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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1369-ii
House of COMMONS
TAKEN BEFORE the
Business, Innovation and SkilLs Committee
Thursday 7 July 2011
Brigid Simmonds OBE, Ted Tuppen CBE, Roger Whiteside, Alistair Darby, Paul Wells and Simon Longbottom
Kate Nicholls, Mike Benner, Simon Clarke and Karl Harrison
Evidence heard in Public Questions 117 - 298
USE OF THE TRANSCRIPT
This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
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Taken before the Business, Innovation and Skills Committee
on Thursday 7 July 2011
Mr Adrian Bailey (Chair)
Mr Brian Binley
Mr David Ward
Examination of Witnesses
Witnesses: Brigid Simmonds OBE, Chief Executive, British Beer and Pub Association, Ted Tuppen CBE, Enterprise Inns, Roger Whiteside, Punch Taverns, Alistair Darby, Marston’s, Paul Wells, Independent Family Brewers, and Simon Longbottom, Greene King, gave evidence.
Q117 Chair: Good morning, and thanks very much for agreeing to come before the Committee. J ust before we start the formal session of questioning, can I just run through a few ground rules? First of all, of course, there are six of you, an unusually large number to interview at one particular time. I am conscious of the fact that we only have an hour and a quarter. We have a lot of questions that we want to ask you, so can I ask you to keep your responses as brief and to the point as possible ? I will also ask my Committee members to keep their questions the same . If at the end of the session I do not feel that we have covered all the issues that we need to , I will hold another session at a time in the v ery near future , because given the length of time the issues that we are talking about have been running, I t hink it i s important that we ask all the questions that are necessary and get all the answers that are necessary this time so that we can remove any need to have a further inquiry in future . Can I just , for voice transcription purposes , invite members of the panel to introduce themselves and their organisation before we start with the questions ? I will start with Simon Longbottom.
Simon Longbottom: Simon Longbottom, I am representing Greene King. We have been a brewer and pub retailer for a couple of hundred years. I have not quite got that level of service; I only joined the company last February, although I have held positions as business development manager and licensee in the industry over the last 20 years.
Ted Tuppen: I am Ted Tuppen. I founded Enterprise Inns 20 years ago. I am still the Chief Executive.
Brigid Simmonds: I am Brigid Simmonds; I am the Chief Executive of the British Beer and Pub Association.
Roger Whiteside: Roger Whiteside from Punch Taverns; I run the leased and tenanted division.
Alistair Darby: Alistair Darby, Managing Director, Marston’s Pub Company.
Paul Wells: Paul Wells, Chief Exec of Charles Wells, and also representing the 29 family brewers.
Q118 Chair: Thank you. Can I just start with a question to Brigid Simmonds? June 2010 was the deadline for pub companies to have their codes accredited. I understand that only seven companies made that deadline, and we still have a situation where three companies are yet to do so. Is this correct?
Brigid Simmonds: I wrote to you on 19 July 2010. By that stage we had 10 companies that were accredited, but they represented 90% of the pubs in the leased and tenanted sector. All the big companies had their accreditation in before June 2010; not all were accredited by that time. We always knew that smaller companies would want to wait and see how the larger companies fared and learn from them, and that has happened. I am delighted to say that all companies have now put forward for accreditation to BII, but as you rightly say, there are five that still have not been finalised through the process. I wrote to you again in October last year, and I have also had some discussions with the Minister at BIS about the progress that we have made.
Q119 Chair: What was the problem? What was the reason for the delay?
Brigid Simmonds: It cost £2.6 million for companies just to get to that stage. I think we wanted to do it properly and there was a lot of work to be done. It took time, and I am sure my colleagues around the table can talk about the process they have gone through and the size of the codes they have produced.
Q120 Chair: I do not really want to spend a lot of time going in to all the processes, but Marston’s, I believe, was not until mid-July, so well after the deadline. Was there any particular reason? Alistair Darby, as the representative of Marston’s, can you clarify?
Alistair Darby: We went for our first accreditation hearing during June. There was a queue of companies waiting to be accredited or for their codes to be reviewed. We had a long four-hour meeting with the BII, which resulted in some suggested amendments and changes to our code to improve clarification. We submitted those after that meeting, towards the end of June, and got official accreditation in July. The reason for the delay was purely the process, and making sure that the codes were as clear as they possibly could be in the eyes of BIIBAS, the accreditation panel.
Q121 Chair: Coming back to Brigid: Admiral Taverns, which is a big pub company, did not have its code accredited until November 2010. What was the reason for that?
Brigid Simmonds: I am afraid I cannot tell you about individual companies, but I can say, and Alistair has just demonstrated it, that there was a queue before BII to have them all looked at. That was the process. It did take time. I thought it was important that we get it right. I am very clear to come in front of the Committee today and say that we have made progress, I think there is a positive force, but there is still work to do. But we do have the big companies, as I said, covering 90% of pubs in the leased and tenanted sector, who have now had their codes in place for over a year.
Q122 Chair: We did say that we would hold your organisation responsible for any slippage in the timetable, and there quite clearly has been slippage. You have answered in very vague terms about process and getting things right, which is obviously absolutely correct. In your submission to us for this inquiry you did not even mention this slippage. Why?
Brigid Simmonds: Because we wrote to you on two previous occasions with information, on 19 July and 4 October. We offered to have meetings with you. I wrote to you when you were appointed to be Chairman, and offered to have a meeting. We followed it up with the clerk; we have not been called to have any further discussions, so we assumed that you did not have any further questions. But I have copies of both of those reports with me if you would like to see them.
Q123 Chair: At the end of the day, it should not require us to have a meeting for you to conform to a timetable that was quite clearly set out. I do not see why it was necessary for us to have a meeting when you could have submitted that evidence in written form. If we do not get the evidence in written form, I am not quite clear what the benefit of having a meeting is.
Brigid Simmonds: We did submit in a written form. We wrote to you with a written report. Both of those are written reports that said quite clearly how many companies had been accredited by certain dates.
Q124 Chair: Yes, but that did not explain why many had not been accredited by the time they were supposed to.
Brigid Simmonds: The Committee the last time was quite clear that, particularly for smaller members, that was not the focus, that the focus was about the big companies, and we were quite clear that the big companies had made substantial progress during that time, but I apologise to the Committee if we did not provide you with the right information that you were expecting.
Q125 Chair: Did you use any sanctions against BBPA members who failed to have their codes accredited?
Brigid Simmonds: We would take sanctions and we would suspend their membership if they had not had their codes accredited, of if they had not submitted their codes for accreditation, by the time we came before this Committee. The only sanction we have as a trade association would be revoking membership, and I do not think it is removal of membership from the BBPA that is the issue. The issue is the reputational risk to the companies concerned: why would you as a lessee and tenant want to look at a member whose code had either not been accredited or had been seen to be at fault by the BIIBAS committee? To me, that is a far greater sanction, frankly, than removal of membership from the BBPA.
Q126 Chair: Our predecessor Committee recommended that your organisation produce a project plan and update the Committee against its achievements at key stages. You did provide the predecessor Committee with what was admittedly a rather basic project plan. We have not had any updates on performance. I have a copy of the project plan at the back, which I must say was a sort of model of noninformation. Why have there been slippages, if indeed there have been slippages, and have you written to the Government, as suggested, to explain them?
Brigid Simmonds: Chairman, we did write to you with a full report on both 19 July and 4 October. We also wrote to the Government with copies of that report. I had a meeting with Ed Davey, the Minister. I have written to him twice to answer questions that he put to me, and that has been provided to the Department.
Q127 Chair: We have no evidence of that. We will obviously investigate that, and the contents of the letter. Have you got any details there?
Brigid Simmonds: I have got the details in my briefcase. I am very happy to write to you afterwards and send you copies of all the correspondence.
Q128 Nadhim Zahawi: My question is really to Mr Whiteside and Mr Tuppen. The information that we received from the BII is that Punch has had the most upheld complaints of code breaking-three breaches. Enterprise has one that is yet to be resolved. Can you give us details on those cases?
Roger Whiteside: As I have the majority of those I can answer that first. There were three cases I think that were upheld. All three I have looked at in detail. They represent technical breaches of promises we made in our code that we did not live up to. The first was where we had provided a detailed breakdown of a shadow P&L, as required by the code, and a rent evaluation. The standard we provided was a higher level of disclosure than what we had first entered in our code, because we are seeking to improve the whole time. Therefore it was judged a technical breach because it went beyond what we had already promised. Since then we have updated the code and we now include the more detailed shadow P&L. I am satisfied that we have resolved that appropriately.
The other two regarded us failing to meet our own timescales that we declared in the code. These timescales were not required by the framework code, but something that we wanted to do to go further to improve service to our partners, and in one instance we failed to give sufficient notice of a rent review forthcoming to the timescale that we specified. That matter has been resolved. The other was where a partner had given notice during a cooling-off period-which is part of the legal contract-and we had failed to acknowledge it in writing. That again was quickly resolved, and the individual who had not acknowledged it was made aware of the shortcoming.
