Legislation

Fair Pint's Clarke: "Heaven forbid tenants might actually make a decent living"

By Simon Clarke

- Last updated on GMT

Fair Pint's Clarke: "Heaven forbid tenants might actually make a decent living"

Related tags: Tenants, Pub, Renting, Investment

Fair Pint campaigner Simon Clarke gives his view on the tenanted debate and busts a few myths on pubco objections to the new legislation.

Having watched the video of Greg Mulholland’s appearance on the panel debate​ at the Tenanted Pub Company Summit, I have to say I don't see him as being all that out of order - he came across as frustrated but honest, if blunt, and said what needed to be said.

Mulholland’s key point I think was that many of the attendees are still living in this bubble of false belief, either by choice or stupidity. Without someone like Greg, pro-pubco speakers can bumble on using trigger terminology and get away with it.

Simon Clarke

How many times did I hear "pub owning companies have moved forward" or "unintended consequences", we have heard it all before and it’s not accepted - move on. Have they moved on enough to have the confidence in their own agreements to voluntarily offer MRO? No - not far enough and they know it.

There may be unintended consequences for the pubcos; heaven forbid their tenants might actually make a decent living.

If anything does emerge that is unexpectedly onerous, the legislation provides mechanisms for amendment, which was lacking in the Beer Orders.

To be clear, pub owning companies have changed, self-regulation brought about a few changes but the point is, and always has been, where is the rebalance of risk and reward? An unfair proportion of a tied pubs profit is taken by some pub owning companies. It is this that the pubcos have been challenged to address since at least 2008, arguably 2004.

Saying they have changed behind a veil of altering the shape of ice cubes or colour of toilet roll does not cut the mustard with tenants or indeed any other intelligent or well informed observers, hence things have not moved on in the relationship between the parties and the propaganda of the BBPA has failed with politicians.

PRAs

I also think there is an utter lack of understanding (perhaps portrayed deliberately?) on parallel rent assessments (PRA).

Really what is so hard to grasp? Tied tenants currently get a tied rent assessment from their pub company at rent review, importantly it is formulaic and an artificial construct (being based upon a hypothetical tenant not the actual tenant’s performance). PRA would simply add another column with a free-of-tie rent assessment using some of the same variables as the tied assessment.

The pubco provide their assessment, and yes, like now, it’s bound to be manipulated to reflect their desired rent, the tenant can seek advice and challenge the assessment submitting a counter assessment of their own (like they can now) which may be equally reflective of what they want to pay. Both parties would put each other to task on variables within the assessment (like they do now).

PRA and MRO is not politicians controlling the market, it is politicians allowing market forces to control its own future rather than a minority of executives operating an unfair model that benefits no one but themselves

If no negotiated settlement is reached (which could be tied or free of tie) then either party may refer the matter to the adjudicator for arbitration (like you can now to an arbitrator) who will produce a PRA rent assessment, the statutory back drop being the tied tenant should be no worse off than if they were free of tie.

At this point the tenant is faced with two rents under different models and has their MRO option, arguably the ultimate test of the arbitrator’s opinion of tied rent and a useful database for future assessments.

The reason this decision is in the tenants hands - and not the adjudicator - is for the very reason Brigid Simmonds outlined, the pubco’s opinion of SCORFA value and the tenants may differ, so the tenant should be offered the choice of taking the SCORFA at the pubco’s perceived value rather than having it forced upon them, at a dictated price, and being told they will earn so much less in exchange.

Again, importantly, there is nothing to stop the pub owning company revising their tied rental proposal to offer competitive, more attractive, terms that encourage the tenant to choose to remain tied.

Burden?

I simply cannot see the administrative burden described and believe this to be simply scaremongering in the hope that BIS officials don't fully comprehend PRA.

Yes, I see the impracticality to some pubcos and brewers; alerting your tied tenants to the fact that they have been worse off than if they were free-of-tie from the outset of their agreement, and having to offer them a fair deal, must be an impractical and inconvenient prospect.

If, however, you are one of those pub owning businesses that genuinely believe they offer a tied agreement that is better than being free-of-tie then wouldn't you voluntarily seek to demonstrate that in your marketing material?

And what better way to prove it than a PRA and giving the tenants the choice? This is where the BBPA’s position falls down - you cannot plausibly maintain a position and at the same time refuse to have it tested. Fair Pint maintains tied tenants are worse off than if they were free-of-tie and we are perfectly happy for that to be put to the test by allowing tenants to choose for themselves.

PRA and MRO is not politicians controlling the market, it is politicians allowing market forces to control its own future rather than a minority of executives operating an unfair model that benefits no one but themselves and would not exist in any other country in the world.

Short agreements will lead to poorer quality of tenants; no entrepreneur is going to offer their flair, imagination, investment and effort without certainty of a longer term

Long leases

On the death of long leases, I have said it before and I say it again, a move to short agreements is short termism that effectively proves the point that we have consistently made; long-term agreements generally only work for pub owning businesses if they can use them to continue to exploit their tied tenants.

Short agreements will lead to poorer quality of tenants; no entrepreneur is going to offer their flair, imagination, investment and effort without certainty of a longer term. Also, only the naive are going to take a short-term, full repairing and insuring, agreement so pub owning businesses are going to have to take on external and structural repair liability and costs - in a dilapidated estate.

