duty, higher brewer increases, etc. Oh, and make sure that none of your other cost increases are affected by something not in RPI, else you will need to compensate for that too. That will make your customers happy!

The removal of rent reviews is cited as one of the main reasons for the introduction of such a lease. However, I see a darker side to this. We in the trade fought hard for the removal of upward-only rent review clauses and the Trade & Industry Select Committee raised this as far back as 2004.

In one stroke, the pubcos have removed their downside of that concession by applying a format that is effectively upward only. BII, take note!

And then there is our dear old friend — logic. You pore over the rent model for weeks, and the calculation of fair maintainable trade, paying money for advice to tell you what it means to you, and two parties finally agree on what is the divisible profit for rent purposes. Then you sign a piece of paper that says: "For the next 15 years, we will never look at divisible profit again, we will simply increase that starting number using an arbitrary non-property index that even the Government does not use any more."

Does that really make sense?