Q129 Nadhim Zahawi: And you think you have systems in place now for those not to occur again?
Roger Whiteside: Yes, we have reviewed our systems, and obviously the code is what we seek to live by, and it goes beyond the minimum requirements that were set out in the framework by trying to set in place service standards. If you set high standards you expect to live by them, and we seek to drive behaviour in that way.
Q130 Nadhim Zahawi: Mr Tuppen, your case.
Ted Tuppen: We had one minor technical breach; we obviously responded very quickly to this. It was about the positioning of something in our P&L accounts and the way that was described in the body of the code of Practice, I believe. That has now been resolved to everyone’s satisfaction. I would make the point that we put a huge amount of work into this.
Q131 Nadhim Zahawi: What was that something in the P&L?
Ted Tuppen: It was to do with the technical positioning of machine income. This was nothing to do with the share thereof or anything like that; it was just where it appeared in the document. We have resolved that with BIIBAS now. I am very comfortable that that has been covered. As you know, we take this code of Practice very seriously, and we have appointed a full-time Compliance Officer, whose sole job is to make sure that we do not make those slip-ups. There are some new processes, and it is not surprising, I guess, that from time to time we have spotted things that we could be doing better, and we have got this chap specifically looking at that. We are comfortable moving forward. You say there has been one further claim, which I believe was made about four weeks ago. The BIIBAS process is now working. The complaint has been raised with us. We have already provided the first set of information.
Q132 Nadhim Zahawi: What was that complaint about?
Ted Tuppen: It is a relatively complex case, and I believe it is brought by Simon Clarke of Fair Pint, and it is about the calculation of rent. It is rather fundamental. Our position is that he has a point of view with which we disagree, and we are delighted that we have BIIBAS there to resolve this.
Q133 Nadhim Zahawi: Can you show us what you disagree with ?
Ted Tuppen: As the Chairman said, we are relatively short of time. I would be very happy within seven days to provide you full details of the claim that is being made of our noncompliance and our response to it.
Q134 Nadhim Zahawi: You cannot share with us now just very quickly what that complaint is about? The disagreement only.
Ted Tuppen: It is to do with the fundamental basis on which rent is calculated.
Q135 Nadhim Zahawi: That is my point: if it is fundamental we would like to air it today, rather than you writing to us later on.
Ted Tuppen: I feel that I would hate to mislead you, and I would therefore much prefer to get in touch with you, and if you would like it within 24 hours I can certainly do that.
Q136 Nadhim Zahawi: My concern is you mention it is fundamental, and therefore you must have given it some thought if it is that fundamental to your business, and therefore all I would ask is for you to explain what that is today.
Ted Tuppen: I would prefer to submit it to you within 24 hours.
Q137 Nadhim Zahawi: Why? Why can you not just explain it?
Ted Tuppen: Because I would be very fearful that I may say something that, whilst a minor technical point, might be taken as me seeking to lead you off in the wrong direction.
Q138 Nadhim Zahawi: You can imagine the Committee now is completely puzzled. I sit here now wondering what this fundamental thing is that you are not willing to air in this evidence session.
Ted Tuppen: It is not through a willingness to air it or not; it is a great desire not to get it wrong. It is a matter to do with the RICS calculation of rent and it is very complex.
Q139 Nadhim Zahawi: Is that the market rent? Is that what you are talking about: RICS calculation of market rent?
Ted Tuppen: The way in which RICS recommends that rent is calculated is set out very clearly in the RICS guidelines. Those RICS guidelines, as you know, are not a roadmap for the uninformed. They are a technical document for use by RICS members, by people who are qualified chartered surveyors. We are not looking at a handy guide for us to talk us through the rent process. I just would not want to in any way prejudice the outcome of the BIIBAS investigation.
Q140 Nadhim Zahawi: Is that the fundamental thing you disagree with, i.e. how RICS calculate market rent?
Ted Tuppen: No, not at all; I agree absolutely with how RICS deals with this. I believe that the interpretation being put forward by Fair Pint is incorrect. Perhaps what I can do to give you some flavour on this is also forward to you the business plan submitted by Simon Clarke when he took on the Eagle Alehouse back in 2006. That business plan, which I have with me, showed a turnover of about £7,000 a week and a profit after rent of £51,000, interest costs on the loan that he had taken out to buy that lease at £16,000, and a postrent, preinterest profit of about £40,000. That business plan was presented to us so that we were encouraged to approve the lease. It was presented to his banks, so that they were encouraged to lend him £90,000. He showed something making £40,000 profit after a rent of £51,778. His proposal is now that the rent for the Eagle Alehouse, based on his submission to BIIBAS, should be zero. That is quite fundamental, and he has a logic that he believes interprets that put forward in the RICS guidance, which would lead to any sensible person following RICS guidelines to reduce the rent from the £52,000 he agreed with back in 2006. The rent is still, by the way, £51,334. The rent we are proposing, given difficult times, is £45,000, which is pretty well in line with what has happened to our rents over the last two or three years. As we have shared the pain with our licensees, our average rents have come down by about 10%. We feel that we follow RICS guidelines; we have RICS-qualified licensed-trade valuers, as we call them, who evaluate in detail every single rent bid. There is not a rent bid that hits the market without being reviewed by our RICS valuers. We think that £45,000 is probably fair.
Q141 Nadhim Zahawi: Does RICS think it is fair? If RICS would do a rental evaluation independent of you, would they agree with you?
Ted Tuppen: As I say, our three senior licensed-trade valuers are all fully qualified chartered surveyors and members of RICS. They have approved this proposal from us that the rent should be £45,000. I cannot speak for RICS themselves, but these are RICS members who believe we have followed to the letter the instructions for guidance that is set out, and they come to that figure. I think that from a rent of £45,000 six years on from a rent that was put in a business plan by Mr Clarke, suggesting that he could afford his loan and he could make preinterest profit of-
Chair: Can I say that we are getting into a level of detail I really do not want.
Ted Tuppen: I apologise, Chairman.
Chair: Brian, you had a very quick supplementary.
Q142 Mr Binley: I was delighted to hear that you would hate to mislead, because the truth is I think you have been misleading incoming tenants for a very long time. Now let me move on to the specific. We got evidence last week-and you will have read that evidence I am sure-that the latest interim accounts of Enterprise Inns show operating costs of 35% in their example. In their very own survey they showed costs of between 42% and 51%. Why?
Ted Tuppen: I think I can answer that very clearly. You are referring to the evidence that was given by Garry Mallen, and I did see that he made reference-completely incorrectly-to the survey of 700 pubs that we had carried out. He compared the estimate that appeared in our interim accounts with a survey carried out independently covering 701 pubs, 137 of which were Enterprise Inn pubs.
Q143 Mr Binley: Mr Tuppen, let me stop you because time is limited. I am referring to the evidence of many of your tenants, who tell me consistently, and I have seen the ingoing estimation given by your socalled experts, that on every occasion they quoted around 35% and on every occasion the actual costs were sizably higher. I can read the letters out if you want, but I think they would embarrass you. Let’s be straight here: you have a business model that is difficult to handle, particularly in a recession. You were over-leveraged. You are applying enormous pressure on your tenants, and you are misleading them when they go into pubs. Is that not the case? We have evidence that it is, so be careful how you answer.
Ted Tuppen: Mr Binley, you have eight of our pubs in your constituency.
Q144 Mr Binley: I am not talking about pubs in my constituency, Mr Tuppen.
Ted Tuppen: Okay. Let me deal with those points. It is your view that we mislead our tenants.
Q145 Mr Binley: Tenants ’ views; I have said that. Let ’ s get the facts right.
Ted Tuppen: Okay; it is the view of some tenants who have contacted you that we mislead our tenants. I would put it to you that they may well be tenants who, having taken on a business plan in good faith, with good faith operated by both sides, by themselves and by our BDMs, regional managers as we call them-
Q146 Chair: We will come to those.
Ted Tuppen: Okay. I disagree completely that we have misled tenants. You can read the letters out, but what I would like to suggest is that, if you have these letters, if you would let me have copies of them I undertake absolutely to give you a full report on every single incident within seven days.
Q147 Mr Binley: I am sure you will, and therein lies the trouble, because I am sure you will justify it by your own means. The truth of the matter is that on every occasion tenants went in on a promise of return that never ever materialised, and nor-as adjudged by experts-could it have materialised, because your people, your middle management, gave the wrong information. That is the fact of the matter again and again and again, and the sooner you come clean on that and say you are going to straighten up your act, the better we will be pleased.
Ted Tuppen: As I say, I reserve the right to fundamentally disagree with you, which I do, but I would point out that over the last three or four years, where trade has been exceedingly difficult, in order to help our tenants we have given discretionary support that has exceeded £50 million. That was not something we had to do, and I can assure you it is not done out of the generosity of our hearts. It is a sensible, pragmatic approach to supporting good-quality tenants. What I would also point out is that-and I am happy to provide you full details of this-during the last two years, the average rent that we charge on a like-for-like basis for the pubs that we currently have-
Chair: Can I stop you there: we are going to come into rents later, and I think we have seen the evidence.
