The rental offer from the pubco is more than anticipated and it is time to enter those rent review negotiations.
Obtaining professional advice could be important at this stage of the process because many licensees can benefit from help in negotiating a reasonable rental figure.
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Tom Nichols, managing director of Everard Cole, says: “If an amicable and fair solution can be reached between both parties, this can often save a lot of time and expense.” But he warns it is sensible at some stage during the process to obtain independent professional advice.
Dan Mackernan, director of licensed leisure at Savills, warns licensees to be careful when agreeing a rent. “Ultimately, anyone can agree a revised rent, but it takes someone who is experienced to agree the best possible rent for your business and property,” he says.
“It is important to remember that just because your rent may be affordable in relation to your actual turn-over that does not necessarily mean it is a fair market rent.”
Research the market
Licensees should research what other pubs in the area are rented for as a comparison and try to get an indication of whether rents are rising or falling. Says Mackernan: “While the landlord’s opening position may sound good, it is best not to take the quoted rent at face value because there are bound to be factors affecting value they may have overlooked.
Tied rents can go down as well as up, so a nil uplift may not always be the best result. Always ask the landlord for their comparable evidence, which should be on a like-for-like basis.”
Negotiation can provide a basis for agreeing a new rent and is the first stage of coming to an agreement.
Peter Taylor, director, Christie & Co, advises any tenant thinking about undertaking their own negotiations to ensure discussions are on a ‘without prejudice’ basis.
This means anything that is said between the parties cannot be disclosed in the event of the dispute being referred to a third party, ie, an arbitrator or independent expert. The purpose of this is to encourage the parties to freely negotiate and attempt to reach a compromise”
What happens if the parties fail to agree the rent?
If there is no reasonable agreement on rent between the licensee and the pubco, it should be referred to a third party. However, who this third party is — such as an arbitrator or independent expert — and the process for this, will be detailed in the lease on the property.
Nichols says: “If either party can’t reach an agreement, there is usually a right to appoint a professional to provide independent advice. Most leases are different, so the appointment procedure will vary.”
There are three main processes that can be used:
An arbitrator will weigh up the evidence and arrive at an ‘award’ of rent based on the weight that they attach to the evidence.
Taylor says: “This does not necessarily represent their opinion of rent and places the responsibility on the parties’ experts to provide well-
reasoned and supported cases for the rent they propose.”
An arbitrator also has power to award his costs and those of the parties, dependent on the results. This could mean if the lessee loses the appeal, they could end up paying the costs of the pubco and arbitrator.
Taylor advises any lessee taking this route to ensure they have a ‘fighting fund’.
A tenant can attempt to reduce the risk by asking the arbitrator to limit recoverable costs. This does reduce their own exposure to fees in the event of costs being awarded against them. However, this request does not limit the amount the landlord can spend, Taylor advises.
Arbitration is the most expensive option, but can be the best route if it is a very complicated case.
An independent expert may receive evidence from the parties or their experts, but will arrive at their own opinion of what the rent should be on the property.
Chartered surveyors will use their own knowledge and expertise to come to a decision.
Taylor says: “An independent expert generally has power to allocate his own costs between the parties, who each bear their own costs.”
Pubs Independent Rent Review Service (PIRRS)
Tenants/lessees — and only them — have the right to refer a case to the Pubs Independent Rent Review Scheme (PIRRS).
This offers an accessible, independent, low-cost rent review resolution service. It has recently been extended to handle rents at tenancy renewals.
Capped fees enable tenants and landlords to resolve disputes in a fair and timely manner. The cost to the tenant is between £1,000 and £2,000, plus VAT, as far as the work of the PIRRS independent expert is concerned, dependent on the size of the case and the location of the premises.
A PIRRS expert, who possesses the right experience and expertise in the market, decides the rent. The choice of expert is also selected by the tenant from the PIRRS panel.
Mackernan says: “PIRRS is the quickest and cheapest solution if the dispute involves only the rent and no legal issues. You can ask for an independent expert, which is similar to PIRRS, but higher fees are generally charged.
“This option is usually taken up where a quicker solution is needed and there may be limited rental evidence.”
Meanwhile Nichols agrees: “PIRRS can provide a quicker and cheaper method of resolution to the more traditional methods of arbitration or independent expert.”