RPI rents should be capped
A committee of the House of Commons is set to have another look at the pubco/tenant relationship later in the year.
I suspect one area that will be examined closely will be the move by the major tenanted pubcos to abolish rent reviews in favour of rent increases in line with the retail price index (RPI) in new leases.
The Royal Institution of Chartered Surveyors (RICS) has already signalled it is far from impressed by the abandonment of rent reviews. This month, RPI hit 5.5%, which means all tenants on RPI leases saw a lumpy increase in rent.
I believe that one of the obligations on a tenanted pubco is to create a benign, sympathetic rental environment for its tenants in the name of maximising the chance of survival. Tenants should not be sheltered from increases, but they need to be sensible and affordable.
Imagine the folly of a major employer that guarantees its staff that their salaries will increase in line with RPI every year. Such a company would be guaranteeing its own uncompetitiveness.
A tenanted pub company that's given itself the contractual right to RPI rent increases is acting in a not dissimilar way — guaranteeing its own income growth at the expense of its licensees. The danger is that, like the major employer referred to earlier, it's edging some hosts, RPI year by RPI year, towards uncompetitiveness, especially those still reliant on beer income.
JD Wetherspoon provides a compare and contrast situation. It reports a very benign rental environment in which it has used the power of its covenant to negotiate flat rent on new sites for five years, followed by a 1% to 1.5% increase for each year at the year-five review — so there's a 5% to 7% catch-up after five years of flat-lining rent.
For Wetherspoon, now targeting rural and remote small towns with populations of 3,000 or so, but with large hinterlands, there's obvious and increasing competitive advantage in the two contrasting rent regimes over half a decade.
A large tenanted pubco would say Wetherspoon is a bad example because you'd expect its covenant to win it below-average rent increases from landlords keen to bag a sturdy tenant.
This view conveniently ignores the over-riding moral obligation for a tenanted pub company operating the tie — to ensure the tie is used to increase the chance of tenants earning a better living than they might without the tie.
Automatic RPI increases actually remove licensees from the world of sympathetic and affordable rent increases in favour of a quick-and-easy escalator — because, let's face it, RPI is very seldom in negative territory.
Large tenanted pubcos should be straining to use their scale to mitigate inflation. Significantly, Fuller's, operating in the affluent south, has capped RPI increases at 3% — why haven't others adopted this sensible approach?