Q148 Nadhim Zahawi: Ms Simmonds, what sanctions do you have against a pub company that does not comply with this code of practice?
Brigid Simmonds: They can be asked to leave the BBPA. As I said before, I do not think necessarily that that is the issue. The issue is the reputational risk to that company if they are asked to leave and the ability then to attract new tenants and lessees to take on their own pubs.
Q149 Nadhim Zahawi: Is 24 major unresolved breaches before anything is done about it a bit of a joke? Mr Robertson told us last week that potentially that is 24 families where their lives have been ruined by a pub company without any sanctions whatsoever.
Brigid Simmonds: The sanction-and I think where you have a situation that you have here, where you have selfregulation-is with BII, and I think BIIBAS-and I am sure my colleagues would agree with me-have done a great job in trying to raise the standards in this particular area. We have 30,000 leased and tenanted pubs in this country.
Q150 Nadhim Zahawi: So 24 cases that are serious is fine?
Brigid Simmonds: 24 cases is very serious.
Q151 Nadhim Zahawi: But is that fine?
Brigid Simmonds: No, it is not fine. I think the BII have done a fantastic job in coming to us, in working with the industry, in working with the IPC to try to resolve and bring these forward. I was very clear at the beginning that this was work in progress, and at the end of our submission we gave clear things that we would like to do more of.
Q152 Nadhim Zahawi: Do you think you should be able to fine those who do not comply with their codes, even after one unresolved breach?
Brigid Simmonds: I have to be honest and say I do not think that is the role of the trade association, and no, I do not think we should be able to fine our members. I think the only thing we can do to our members is, as I said, suspend their membership.
Q153 Nadhim Zahawi: Thank you for that. Mr Longbottom, as a pub company that is no longer a member of the BBPA, what sanctions can be used against you when you break the code?
Simon Longbottom: As Ms Simmonds has said, I am very clear that our relationship is with BII and with BIIBAS, and loss of accreditation for us-I think we are at the 20 mark, not the 25-
Nadhim Zahawi: Is that enough of a threat?
Simon Longbottom: -is extremely significant. At the moment, we have no breaches, we have no cases in PIRRS reviews. We have used the mediation system I think once in the period of time since our code was accredited. I am in complete agreement again with Ms Simmonds: reputationally, for us to lose accreditation would be a disaster in trying to attract quality licensees to our business.
Q154 Nadhim Zahawi: Why did you leave the BBPA?
Simon Longbottom: Very much a corporate decision. Divorced very much from the predecessor Committee’s findings, we decided we were going to put our efforts into a smaller number of areas in terms of dialogue with officials. We were going to work with the tie, we were going to work with social responsibility and duty, rather than a disparate range of issues.
Q155 Chair: Could I just ask you, do you feel that by leaving the BBPA you have suffered any reputational damage?
Simon Longbottom: I do not believe that to be the case, Mr Chairman.
Q156 Chair: That rather undermines the sanction that BBPA says they can invoke, or will be invoked.
Brigid Simmonds: I said the reputational risk was the loss of accreditation, which is what Simon Longbottom has just repeated.
Chair: It is obvious that Greene King did not think the risk was very great.
Q157 Nadhim Zahawi: Have you had lessees approaching you to take on your pubs?
Simon Longbottom: The Select Committee findings were for pub codes. The BBPA was a conduit. We were part of the committee that put together the draft recommendations, so we were very much involved in that process. As I say, our relationship is now with BIIBAS, and it is our reputation that would suffer if we were to lose that accreditation.
Q158 Nadhim Zahawi: Ms Simmonds, can you give us a definitive statement on whether the codes are legally enforceable?
Brigid Simmonds: I think if we got to a situation where we went to a court of law, there is no doubt that these codes would be taken into account by that court. In that sense yes, they are absolutely enforceable, and they are like many other codes of practice that exist, which a court will take into account. So yes, they are.
Q159 Nadhim Zahawi: And you would not need for Government to put them on a statutory footing?
Brigid Simmonds: I do not think it would help for Government to put them on a statutory footing.
Q160 Ian Murray: Just before I start, can I refer the Committee to my register of interest, but also add that I was a former lessee of Enterprise Inns, a former lessee of Greene King, and a former lessee of the G1 Group, and I am a contemporary customer of Wadworth, who are also accredited. With that, can I ask, Ms Simmonds, if the codes are not legally enforceable in their current state, why should we not put them on a statutory footing? We have heard already that the only sanction available is to leave the association, and we have heard from Greene King that leaving the association has not given any commercial disadvantage to Greene King. Should we put it on a statutory footing in order for it have some teeth?
Brigid Simmonds: Personally I do not think something being statutory helps it. I think there is far more benefit seen by a company if they do something that is voluntary and selfregulation than they do when it is statutory. I can give you the example of Challenge 21; Challenge 21 was something BBPA introduced for all our members. Many of them took it up. The Government then introduced it on a statutory footing and it became Challenge 18, because that was the only way that law works. If you are going to have a statutory code you also then have to have a system of how that statutory code is enforced. I think the cost and the share and putting the whole thing in place would not be a cost benefit to the industry or the tenants.
Q161 Ian Murray: We are talking about multi-billion pound businesses here, and you are honestly telling the Committee that breaches of code, if they were not on a statutory basis, the reputational harm to those multi-billion pound businesses would be so much that they will not break the codes?
Brigid Simmonds: The reputational risk would be to the tenants or lessee taking on those businesses. Tenants and lessees read a lot of information. We now know that the vast majority of them going into this trade take up the preentry training, which is absolutely mandatory. They know a lot about the industry. If you have companies with outstanding black marks against them, why would you take a lease with that particular company?
Q162 Ian Murray: Can I give you an example? Punch taverns, in their recent court case, referred to the code and said it was "only a consumer-friendly document with no contractual effect". They used it in court against a court judgement in terms of it not being legally enforceable. What would your comments be on that?
Brigid Simmonds: I do not think I could comment. Roger?
Roger Whiteside: I am not familiar with the specifics of the case, so I would have to go away and examine quite what the case involved and why we would have made that claim.
Q163 Ian Murray: But doesn’t it just highlight, though, that when there is a material breach of a code that is not legally enforceable, and the only sanction is reputational value, companies could use them against lessees and tenants in a court of law and say they have no contractual effect?
Roger Whiteside: If I can answer on behalf of Punch, we have laid out in the foreword of the code, which I wrote myself, that the licensee is able to rely on this code if they believe that we have in some way misrepresented what it was that they were signing in taking on the contract. We certainly envisage that our licensee can rely on their datestamped version of this code in a court of law. I am struggling to understand that particular case that you have highlighted. It could be that that is somebody seeking to claim reliance on the code prior to the code’s existence. In other words, they signed the contract before we had created the code, in which case they could not rely on it. That is made clear in the foreword as well.
Q164 Ian Murray: If we provide you with the information, it would be very useful if you could write to the Committee.
Roger Whiteside: I will do that very quickly.
Q165 Chair: Just before we move on to the next questions with Brian Binley, if I could just ask the BBPA: the Government in another area is looking at introducing an adjudicator. I am talking about the grocery codes adjudicator to, if you like, carry out investigations into breach of code between suppliers and retailers. Given the fact that you are opposed to making the code legally binding, what would your opinion be on the appointment on, in effect, a pub code adjudicator to mediate?
Brigid Simmonds: I would say to the Government that they would have to be absolutely clear that that was justified in the circumstances. We agreed that we would carry out a survey with the IPC, which we have done. We found that 93% of lessees, particularly new lessees, were satisfied with what we put in place. I think we have a very good selfregulatory system, and I think you heard from BIIBAS last week exactly how they are enforcing that system. My view would be that because of the cost of that-at a time when we are still closing 25 pubs a week-I would rather the Government concentrated on other things.
Q166 Chair: Basically you are against it?
Brigid Simmonds: Basically I would be against it, but it would obviously be up to the Government to make that decision.
Chair: That is not altogether surprising, but can I now go on to Brian Binley?
Q167 Mr Binley: You will know that we heard last week that the new RICS guidance is generally recognised as being very good guidance indeed but is not being followed, because most of the people-middle management, BDMs-assessing rents are not trained in the code. They are neither trained valuers nor members of RICS-neither should they be necessarily-but we are told that most of them that they come across do not know about the code and do not understand about rent reviews. They are therefore not bound by RICS because they are not members. Can you confirm that this is the case, and can you tell me what training you give your BDMs in terms of proper rent negotiations? I have had meetings with BDMs where their knowledge of rents is almost nonexistent. You first Mr Tuppen.
Ted Tuppen: Would you like me to answer that? We take training very seriously, and you may or may not know that we have the highest possible award of Investors in People on the basis of the training that we give. Turning to the specific point of the RICS guidance, within our business we do in fact have-and I checked yesterday-30 RICS-qualified people, so about 7% or 8% of our workforce. Many of those are surveyors and the like. There is plenty of RICS knowledge and experience. When we look at the RICS guidance-which, frankly, was clarification rather than major change-I would like to take you through the process.
