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Tuesday, October 01, 2019

The Tied Tenant Shall Be No Worse Off...

Article by Dave Mountford in Nottingham Drinker Oct/Nov 2019



As the Government conducts a review into the Pubs Code and the role of the Pubs Code Adjudicator, publican Dave Mountford considers how the hopes of tied tenants have yet to be met.



Introduction

I was the landlord of the Rising Sun, a Punch Taverns tied pub from 2007 to 2012, which despite becoming an incredibly successful business turning over in excess of £500k per year, resulted in my bankruptcy in 2013. In 2012, one of my locals bought an ex-Punch pub in the neighbouring village of Cromford, which had been shut for three months. Seven years later it is a thriving and profitable free-of-tie pub, providing us with a living and the community a successful asset.

Six long years ago, the then Business Secretary, Vince Cable, announced that there would be statutory legislation to rebalance the economic disparity between tenants and the owners of the pubs. Furthermore, it was supposed to stop the numerous examples of abuse that had been noted by four successive Business and Industry Select Committee enquiries over a seven year period. This rebalancing would take the form of a statutory code, which would be administered by a Pubs Code Adjudicator (PCA) (1).

A Key Principle

One of the key principles underpinning the Pubs Code was that “The Tied Tenant should be no worse off than the Free-of-Tie Tenant” along with the principle of “fair and lawful dealing”. To all those courageous campaigners who pressed the Government for some oversight of the tied tenant relationship, this was to be the killer-blow to the deeply exploitative business model that
the tie had become. Application of these key principles, would, it was hoped, finally expose the obvious difference between being tied and being free-of-tie. This in turn ought to have shone a spotlight on the significant levels of profit Pubcos and brewers generally make from the tied tenant relationship.

When I ran the Rising Sun, as a tied tenant my wet Gross Profit averaged 42 %. As a free-of-tie tenant, with marginally cheaper prices my Gross Profit has averaged 60 % for the last 7 years.On the average net wet turnover of £4,800 per week, the difference of 18 % equates to £864.00 per week or £44,928 per year lost profit.

The Myth of Scorfa

The principle that the “tied tenant shall be no worse off than the free-of-tie”, meant that the £44,928.00 that I had lost by being tied should have been compensated for by something that Punch would offer me in return, known as a “Special Commercialor Financial Advantage” (SCORFA). SCORFA first appeared in EU Regulation 1984/83 and is the block exemption which applied to brewer and pub company ties
prior to May 2000. It is this which allows the tie to exist in EU Law.

The problem is the SCORFA has never really existed, despite the best efforts of the British Beer and Pub Association (BBPA) to suggest otherwise.The BBPA is the industry body which represents some 20,000 of the country’s pubs. They include international companies, family brewers, managed locals and the nation’s largest tenanted pub estates.

Following my very celebrated and very public bust-up with Punch Taverns in 2008, Giles Thorley their then Managing Director, wrote to me challenging my point regarding the lack of support and referred to “free wine glasses and business development managers who visited me at the weekends”. Not bad for £44,928 per year!!!  As the Business & Industry Select Committee noted in 2004, in the event of no SCORFA, or SCORFA of a token value, then the only way that the “no worse off principle can be achieved, is through a reduced rent”.

Yet this has not happened.

Surveyors in denial?

Unfortunately, Royal Institute of Chartered Surveyors (RICS) guidelines on Pub Rent Setting had always failed to highlight the “no-worse-off” as a key principle of their rental guidance and was therefore ignored by the Pubco surveyors.

Eventually, after pressure from the 2008 and 2009 Business and Industry Select Committee enquiries, RICS attempted to clarify the principle and in 2009 they confirmed that the concept of a tied tenant being no worse off than if they were free-of-tie had always been incorporated into their guidance (2).

SCORFA was discussed in the 2004 cross-party investigation and the first Trade & Industry Report said: “Pubco’s do not deny that their tied tenants pay higher wholesale beer prices than other public house operators. The offset or, “countervailing benefit”, to the tenant is in the form of a lower than commercial, or free of tie, dry rent and special or financial advantages (SCORFA).  Under EU competition law, contracts containing an exclusive purchasing obligation, such as the beer tie, have only ever been permitted if they provide such “countervailing benefits”. The theory is that the net cost of the beer tie to the tenants makes them no worse off than if they were free-of-tie”.

On the face of it , this would seem to be perfectly reasonable — the publican pays more for his beer but has a cheaper rent and the support of a large business partner which wants the publican’s business to succeed.

So, remembering that the average Pubco was making perhaps 5, 6, 7 or 8 times that of the publican as a result of the tie, how did all those RICS surveyors help those poor tenants tackle the issue of SCORFA? Simple … They ignored it.

After all, whilst the Rising Sun was sending me bankrupt at 300 barrels per year, even if Punch were getting £200 discount per barrel, they were still making £60,000 per annum before rent.

Poachers & Gamekeepers?