This ‘toys out of pram’ attitude - rather than delivering fairness - will lead to lower sales overall, and since the majority of the pub owning businesses income from pubs is from tied sales not rent accelerates their financial spiral decline. I don't doubt some will do it, but its sabre rattling suicide.

The withdrawal of SCORFA, assuming they genuinely felt it improved the tenant’s prospects of sales and/or profitability, again is short-term dummy spitting. If a tenant went for an MRO option the pubco’s only revenue stream would be rental income (no profit on over inflated tied products) and only prospect of income increase would be increased rental which is based upon improved tenant performance.

Would it not be in their best interests to try everything to assist the tenant to achieve the best possible results? I would think such circumstances should encourage SCORFA to any forward thinking, pragmatic, property landlord.

Move to managed

The move to managed is also evident of what the market has come to and how skewed it is. The best income for a pubco from a pub is to exploit a tied tenant; this is easily done with the tied model, harder if the tenant is free-of-tie

This message is delivered loud and clear for once the next best option, to rumping a tied tenant, is to manage and actually pay someone a manager’s salary, rather than let the pub on free-of-tie, fair, open market terms, tells you all you need to know.

Again much sabre rattling here. By their own admission Enterprise has stated their potential managed pubs need to have a breakeven of about £7,000 - 8,000 a week (so in reality the sales target is much higher). Enterprise themselves estimated their average pub sales were about £5.4k a week, a year or so ago (and I'd suggest with beer volume sales decline in the tied sector that’s less now).

The tenanted pub model survival depends on pub owning companies offering a fair relationship based on genuine partnership

So the average Enterprise pub weekly sales fall well below the necessary minimum breakeven levels to be management options, and are incidentally about half the claimed managed house current weekly averages sales).

The reality is relatively few of the however many thousand pubs Enterprise have now are suitable long-term management options. Taking on pubs that are not viable managed options is more a suicide plan rather than confronting the problem and I suspect the purpose of the exercise is to imply the threat as an unforeseen consequence that in fact they cannot sustain.

Fairness

What Mulholland said at the beginning of the debate was right; the tenanted pub model survival depends on pub owning companies offering a fair relationship based on genuine partnership. If they do not embrace fairness the model their businesses will fail and, if that is their attitude, the sooner that happens the better for the long term survival of the Great British Pub.

In too many cases the tied model only survives because it is able to depend on a trapped audience of tenants and - to a degree - punters. They don't have to compete so they don't try to.

The notion of investment is laughable. Andy Slee indicated that if a pubco were to invest they would expect to see a return on investment, just like a bank - but it’s nothing like a bank. Sure, they should expect reimbursement but a bank loan is paid off over a period and comparatively cheap; pubco investment is rentalised and never paid back.

In reality it is the tenants investing, those being had over on the tied deal providing the revenue for the pubco to redistribute a small portion to other tenants who pay off the ‘loan’ back to the pubco.

Pubcos are spending money, refurbishing run down pubs where the tenant has finally been bled dry, or being forced to lower product price and rental for a tenant to 'just' survive (rather than take the pub back), persuading naive tenants to take a capital investment in exchange for an increased rent, but still claiming a huge proportion back as return on investment.

Look at Enterprise; they just announced they have reinvested £69m in its estate in 2015, and achieved an average ROI of 19% in 12 months. It’s the tied tenants paying that 19% return (and bear in mind it’s for the duration of their agreements) a bank loan would be a fraction of the repayments and can be paid off after which the tenant benefits from the improved performance. At 19% return how fast could a bank loan be paid off?

The long-term is much brighter if legislation is not watered down and PRA and MRO are allowed to reshape a more open, competitive, market

MRO waiver

Investment in exchange for MRO waiver is a red herring - the pubcos could have done this anyway and they shot themselves in the foot bringing it up. Put simply, even after the legislation came in, they could simply approach a tenant and offer an investment in exchange for a surrender and regrant of the tenancy or lease, or a deed of variation, with the new terms basically deferring the next rent review date.

What would have been a relatively simple, unregulated, agreement between the parties is now under scrutiny and likely to be regulated in some way. Schoolboy error.

Sadly the nature of many of the pub owning companies attitude is blinkered, self-destructive and vindictive so I do believe we are in for a rough ride in the next few years. So to many tenants it spells nothing new. The difference is the legislation may bring about the change needed more rapidly.

Naive tenants taking short-term leases will at least be able to get out with the shirt still on their backs rather than tortured for the better years of their life and lose everything. Some existing tenants may lose pubs to what, I suspect in the future, will be called the ‘management fiasco’ (probably including me) but that could have happened anyway.

The short term is a painful prospect but then for 67% of tenants trapped in an abusive commercial relationship on less than £15,000 a year it already was. The long-term is much brighter if legislation is not watered down and PRA and MRO are allowed to reshape a more open, competitive, market.

The legislation may even pave the way for an open goal for the first pub owning company to come up with an agreement that genuinely delivers a fair balance of risk and reward to wipe the floor - but I doubt it will be any of the usual suspects.

Simon Clarke is a Fair Pint campaigner and lessee of the Eagle in Battersea, south London

Related topics: Legislation

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