Mr Binley: No, I understand it; let ’s move on.
Chair: Yes, I do not want to go into this sort of detail.
Mr Binley: I understand it; do carry on.
Ted Tuppen: All of our new regional managers have a full two days of their induction given over to rent calculations.
Q168 Mr Binley: Then why did RICS say it is not being followed by most people assessing rents? Are you saying that RICS are not telling us the truth?
Ted Tuppen: I am not sure that I recognise the quote.
Q169 Mr Binley: It was the information we heard last week. I was here. So do accept it; do not question everybody as though they were not telling the truth.
Ted Tuppen: I have a letter from RICS saying that they have absolutely no evidence that we are not following the code.
Q170 Mr Binley: Perhaps you could show us that letter.
Ted Tuppen: I have it with me, and I would be very happy to show it to you.
Q171 Mr Binley: If you would hand it over afterwards we would be very grateful, because it is totally contrary to the evidence we received last week.
Ted Tuppen: If you are talking about what Mr Mallen said to you about our RMs not being qualified-and of course Mr Mallen himself is neither RICS qualified nor a member of RICS-then I did-
Q172 Mr Binley: So Mr Mallen is a liar, then?
Ted Tuppen: No, I do not believe he is a liar at all.
Q173 Mr Binley: I just wonder where we are with all of this .
Ted Tuppen: He is currently investigating, as an unqualified rent assessor-because he is not a member of RICS-seven cases where he is representing tenants in cases against us. That is absolutely fine. The regional manager in our business is responsible for his pub, and in the first instance sets what he believes to be the rent. That rent goes no further at all until it is signed off by his boss-our divisional director-and does not go any further beyond that without being signed off by our licensed-trade valuer. We have three of them who look at every single P&L account and every single rent bid to ensure that it complies with RICS guidance.
Q174 Chair: Could I ask how many of your BDMs are RICS members?
Ted Tuppen: Very few; that is not their key skill, and because they are not RICS members that is why we have introduced a rigorous and-I have to say-expensive process to ensure that every single P&L account, every single rent bid, is reviewed by our licensed-trade valuers, one of whom is known to you, Rob May, and the two others who work with him are also RICS-qualified specialists, and their sole job within the organisation is to-
Q175 Chair: Can I just intervene? Rob May declined the opportunity to come and be interviewed by us. Did you tell him not to?
Ted Tuppen: Perhaps I could put the record straight on that. As you know, Rob was initially invited for today, and worked very hard to move his diary so that he could attend. When the dates were changed around-nothing to do with Rob-he was then given relatively short notice to appear on the 30th. I am afraid-and he was disappointed not to be here-that he had a prebooked engagement that was in fact a family holiday that meant that he was not able to be here.
Q176 Chair: We changed the date so that Brigid Simmonds could attend . That is the reason .
Brigid Simmonds: I think it was so Neil Robertson could attend.
Ted Tuppen: I honestly do not think that you can even imply any wrongdoing by Rob.
Q177 Chair: Can we get back to what is the central issue, and that is the level of training and RICS accreditation if you like amongst your RMs.
Ted Tuppen: I am very happy indeed. As I say, every single rent bid, every single P&L account is reviewed and signed off by a fully qualified licensed trade valuer.
Q178 Chair: RICS accredited?
Ted Tuppen: RICS accredited, fully qualified, chartered surveyor members of RICS. Every single agreement is subject to that stress. That same group of people run regular training courses, workshops for our BDMs, they visit every divisional business unit-which is 400 or 500 pubs-every six weeks to bring people up to date with any latest developments that they feel are necessary, and during that period they conduct workshops where necessary. I am very happy to share with you the detailed training programme that we put in place. We do honestly take this very seriously.
Q179 Mr Binley: I just wonder when you put this wonderful, all-embracing scheme into effect, Mr Tuppen?
Ted Tuppen: As I say, we have been Investors in People champion for a couple of years.
Q180 Mr Binley: When I ask you a specific question, if you could give me the specific answer, because I find your answers really quite prevaricating. When specifically did you put this particular system you are talking about into effect? It is a date: when?
Ted Tuppen: September 2010, just before the RICS guidance came out in November.
Q181 Mr Binley: We have that, thank you very much. Then why do so many of your tenants not believe that you are abiding by the code, that you are giving them misleading information, and why don’t you, as the very boss of a company, want to get down there and talk to them and find out what those particular tenants, whom you have had letters from, are saying?
Ted Tuppen: As you will know from previous evidence, I make a commitment to reply to any letter that I receive within 48 hours, and I do not think you will find any evidence that I have not done that.
Mr Binley: No, that was not the question Mr Tuppen
Ted Tuppen: My reply, if you will let me finish, is that clearly this is a detailed case, and I undertake to have it properly investigated, and I will make sure that the outcome of that investigation is thorough.
Q182 Mr Binley: I believe that you are prevaricating because you want to put off further questions, so let’s get to the point. The point I asked was why have you not talked to those tenants who are, many of them, distraught, a number of them whom I have met, many of them sunk their whole life savings into a pub on false information, and yet you have not even gone to talk to them. Why is that? I would do in my company.
Ted Tuppen: You have just made a claim that they have gone into their pub based on false information.
Q183 Mr Binley: I have seen the information. I am sensible enough to know that. Let’s take what I believe as being the case at this moment and answer the question why you have not talked to those tenants.
Ted Tuppen: What I would like to see is the evidence that you have that I have-
Q184 Mr Binley: I will show you the evidence: why have you not talked to the tenants?
Ted Tuppen: I have talked to tenants.
Mr Binley: They are telling me you have not.
Chair: Okay, I do not want to-
Q185 Mr Binley: We will go on. I think the prevarication here is becoming clearer and clearer. We also heard that your chief rent controller is a member of RICS, and therefore everybody who works for him should be following RICS guidance. You know that, don’t you? And yet many of your BDMs who are not members are not following RICS guidance. Is there a risk that you could be struck off RICS if it is the case that your BDMs are not following that RICS guidance?
Ted Tuppen: You perhaps did not hear my last answer, which is that every single profit and loss account and every single rent bid is reviewed and signed off by a RICS-qualified licensed trade valuer.
Q186 Mr Binley: That is not the question I asked. I said to you, and you admitted, that your BDMs were not members of RICS, many of them are not knowledgeable in rent and they are doing the rent negotiations. The fact that somebody signs them off up the line without having a personal contact with your tenant does not answer the question. It is the BDMs that have the contact with the tenant; they are not members of RICS; they are not following the guidance. Does that disturb you?
Ted Tuppen: Not in the least.
Mr Binley: Well it ought to, Sir . I t ought to.
Ted Tuppen: The job of the BDM-
Mr Binley: It ought to.
Ted Tuppen: -is many and varied, and it is the importance of RICS that means we will not allow a single P&L account, a single rent bid, to be negotiated until it has been fully approved, signed off, by a RICS-qualified chartered surveyor.
Q187 Mr Binley: I think we have the answer.
Ted Tuppen: I think you do have the answer.
Mr Binley: I think I have, Sir.
Q188 Chair: The key to this is: can you sit here and guarantee that every rent agreement you sign off has been arrived at in accordance with RICS guidance?
Ted Tuppen: Yes.
Chair: You can. We have had contrary evidence from Garry Mallen; you have effectively repudiated that. We will obviously make an assessment of that when we come to our conclusions.
Q189 Ian Murray: Mr Tuppen, you gave us a very useful example earlier on of a tenant who had gone into a property based on a business plan at various levels. What would happen with that rent at £51,000 that has been reduced to £45,000? Could you have that rent independently tested for us to see if that would be an adequate rent to charge on that turnover, given the current market?
Ted Tuppen: That is one of the great benefits of the process we have been through over the last few years. For that rent to be tested until the introduction of PIRRS might have cost, say, £20,000 through arbitration. As an example of just how carefully the industry has listened, and indeed how many benefits this Committee has brought to the industry as a whole, we now have PIRRS. The rent can be challenged and will be adjudicated on by an independent assessor. We believe currently-because we are in negotiation-that the correct rent for that pub should reduce from £51,000 to £45,000.
Chair: We will be talking about mediation later, and this particular area.
Q190 Mr Ward: We have had some evidence about the updating of new leases automatically for RPI. Is that common practice, and how does that fit in with this independent assessment that has allegedly been carried out on tenancy agreements?
Ted Tuppen: Would you like me to answer? I have a very quick answer. RPI is not new. 62% of our agreements currently have RPI clauses. Back in 2008 56% of them had RPI clauses. RPI indexation has been around the industry for a very long time.
Q191 Mr Ward: It was really in response to your comment about "sharing the pain", that was all, and if the RPI is simply one element in looking at a rent, I just wondered how that fitted in with an automatic up-rating because of RPI.