It may be a coincidence but between 2002 and 2010 the guy who was chairman of the department responsible for setting the guidelines at RICS HQ was a bloke called Rob May. Whilst undertaking this incredibly responsible job, Mr May was also the National Rent Controller for Enterprise Inns, the then second biggest Pubco in the country, where he remained in post until just a few months ago. When he stood down as chairman of the RICS Pub Rent-setting Guidance Committee in 2010, under a certain amount of pressure from the Business and Industry Select Committee enquiries, his position was taken up by Martin Willis, the CEO of Fleurets. Fleurets is a firm which provides agency, valuation and advisory services to the specialist leisure and hospitality sector, including Pubcos.

By yet another industry coincidence, Mr Willits is the former boss of the current Pubs Code Adjudicator, Paul Newby, when he too was an employee of Fleurets. It is a worrying fact is that over the 25 years the Pubco model has ruled the industry, a very small and select group of surveyors appear to have been allowed to support the fiction that being tied was as beneficial as being free-of-tie.

The fact that the average tenant had absolutely no idea how rents were assessed was exploited firstly by the Pubco and then seemingly overlooked by any “independent” surveyor who may have been engaged to back the Pubco up. And, of course, Paul Newby was one of those surveyors.

It is easy to believe that the process by which tied rents are assessed is deliberately opaque. The resulting confusion over rent assessment is at the root of deep flaws in the Pubs Code which promised to achieve so much, and yet appears to be have achieved so little. Under the current Pubs Code regime, if you agree to the dreadful terms offered to you by your Pub Owning Business, you then move on to the next stage of the process, which is your Market Rent Only rent calculation.
Independent Assessment for MRO Rent?
At that point you get to choose an “Independent Assessor”, whose job it is to make an assessment on what your rent should be. This, of course, relies upon the Independent Assessor being truly independent and following the “no-worse-off” principle.

The select group of “Independent Assessors” would seem to be far from independent, all having worked for Pubcos and brewers to a greater or lesser degree. Indeed, it seems highly unlikely that any of them have ever applied the “no-worse-off” principle. Because if the Independent Assessors had been following the “no-worse-off” principle, then rents ought to have fallen like a stone. This lack of objective independence seems oddly irrelevant to the PCA, despite it being flagged up by campaigners such as myself.

The PCA and the “No-Worse-Off” Principle

Even the PCA himself seems to be a little confused by this crucial principle. In September 2016, one of the Members of the Pubs Advisory Service, who was undergoing the MRO process took the opportunity to ask Mr Newby to demonstrate exactly when and where, in his role as a surveyor, he had practiced the principle of “no worse off”. The reply, from the PCA, in writing and without any attempts to be vague, threw us all:

“The principles underpinning the Code neither applied nor were in existence when Mr Newby undertook his previous work at Fleurets.” 

Which is odd because RICS had clearly identified the importance of the “no-worse-off” principle back in 2009.

Moving Goalposts?

Just to muddy the waters further the PCA seems intent on confusing matters. In 2017, the PCA’s website, in its “About the Code” link (updated in November 2018) correctly described the principle as:
“tied Pub tenants should be no worse off than if they were not subject to any tie” (3)

However, in March 2017, Paul Newby was live on a radio programme for Radio 4’s “You and Yours” when he said: “I’m here to return to the fundamental principles to ensure that fair and lawful dealing and that a tenant electing to go into the free of tie channel, the MRO option, should be no worse off than a tied tenant” (4) This was of course completely wrong. The principle requires that tied tenants should be no worse off than if they were not subject to any tie. Mr Newby’s unfamiliarity with the no-worse-off principle was confirmed in March 2018, when a Press Release was issued in which the principle had somehow morphed into:

“… tied pub tenants should be no worse off than they would be if they remained tied” 

After this error was pointed out by campaigners, it was changed to: that there should be fair and lawful dealing and tied pub tenants should be no worse off than they would be if they were free of tie.* And a note at the bottom which stated: *Correction note dated 2 November 2018: An earlier version of this press release contained an editorial error and has been amended. (5)

An error? Or evidence of a fundamental misunderstanding of the “no-worse-off” principle within the office of the PCA?

Conclusion

Had the “no-worse-off” principle been followed when first established in RICS guidance, there may never have been a need for  the Pubs Code. The failure of both the industry and the PCA to properly implement this principle and the link between the two is a cause for concern. Is it a coincidence?

This, together with Mr Newby’s material dilution of the principle, means that many publicans believe that he cannot be trusted to oversee the Code. For those like me it seems illogical that a PCA who does not appear to believe in the “no-worse-off” principle should ever be appointed to the post.

It also goes a long way to explaining why after 3 years we are no nearer a tied tenant being as well off as a free-of-tie one.

Dave Mountford is publican of the Boat Inn at Cromford in Derbyshire and is now a free-of-tie tenant. In August 2019, Paul Newby, the PCA, advised he would not be seeking re-appointment at the end of his 4-year term of office.

1 comment:

  1. Some misrepresentation here.

    As rents are based in the profits method a GP gain of £45k does not produce (all else being equal) a net profit gain of £45k, but £22.5k.

    The trick of comparing tenant's net profit to landlord's gross profit also seems to have been employed when quoting Punch's profit.

    Nothing wrong with putting a case, but it should be put without distorting the figures.

    ReplyDelete