Are pubcos going to exploit rate relief?

By Phil Dixon, trade adviser

- Last updated on GMT

Are pubcos exploiting rate relief?

Related tags Pubco + head office Finance Tenanted + leased

It was ‘Black Country Bus’ Syndrome: Two, one million pounds turnover local publicans contacting me in the matter of a few days.

‘Phil it ain’t bostin, them trying to increase my rent in this current climate’ both confirmed.

As the Roman Seneca (4 BC-65 AD) commented: ‘He who fails to prevent an injustice is its accomplice’. So I agreed to have an involvement.

These cases leave me desperately sad. Two superb outstanding retailers who have been feted wined and dined by their company. Indeed, one of them used frequently as an ‘Ambassador’ with both enjoying excellent relationships. Then suddenly, the ‘Harbinger of Despair’ appears i.e. the pubco chartered surveyor who pronounces that not a single beer or baguette is down to either publican and any reasonable efficient ‘numpty’ would trade these pubs at their record levels. Actually, a question for the Royal Institution of Chartered Surveyors (RICS) is; How can a pubco RICS member in line with your guidelines disregard ‘goodwill’ i.e. the amount of trade dependent on the personal contribution of superb operators if they never accept it i.e. ‘goodwill’ exists in the first place?

I inform the pubco that both cases may well finish up with the PIRRS scheme (Pub Independent Rent Review Scheme) together with the surveyor of my choice determining the rent. I do though put in the ‘hard yards’ re-evaluating current profitability and offering comparable sites with much lower rents.

The two cases then take a hilarious turn when the pubco surveyor questions if I really understand how the PIRRS scheme works?

"For ***** sake!"  I respond, "I should do as I am the one who put the scheme together!" (with plenty of appreciated help).

Genuinely shocked

After factoring in reduced profit margins, massive energy and increased wages costs. I am genuinely shocked how little profit there now is and the rents far from being increased are drastically reduced to between 3.5% and 5% of turnover.

Then a BII former, West Midlands Council member asks me to look at his rent on his million pounds turnover site. His relationship with his BDM is excellent. The BDM in fairness, immediately recognises there is an element of goodwill. He respects the blood, sweat and tears of the publican’s contribution. However after drafting in all the extra costs etc, the rent is agreed at almost half of what he was paying at around 5% of the fair maintainable trade (FMT). I try to be fair to the company and offer to agree it for one year and then revisit it in 12 months and if the situation has changed for the better to consider a rental increase. This is accepted.

Rents though will, in the vast majority of cases need to come down. There will be exceptions e.g. Wellington Pub Company, which will take advantage of its ‘upwards only’ rental clauses. A pub is a pub. There is no justification for such clauses and they should be made illegal in my opinion. I will never understand why pubcos apply this clause to create unsustainable rents. I got involved in a ‘free of tie’ upwards only case near Bury, Lancashire in 2018 with the brewery/pubco using the clause to force an unjustified rent increase. The pub closed soon after and remained so for more than threeyears​ before the same brewery/pubco had to spend £485.000 to reopen it. My ‘Poundland’ calculator had a meltdown trying to comprehend those figures!!  

So, if rents are to come down, will pubcos seek to recover income by exploiting the Governments 2023/24 -75% business rate relief? After a bit of investigating, I think the answer will be sadly yes, a number of companies will try to do this, though there will be exceptions.

How will the pubco argument go? Hope you are ready for some chartered surveyor or should that be Magic Circle jargon! The business rates support is factual and they rent on hypothetical R.E.O’s (reasonably efficient operators) who they obviously presume have no debts to offset the concession because they are hypothetical.

So we can justify, so say the companies pocketing half the Government support at a rent review. However I would like to emphasise that some very efficient, not just reasonably efficient operators, especially those with rateable values over £51,000, who had no grants have massive debts after taking out £50,000 Bounce Back Loans just to survive. How can pubcos ignore reality and insist on fantasy? 

Business support

In one company, the matter takes an even more sinister turn where one major pubco is even projecting Government business support may continue for almost five years and are seeking to rentalise all of it.

The pub is in Somerset close by to the former home of Samuel Taylor Coleridge.

Remember the lower the rates, the higher the pubco rent. The pub’s rateable value is  £19,600. At 49.9p in the pound, I estimate the business rates costs in a rent review calculation at £9,780.40 per annum so that will result in a rent level reduced by £4,890.20 based on a typical 50% bid vs profit.

However the pubco has allowed just £3,890 for business rates that leads to a rent reduced by just £1,945.00 resulting in a higher rent to the tenant by £2,945.20 (£4,890.20 – £1,945.00) now this pubco has also a ‘fetish’ for annual CPI inflation, if you factor in inflation amounts this will result in the tenant paying around £17,000 more in rent because God forbid he has been given UK Government business rate support of £7,335.30 (75% reduction) So thanks to the Government's well meaning intervention but due to his greedy pubco he is actually £10,000 worse off over five years!

In addition no one has asked the tenant of his Covid-related financial issues. The presumption is there are none. Well, there can’t be as he does not exist in his hypothetical state. By using outdated costs and allowances, tweaking all the higher profit areas, the rental proposal is over 10% of FMT. Accompanied by the usual pubco mantra that things can only get better, volumes will recover to pre-Covid levels, Sheffield Wednesday will win the Champions League and Liz Truss the Nobel Prize for economics!

When MPs are made aware that their well intentioned assistance for the British Publican and his/her Pub is the subject of an attempted mugging simply to line the coffers of overseas based ‘Venture Capitalists’  I suspect they will be furious. All the laudable work and efforts of Emma McClarkin (BBPA) Steve Alton (BII) and Kate Nichols (UKH) will be seriously undermined.

The potential damage to the industry is very worrying and there needs to be a re-think before this issue becomes an ‘Albatross’ around the sector’s neck (with apologies to Mr Coleridge).

Related topics Rebuilding the Pub Sector

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