Ted Tuppen: Where the automatic up-rating is appropriate then it works, and I think the majority of tenants rather like that process as opposed to a five-yearly rent review. As I said earlier, our actual rents charged have fallen by 10% over the last two years, and our discounts given to tenants have increased by 50% over the last two years. The average discount we used to give was £42 a barrel; the average is now £63. Where a pub is working, where a pub is successful despite the very difficult environment, the RPI may well be appropriate, and of course it can go down as well as up.
Q192 Mr Ward: Just one other point, is it Ian Dyson who is currently the chief exec?
Chair: David, I really need to bring in Simon.
Mr Ward: Is that true? Is it Ian Dyson who is currently chief executive at Punch? I just have a question later on on that.
Q193 Simon Kirby: To Enterprise Inns: you mentioned the Pubs Independent Rent Review Scheme. As far as I understand, of the 27 cases, 21 to date have been Enterprise Inn lessees. Why is that, and is that a positive or a negative thing for your company?
Ted Tuppen: I think it is really positive, and the reason is that since October 2010 we have conducted 497 rent reviews. Five have been settled through PIRRS, and four have been settled at arbitration. I think following the spirit of the code, when we enter a negotiation, we, perhaps more than any other company, make it very clear to our tenant that if this is not working they have a very cheap route through PIRRS, a well respected cheap route, that they can follow, and whereas it could be interpreted that we are the most difficult, I would like to interpret it, and believe it to be true, that we are the most open. If I could talk you through the 21 referrals-
Chair: No, please do not; we have not got time for that.
Q194 Simon Kirby: Okay, thank you for that. If I may move on, I will ask you, but it could apply to everyone I suppose: do you accept fully the principle that a tied tenant should be no worse off than free-of-tie tenant?
Ted Tuppen: I am happy to have first go at that. That is not referred to anywhere in the RICS guidance; in fact, on the contrary, the RICS guidance said that comparisons between tied tenants and free-of-tie tenants are about as relevant as between tied tenants and fish-and-chip shops. They are different businesses, and the comparisons should be made between businesses of a similar type. The only comfort I can give to those who seek that principle is that, after a detailed review twice by the OFT following the CAMRA supercomplaint, the OFT concluded that, based on the evidence that they had looked at, they saw that there happened to be no material difference. But the RICS guidance makes no reference to tied tenants being no worse off, as far as I can see.
Q195 Simon Kirby: And you see no reason why it should, in answer to my question?
Ted Tuppen: I honestly believe they are very different things. We are negotiating free-of-tie deals with people as we speak, and in an open market, if somebody wants to take a pub from us free of tie, they will have a business plan, they will have a rent that they believe is correct and they will make that rent bid. That is in that particular market. They will have a particular business that they feel is most suited to being free of tie. We are also negotiating tied deals with a wide range of different rental and discount structures, and the same people are making those decisions. If they want the pub and they believe their business plan supports a certain structure, then it is up to them to make their rent bid. I think the open market works very well, and again, I believe the torch that the Committee has shone into our industry over the last few years has led to far greater competition, so I am fighting very hard to get the best tenants.
Q196 Chair: So you think everything we have done has been helpful to you?
Ted Tuppen: Some of the things you have done to me personally might not have been particularly helpful, but I think the issues raised by the Committee have moved the industry forward. I do think we now have an industry where there is greater choice and competition.
Q197 Chair: Okay, I can assure you that we will be continuing this process. Simon, have you finished your question?
Roger Whiteside: Could I try to add something to the point about the free-of-tie and tied-tenant comparison? It is my understanding that the RICS panel that were formed to come up with the revised guidance tackled that question specifically, and have provided their answer to that in the guidance. What we have all done is committed to executing our rent valuations following that guidance, and therefore-to the extent that the answers provided are there, obviously-that is what we will seek to do.
Q198 Simon Kirby: If I may press you on that, I am not sure if that is a very clear answer or not, because if I approach Mr Tuppen with two separate business plans, one for a tied lease and one for a free-of-tie lease, as a business you are going to assess which is more beneficial to you, because it is an agreement between the two parties and you will have a view whatever my view is. Presumably you are only going to go down the free-of-tie route if it is financially advantageous for you to do so. I am saying that there is a direct comparison between the two concepts, whether it appears in the guidance or not.
Roger Whiteside: The question is not presented in that way though.
Q199 Simon Kirby: No, but what I am trying to establish is, if I am an individual and I want to run a pub, should my outgoings be more for a tied lease or a free-of-tie lease? I am not sure whether they should.
Ted Tuppen: I suppose my answer will be that you will have your business plan. There are an infinite number of models under which a pub can be run, be it wet led, food led, accommodation, high quality, average quality, whatever-different pricing structures. Every business plan will be the same. I would like to make a point here: we are all trying to ensure that the tenant does not make the mistakes that have been evident in some cases. At the end of this process we insist, before anyone can take a lease with Enterprise Inns, that their business plan and cash flows have to be signed off by a professionally qualified trade accountant, and we provide a list of names from which they can choose. If they choose someone from that list who we are currently trying to get accredited, we even pay for that process. Business plans are very varied, and with the complexity of deals that are now on offer it is vital that tenants have the best advice, and we made a commitment some time ago that we would pay for that advice to the extent now that it is impossible to get an agreement with Enterprise-
Chair: We are making hard work of this. I accept that these business plans are signed off; the issue is really who is the major beneficiary: the pubco or the tenant? Brian has just got an example, and then I will come back to you Simon.
Q200 Mr Binley: Sorry Simon. I want to get this on the record, and it is from a lady who owns the Royal Oak at Blisworth, and you may look into it. "A little over three years ago my husband and I bought the Royal Oak in Northampton. I was a nurse; he was a soldier. We did not know much about the pub trade, but we were keen to learn. The pub is owned by Enterprise Inns. The rents were £48,000 a year, which did seem high, but the turnover figures that were given, rubberstamped by Enterprise in our business plan, showed that with a lot of graft the business would work. It did not take long to realise we had been conned into taking on an impossible liability." That was three years ago. That sort of story-and this is a soldier and a nurse, people who you would think were good, upright people, and I know they are-
Chair: Okay Brian, I think we understand the message.
Mr Binley: Just one question: there are many more like it, and I just want you to know, Mr Tuppen, what sort of suffering is going on in your trade, in your pubs.
Ted Tuppen: Do I have a right to reply to that?
Q201 Chair: Yes, I will give you a right to reply.
Ted Tuppen: Thank you very much. I know the case in point. I am acutely aware of that case, and I find it as difficult as you do to understand things like that. You will also know that the couple concerned-for whom I have sympathy, please believe me-paid the outgoing tenant a premium of £70,000, of their own free choice, to take on that pub business. We did not con them. They took on that business on assignment.
Chair: The point is that the processes that you have obviously do not always work to even a reasonable satisfaction of the tenant. I do not want to get too bogged down into this one particular issue. That is the key point.
Q202 Simon Kirby: Yes, just a question: if, as I believe to be correct, that your earnings, Mr Tuppen, last year were some £1,223,000, can you explain to me how everyone is "sharing the pain", to use your expression.
Ted Tuppen: Thank you for raising that. You will know that my salary is part of that, and my salary has been frozen for the last three years, and will indeed be frozen for the coming year. The balance of that was my bonus for last year, which in the opinion of the board and my shareholders, who all voted in favour of it, amounted to quite a lot of money. I accept that I am very fortunate to earn that amount, and I hope it will reassure you that I am a UK resident and I pay full tax under the PAYE system.
Chair: We don’t want to go into tax. Can I now bring in David Ward on the RICS national database and the ALMR benchmarking?
Q203 Mr Ward: One of the ways of dealing with many of the issues that we have been discussing is to have comparability, and it was mentioned, I think, last week that the pubco has all the detail of the comparable evidence and the tenant has access to none. A way of dealing with this was through the national data. We were told by ALMR that attempts had been made to engage with BBPA to develop the benchmarking survey into a genuine industry database, along the lines recommended by the Committee. These have been fruitless. I was just wondering what your comments were on that.
Brigid Simmonds: I am very happy to comment there. I think there are two parts to this in terms of a database. First of all, RICS are talking about rents and average rents across the country. I have talked to the RICS since they came in front of this Committee.
Q204 Mr Ward: And business costs?
Brigid Simmonds: And business costs, but average rents is where the RICS would be coming from. They have tried to engage with a commercial supplier. It has proved to be too expensive and has not worked out. All our members-and we have discussed this-would be very happy to contribute towards their business research unit in producing such data and in bands and in the way the Committee would like to do it.
In the case of ALMR and some additional information, that is purely about costs. The issue with ALMR data is much of it is about managed houses. We have tried, but it is obviously not the actual tenants that are members of the BBPA, to get more information from actual tenants. We are quite close to having information. We will very clearly share that with ALMR. We talk to them and work with them on a number of other areas, and indeed all our members recommend to tenants who take on their pubs that they should look at the ALMR database. There is a bit more work to do, and I am sorry we have not been able to produce that information to you as yet, but we are certainly working on it.
