Of course, the pubs code does not change the basic valuation methodology for pubs which is based on trading potential. It also doesn’t replace the contract between landlord and tenant to pay rent based on that valuation.
What the pubs code does do is to entitle a tenant to a rent assessment at rent review and to request one where there hasn’t been a rent review in five years. In practice that means that there will be many tenants whose rents were set on trading assumptions made before the unforeseen impact of Covid-19 with its drastic effect on the industry.
Little-used part of the code
Tenants do not have a universal right to a rent review if trade expectations cannot be met because of some unforeseen circumstances. However, the code does provide that right in some limited cases, namely where a trigger event has occurred. The code specifically defines such an event but in general terms it is one that does not affect all the pubs in England and Wales and has a significant impact on trade forecast over 12 months. It also has to meet several other tight conditions.
This is a little-used part of the code, probably because of the very specific nature of the conditions, and I’ll be watching its impact carefully. A trigger event, as well as any rent assessment, gives the tied tenant the right to enter the Market Rent Only (MRO) procedure and to look at the free of tie option alongside the tied deal.
At the time of a rent assessment, the code requires the pub company to propose a rent supported with a 12-month forecast profit and loss statement and to back this up with evidenced data, information and assumptions. This may be information of heightened importance during this period. For example, the estimated costs of operating during the pandemic will need to be considered.
Clearly, pub companies are going to have to think carefully about how they approach the valuation. There may be different views on the right approach to take, including among professional valuers. The Royal Institution of Chartered Surveyors (RICS) has issued its own guidance to members on valuations during the current period.
Reasonable and realistic forecasts
All of this poses a big valuation challenge given the uncertain picture for the trade, but the principle of the code is that the pub company must take a reasonable approach. It must explain and provide the evidence to back up the valuation so that the tenant is fully aware when entering negotiations over their rent.
The pub company must be similarly open-handed when signing up a new operator. It must ensure that tenant has a reasonable and realistic forecast of income and net profit over the period of the tenancy and a sustainable business plan. That plan should reflect whatever trading uncertainties exist. Of course, these will vary according business type and location.
So I know code rent events will arise at different times for different tenants. When they do it is my role to ensure compliance. I will be looking at how rent assessments are undertaken. But the code is just one part of the landscape in the tied pub trade, and it remains to be seen how the market as a whole will react to these new circumstances.
- See the PCA website – www.gov.uk/pca - for full details of Code requirements, including factsheets on Rent Assessments and Trigger Events.
Pubs code adjudicator Fiona Dickie will be speaking directly to the regulated industry by contributing a monthly column to The Morning Advertiser. Tell her if you would like her to discuss any particular topics at email@example.com