Q205 Mr Ward: There has been a suggestion that pub companies were unhappy about releasing presumably commercially sensitive information. Has that been an issue?
Brigid Simmonds: As I have already said, I think-the companies can answer for themselves-they are very happy to share with the RICS information on rents if that would make it easier. One of the difficulties, of course, is that so many pubs are run on different bases. You can be food led, wet led, so getting actual averages is difficult.
Roger Whiteside: I personally took part in two or three meetings with RICS and the third party they had engaged to try to make progress with this, and we quite quickly hit difficulties because of the complexities involved and the varying styles of agreement on offer. Therefore to try to come up with a realistic database that would be of use to qualified surveyors out in the field in coming up with accurate rent evaluations proved quite difficult. That does not mean that we have given up, and we are currently working with the RICS business research unit-I think that is what they call themselves-to create a simple database that will reflect-in the way I think the Committee described last week-simple bandings, if you like, of types of discount alongside rent. Because of the complexities, you cannot use it in isolation; you will need to be a fully qualified individual to be able to interpret that data alongside the other, normal comparables you would typically use in coming up with a rent evaluation. But I think it could prove helpful and we are willing to cooperate. I think we can make progress with it; we failed at the first attempt.
Q206 Mr Ward: What is the motivation then? Presumably the purpose of this would be for the benefit of the lessees.
Roger Whiteside: No, we see it as a benefit to the market. In other words, we want the market to operate effectively. It is the market that determines rent, and therefore if the market has better information it will help the market to work more efficiently. As a result of that, we will end up with accurate rents.
Q207 Mr Ward: But it is unlikely that this comparability that will result from this survey will result in increased rents.
Roger Whiteside: It could do; it depends on how the market moves. If the market strengthens, then obviously rents will rise, won’t they? Over the last three years, as a consequence of the smoking ban first and then, subsequently, the recession, the market has quite definitely fallen. As a result you have heard Ted already report on falling rents in his business. In our business, rents have fallen 17% over the last four years. I am hoping one day those rents will begin to stabilise, but right now the market remains very difficult and rents continue to fall.
Q208 Mr Ward: I just have one more for the BBPA, because we heard from the ALMR that the BBPA had refused to work with the benchmarking survey. Why would they make that comment?
Brigid Simmonds: We have not refused to work with the benchmarking survey. The ALMR have a well-established survey. I think this is the third year that they have produced their survey. It is mainly from their members, although I know Punch contributes to it, but it is mainly about managed information. We are very happy to work with them. I apologise to the Committee that we have not made as much progress as we should have done on getting the information about costs that are based on the tenanted lease model, but we are very happy to work with them going forward.
Q209 Mr Ward: So they are simply wrong?
Brigid Simmonds: No; we are not refusing to work with them on it, and every code recommends that would-be lessees look at the ALMR benchmarking. There is no problem about that.
Q210 Chair: Can I get absolute clarity on this? ALMR effectively says that you refused to work with them on it. RICS said it was difficult to get the data necessary to do this benchmarking exercise. My interpretation of what you have said is that in fact you are willing to get this exercise and publish it in a banded form. Is my interpretation correct, and if so, when will you publish it?
Brigid Simmonds: I think we are talking about two different things. We are willing to work with RICS to produce rent information, which could be published in a banded form. That is not something the BBPA could do. In terms of costs that would help with the ALMR survey, which is what their survey is about, we have some information on that, we will share it with the ALMR, and yes, we will publish it.
Q211 Chair: Have you any idea when you could do that?
Brigid Simmonds: I am being told that we have a meeting already arranged with Kate Nicholls and we will do it in the next few months.
Q212 Dan Jarvis: My question is to Ms Simmonds. The Committee asked BII to provide details of all agreements and discounts available, and they have not done this. Can I ask you how easy you think it would be for your members to provide this detail?
Brigid Simmonds: I think it would be possible. I think, as BII said last week, it is hugely complicated, because-and you have heard from both Ted and Roger-we have such a range of different agreements available, and it is everything from franchise to free-of-tie pricing. You would have to get that range. It would not be impossible. I do not know if any of my colleagues would like to add to that?
Roger Whiteside: We would certainly be willing to provide it, but I would not envy the person whose job it is to pull that together and keep it up to date, because we are in competition, so we are constantly changing our agreements. To be honest with you, as a result of the difficulties in the marketplace over the past few years, the agreements have exploded in variety, and we have all kinds of agreements out there, varying types, seeking to provide genuine transparent choices to new entrants to the business looking to run a pub successfully. It is not impossible, but noone has put their hand up to do it because of the complexity involved.
Q213 Dan Jarvis: But in principle you would have no reason why not?
Roger Whiteside: Absolutely; it would be another window for us to advertise our wares. Obviously ours are available on our website.
Q214 Mr Binley: Can I ask you a supplementary question there? Have you ever been asked to help compile such a database?
Roger Whiteside: No, not to my knowledge.
Ted Tuppen: I share everyone’s willingness to take part in this. I do genuinely believe that there are practical difficulties. We will go as far as anyone asks us to go to provide that information. I just wonder whether the Committee might not consider what we do, which is to accept that any sort of database is going to be complex and difficult to understand for the average publican taking on a pub.
Q215 Chair: But surely it is your job to ensure that a database is presented to a wouldbe publican in a form that is readily understandable.
Ted Tuppen: This is where I think our approach of insisting that an incoming tenant takes professional advice should perhaps be something that the Committee pursues, and, in our own case, we already contribute to the cost of that. I am concerned that the database is not an end in itself; there will still be chances for people to misunderstand it because it will be horribly complex. If that database is available and is used by a professional, fully trained trade accountant then I think it moves from being data to being useful information, and I make this absolute commitment from Enterprise that we will always insist that everyone has their business plan reviewed by a trade accountant and we will continue to contribute towards that cost in a meaningful way.
Q216 Dan Jarvis: Okay, thank you. Ms Simmonds, can I come back to you, please? On average, how much of the discount that the pub company receives from the brewery gets passed on to the lessee? Is it shared 50/50 as it was traditionally, and if not, what is the current share?
Brigid Simmonds: I have to be honest, I could not possibly answer that question. It is up to individual companies competing among themselves how much discount to pass on. I would have to ask my colleagues to answer that.
Alistair Darby: I do not have the figure. Equally, that is a commercially confidential matter, because in the end we are not just a pub company. We own breweries, we own managed houses, and we use our buying scale to get good terms from our suppliers, and we do our very best to share those good terms with our tenants. For example, in the spring of this year we enacted a significantly below inflation price increase, 1% weighted average in a market where RPI was running at 4.5%. That is us sharing our buying power with our tenants. That is a source of competitive advantage, and it is in my interest to not reveal how much of my buying power I am sharing with my tenants, because I consider that to be a point of attraction for a tenant to take a pub with Marston’s pub company versus my competitors. I think there is also quite a risk here in that we need to be very careful about to the extent to which transparency of pricing, all the way through from the point of the pub company purchasing, is shared, because there is risk here that we are going to be accused of price collusion. Under advice, I think we just need to be quite careful on this one, because this is a very dangerous area, and I am very keen that I maintain my competitive advantage.
Q217 Mr Binley: Excuse me, Mr Chairman. This was asked of you a year ago. Have you written to us to make that particular point? Every pub was given a year before this second review to work the new code. That new code had within it a recommendation that there was a database of this kind.
Alistair Darby: Sorry, a database of what kind, Mr Binley?
Q218 Mr Binley: Of a banded kind, giving an idea of where costs lay and how the business worked to potentially incoming tenants. That was said a year ago.
Alistair Darby: Mr Binley, our code-
Q219 Mr Binley: No, let me ask the question. Have you written to us in the interceding year to tell us your concerns?
Alistair Darby: The concern about pricing specifically and sharing of-
Q220 Mr Binley: You mean discounts?
Alistair Darby: Discounts. The concern regarding that particular issue-because there are a number of issues here-has been very clearly laid out, and indeed we made it very clear last year when we presented that, for the BBPA, the issue of consolidating price information was impossible because it contravened competition law, and we were very clear on that. As far as I am aware, competition law has not changed in the prevailing year. As far as costs are concerned, the benchmarking, our code, just as I am sure everybody else’s does, makes very clear that there are benchmarking surveys available, of which in our code we detail the principal one that is available at the present time is the ALMR benchmarking code, and people should take advantage of that. We also indicate in our code-as I am sure my colleagues do-that if further benchmarking surveys become available, we will draw those to the attention of our tenants in order for them to make a meaningful decision on their pub.
What I would say, Mr Binley, is the key test for all of us, if these codes are really working, is that no tenant should sign up to an agreement and after the event say, "I did not enter this agreement eyes wide open." If they go in eyes wide open, then the codes have achieved what they are supposed to achieve, and I think enormous progress has been made on that front.
Q221 Mr Binley: Can I welcome that comment, and can I say that I have never had one comment from a Marston’s tenant, which might please you. I still go back to saying that you did raise the point about business confidentiality, and I understand that point totally. Banding would deal with that, so that we are talking about a mean, an average. I just wonder whether you have come back to us on that basis since the initial code was issued about a year ago.
Alistair Darby: Every single rent proposal we put to a tenant lays out, side by side, absolute details of every single option that is available to them, including behind it a price list that shows the prevailing beer prices available on every single agreement. We are absolutely transparent about the combination between rent, on each agreement, and the price that you can provide beer, as laid out in the code. As far as I am concerned we are meeting that information transparency.
What I have not come back to you on-because I was not aware that it was needed-is to further confirm that we are going to share the full discount stream information with you, because I consider that to be both commercially sensitive and also, under advice, puts me in an extremely difficult legal position, because essentially if I was to put the discounts we are earning into the public domain: one, I would be releasing exceedingly confidential company information, which I think we have spent a lot of time working on and put a lot of intellectual capital into-
Chair: I think we have got the message.
Alistair Darby: I think this is important, because this is a competition issue, and I do not want to be in a position where we get a letter from the OFT suggesting that we have embarked upon dangerous ground.
Q222 Mr Binley: I think we buy that. Could you send us the way you lay your stuff out? I think that would be very useful.
Alistair Darby: With pleasure, and it has been available through BII.
Mr Binley: And if everybody else could do the same that would give us an overview of where we are in this respect.
Chair: C a n I come back to Dan Jarvis?
Q223 Dan Jarvis: Thank you Chair, one final quick question to Mr Wells; you have been sitting there very patiently. Can I ask you whether Punch and Enterprise pubs sell your beer? Can I also ask you how easy is it for a small brewer to get on the pubco supply list, and if you do get on the list, how much discount you have to give to the companies?
Paul Wells: The answer is yes, we do sell our beer to Punch and Enterprise, and like a lot of the family brewers we are varyingly active in the free trade as well as the pubs that we own. Not all family brewers are as active in brand building as others. Just to quickly say, in terms of pub operations, our business model is rather different to the lease model that you have heard a lot about. What we tend to do is operate brewery tenancy agreements-eight out of 10 agreements in the IFBB are those-and the rest are largely managed, and one or two lease pubs have been purchased over the years. In our case, when we have bought a lease pub we have taken out the RPI clause and all that sort of thing. The big difference is that we maintain and insure and we improve our properties so they are not FRI leases, and we want to make sure that landlord and tenant protection is offered to those tenancies.
Turning to the free trade, it is a difficult market. It takes years and years to build up a presence. The job in manufacturing at the moment is not easy: utility costs are climbing; raw materials are climbing. You will hear a lot later on this year about the barley harvest having been a catastrophe, particularly in East Anglia -
Chair: Would you bring your comments to a - ?
Paul Wells: It is a competitive world, but the pub companies have offered access to smaller brewers, and we have seen a lot more microbrewers growing up. They get the benefit of progressive beer duty, which gives them an extra competitive edge over our smaller breweries, but in general there is better choice for consumers than we have had before.
Chair: Can I bring in Rebecca Harris on mediation?
Q224 Rebecca Harris: Have any of you yet experienced the BII mediation service, and what views do you have on it?
Roger Whiteside: It is my understanding that the service has just opened and is just beginning to create a formal channel for mediation to take place. There have always been attempts in the sector to have informal mediation, where individuals seek to bridge the gap between one disputing licensee and the pub company, and we welcome the fact that the BII is seeking to develop a more formalised channel for licensees to be able to appeal to a higher authority than ultimately me, because it comes to me in the end in our business. Once they have gone up the line they can appeal to me, and if they are still not satisfied with my response then there comes a place they can go outside. That would be very welcome, and certainly I hope it develops and we are able to take advantage of it.
Ted Tuppen: I completely agree. I think BII have done an outstanding job with PIRRS, both the implementation of it and the process since then, and I think it has made a huge difference for good within our industry. I think a similar mediation service can only be good for us, and we wholeheartedly support it.
Q225 Rebecca Harris: And you accept their proposals for a more formal service?
Ted Tuppen: Absolutely.
Simon Longbottom: I think we heard Phil Dixon last week talk about a particular Greene King case, so we are not complacent. We have not had breaches to date, but we have had one case where Phil helped us in a situation where a relationship had broken down. The service worked excellently, so I would support it fully.
Q226 Rebecca Harris: And how genuinely independent would you say it was as a mediation service?
Alistair Darby: We have been through one mediation with BII, and I would say it is very independent, and we fully expect, when the BII get involved, to get scrutinised very deeply and very pressingly. Mr Binley, you have good competition in Mr Dixon.
Mr Binley: I am delighted.
Brigid Simmonds: I think the Committee, having heard from BII and Phil Dixon, can have no doubt about how committed they are to raising the standards of the industry, and yes, of course some of their members are funded by the industry, but I think in the mediation service they act very independently.
Roger Whiteside: Some of this is supported, though. The FLVA, for example, often involve themselves in trying to intermediate between the pub companies and the licensees, and we have a longstanding and good relationship with them in seeking to make progress in dispute cases.
Q227 Rebecca Harris: The Committee also heard last week from Mr Robinson, who said that he felt that some of the business development managers used "an overly muscular approach" with the lessees. Would any of you accept that criticism, and what could be done to prevent that?
Simon Longbottom: I would simply say we have 34 BDMs in the Greene King business. We have a very flat structure in terms of the operations directors that manage them and performance manage them. We are very proud of our training, which we have written to you separately about: twice-yearly appraisals, several oneonone meetings with which to manage the BDM competence. In addition, we have also written about the BDM training that we do, which now leads to a diploma in multisite retailing, where we are working with Birmingham City University, that we are immensely proud of. We think that is the top qualification a BDM could gain in our sector. We take that very seriously, and we look to improve our BDMs. We have recently made a couple of changes in our team to demonstrate again that we are not complacent about the ability levels.
Chair: I have David Ward and then Simon Kirby to come in with quick questions, and then I will conclude.
Q228 Mr Ward: The Secretary of State recently referred to pubcos as being on probation, and if you look at the inquiry a year or so ago, when it was seeking some evidence of the genuinely free-of-tie option, the open market review and guest beer being introduced and so on, how would you score yourself out of 10? Of course the probationary period would have led, if unsatisfactorily, to legislation being involved.
Ted Tuppen: I would not want to give myself a score, because I know that I have not quite reached 10 yet.
Chair: Just give yourself a number, will you, so that we can get on.
Ted Tuppen: Roger, I will pass over to you.
Roger Whiteside: Thanks Tim. We put it at the heart of business change programme. We have had a change of leadership at Punch. We think we are making good progress and we are probably seven out of 10.
Q229 Mr Ward: Just in terms of the change of leadership, it was Ian Dyson who I believe carried out a review and said that the business is not sustainable and requires structural change.
Roger Whiteside: We have announced as a result of a strategic review in March, which we have formalised this morning in fact, that we believe the business needs to change its structure, and as a consequence of that are demerging the business, separating the managed business from the leased and tenanted arm, and I will continue as the Chief Executive of the leased and tenanted arm, and the separate managed business-provided we get shareholder approval-will be a separate listed business as of the end of this month.
Brigid Simmonds: At the end of the day we have improved transparency, a positive force. We are on a journey, but we are certainly not there yet.
Q230 Simon Kirby: Isn’t that demerging of the business an admission that the business model that was perhaps applicable 10 or 20 years ago-and the asset values that underlie your big businesses’ business model, providing the cement that holds it all together-has changed so much that it is no longer sustainable?
Roger Whiteside: I should not answer that until the company demerges.
Ted Tuppen: We are not doing anything like that.
Q231 Simon Kirby: No, but your assets, for instance-and you have lots of borrowing based on that asset valuation-surely, because of the change in business environment and pubs finding it more difficult on an individual basis to pay their rent, and rents in some cases going down not up, mean that your business model, with its large borrowing, is not sustainable?
Ted Tuppen: Would you like me to answer that first?
Simon Kirby: I would like both of you to answer that, please.
Ted Tuppen: Let me go first. I believe that our business model has worked very well for the benefit of the industry over the past four years. Despite all of the difficulties faced since the smoking ban-the 35% increase in beer duty, 23% increase in utility cost-we are still very much in existence. We have an amount of debt that is completely under control and sustainable. The average interest cost per pub has reduced over the last two or three years. We have not had to go to our shareholders for a rights issue. We will not have to go to our bond holders or our bankers for any restructuring. We have a very sound business, despite the fact-and I keep trying to say this-that our rents have come down indeed by 10% over the last two years.
Chair: You have said it before. I think it is understood.
Ted Tuppen: I do feel that we have shared the pain. We have taken substantial drop in our profitability; we have written 10%, roughly, off the-
Chair: I think we are really repeating what was said before.
Ted Tuppen: And we think the business is still sustainable.
Roger Whiteside: Did you want an answer from Punch?
Q232 Chair: Yes please.
Roger Whiteside: Clearly we are a completely different business from Enterprise, in that we mix two business models. We have an arm that is fully managed, and we have an arm that is like Enterprise: leased and tenanted. The two businesses are very strong and profitable businesses. They have been caught out in these past three years because of a recession that nobody predicted. As a result of that, when we built the business we took out a mortgage to build that business that is now too high, and the businesses are separating in order to focus management teams on driving value for all stakeholders as separate businesses because they can be best executed in that way.
Q233 Simon Kirby: That is a partial yes, then.
Roger Whiteside: That is not a partial yes. These are very strong businesses.
Simon Kirby: Thank you.
Q234 Chair: Just before we conclude, I shall pick up on comments arising from my initial questions to Brigid. You did say that you sent us information; yes you did, and we have published it. The problem was it did not convey any reasons why there were slippages.
Brigid Simmonds: I apologise if that is the case. I hope that we have explained today why we are in that position. I do think at the end of this process, we are on a journey and we are making progress, and I do think that if a number of these businesses had been shops they would have closed much before this sort of stage that we are in now, and that the support that has been given-£265 million in 2010-to leased and tenanted pubs is significant.
Q235 Chair: Okay, can I assure you that I am delighted that you think that progress has been made, and I can assure you that this report will continue that progress. I am conscious I had to, shall we say, cut one or two people off in order to keep within the timescale available, so I would emphasise to you that, if you feel that you have additional information that you would like to give us in response to any of the questions that we have asked you to which you have not had the opportunity to put the full case, we would be very willing to receive that information in writing. It is not the purpose of the Committee to prevent anybody from developing a case that they have in response to a question. Similarly, if you feel there is evidence that you have not been able to bring out from the questions we have asked you, please feel free to submit that in written form as well. Thank you very much.
Alistair Darby: Mr Chairman, just for clarification, when is the deadline for you to receive that information?
Chair: End of July.
Examination of Witnesses
Witnesses: Kate Nicholls, Secretary, Independent Pub Confederation, Mike Benner, Independent Pub Confederation, Simon Clarke, Independent Pub Confederation, and Karl Harrison, Independent Pub Confederation, gave evidence.
Q236 Chair: Can I welcome you to this session? I apologise for being a little late , but I am sure you will appreciate that it was very necessary to cover all the areas that we did. I will repeat what I have said to other panel s: i f we ask a question and you feel that it has been adequately answered by the person who first steps in, please do not feel obliged to repeat it because we obviously have time constraints . Obviously if you feel you need to add something or you need to contradict something, then we would welcome that participation. Can I just start for transcription purposes by invit ing you to introduce yourselves and the organisation you represent?
Karl Harrison: My name is Karl Harrison. I am a publican in London with three premises, two of which are free of tie and one of which is tied to Enterprise Inns. I am a member of the Fair Pint campaign, and also a member of the BIIBAS accreditation committee.
Kate Nicholls: My name is Kate Nicholls. I act as secretary to the Independent Pub Confederation, which is an umbrella grouping that brings together the thousands of small businesses, microbrewers, individual lessees and consumers who are directly affected by the Committee’s deliberations.
Simon Clarke: My name is Simon Clarke. I am a member of the Fair Pint Campaign. I sit on the IPC steering committee. I am a publican of a tied house and a chartered surveyor. I sat on the RICS panel that was involved in rewriting the rental guidance. I have sat in on a mediation with the BII. I offered oral evidence to the two previous Committees, and I am grateful to be offered the opportunity again today.
Mike Benner: I am Mike Benner, Chief Executive of CAMRA, the Campaign for Real Ale. We are a not-for-profit independent consumer group with 125,000 members and growing, and we are a founder member of the IPC.
Q237 Chair: Thanks very much. I will start off. Are the new codes an improvement on the old ones? Who would like to lead on that?
Kate Nicholls: I can take that and lead off on that one. I think if they were being fully implemented and complied with then they would be a step towards improving levels of transparency and clarity of information for new entrants, but if we are asking whether they deliver meaningful reform of the commercial relationship, then no they do not. The code should be a means to an end; it is not an end in itself. I think I was quite heartened to hear Alistair say that the acid test of a code is if a lessee never again says after the event that they did not know what they were signing up to, and I think that is a direct quote of what he also said to your predecessor Committee. We are not there yet. We have 20% of new entrants still signing an agreement when they have not received a shadow P&L, 50% of existing lessees making commercial decisions without a shadow P&L and 24% of new entrants to the industry not understanding the terms of the lease. That is no improvement on the survey that you had from Morgan Stanley in 2004.
Q238 Chair: In summary, and I do not wish to put words into your mouth, would you say that the code has not been very effective?
Kate Nicholls: If it had been fully implemented and complied with it could have been effective, but without full implementation and effective compliance, then no.
Q239 Chair: You made great play about the importance of the code being statutory. There are downsides to most things-the socalled unintended consequences. Do you see any potential ones in a code being made statutory?
Karl Harrison: We have had some stark examples this week of the failure of selfregulation in other sectors, and selfregulation in the pub sector at the moment is not working. At the moment we have a weak code of practice written by the people that the code is meant to apply to and enforced in a weak way, and as we have heard today from Ms Simmonds and others, there really is no sanction. The only sanction that was offered was maybe you will not be a member of the BBPA in the future, and, as Simon Longbottom confirmed, that did not seem to be too much of a problem for Greene King, and it seems to me to be a very weak sanction indeed. The only way to really deliver real reform and to create a market that operates freely and properly, and not the dysfunctional one that we have, is to get this code independent and on a statutory footing and with proper enforcement.
Mike Benner: If I can add to that, I think that regulation is there to protect people, and we are still at a stage when people need to be protected from what is going on in this marketplace. We have already heard how the code is ineffective, how it is not being delivered and enforced properly, and the only next step now is to put it on a statutory footing, and that will protect people.
Q240 Chair: Could I just come back to Karl Harrison’s comments? Greene King is certainly not a member of BBPA, but is not the issue that is damaging to their reputation whether a company subscribes to a code or not, rather than membership of the BBPA?
Karl Harrison: The framework code of practice that is allegedly in operation was put together by an organisation that a lot of tenants have never heard of anyway, to be honest. The British Beer and Pub Association do not represent pubs anyway; it represents property companies and brewers, largely. A lot of tenants would not have heard who that is and would not attach a great deal of credibility to it. Below that there is a whole raft of codes, each code for each individual company. All we have as a sanction for breaching that, as we have been told today, is that you can no longer be a member of an organisation that perhaps does not have the credibility that it would like to claim it has, and probably is not that well known outside of, perhaps, the political circles where it lobbies and its own members. I do not see that as a sanction at all. These are multi-billion pound companies seeking to generate very substantial amounts of money. They will do that how they see fit. We have a code at the moment that does not deliver a regime that is enforceable, and the BII cannot enforce that at the moment.
Kate Nicholls: Could I just add to that as well? It may well be a credible sanction that you will have a reputational risk if your code is not accredited. That only comes into play if there is the genuine competition that the previous witnesses claimed was happening in the marketplace, but the survey that was commissioned jointly by BBPA and the IPC shows that three-quarters of people taking on a pub are not making a decision about the pub company and whether the pub company has an accredited code of practice, whether it has five breaches, 50 breaches, a clean bill of health. They are just making a decision on the fact that they want that particular pub. There is no competition. So the threat of having accreditation removed is meaningless to the person making the decision to go into the pub; they are choosing that pub.
Q241 Chair: One of the assertions has been this loss of reputation and refusals of potential tenants to go to a company. What in effect you are saying is, because of the lack of comprehension about that and the status of BBPA, that is effectively not a sanction?
Kate Nicholls: Yes; the majority of people, three-quarters of people who are choosing a pub, are choosing the Dog and Duck in the high street. They are not going out there are choosing Punch, Enterprise, Greene King, Shepherd Neame or any of the other pub companies. They are choosing it on the basis that that is the particular pub they wanted, irrespective of who the landlord is.
Q242 Ian Murray: You said in your submission to the Committee that relations between the BBPA and IPC are limited. Can you expand on what you meant by that?
Kate Nicholls: They are not as good as I would like them to be. We have had one formal meeting of the IPC Chairman and the BBPA Chief Executive, and three followup meetings between me and BBPA officials. I think we would really like to have a healthy and robust dialogue with the BBPA, as indeed we have with other bodies-BIIBAS, BII, RICS; we have all had dialogue with them. I think that dialogue is beneficial and it delivers not just a better outcome for lessees but a better outcome for the industry as a whole.
Q243 Ian Murray: In answers to the Chairman’s questions earlier you said that-many people in the panel have said it-the BBPA is not well known, therefore why would tenants use that as a barometer of quality, if you like. One of the organisations I think within the industry that is well known is the BII. I think everyone would recognise that as a more public-facing body that people would recognise. Do you think they have done enough of policing the industry?
Mike Benner: I think there are two points here. The first one is that policing is a strong word. In order to be effective in policing you need to have a code that is strong enough, robust enough and effective enough in the first place. We have not got that, so the job of policing it is a bit difficult in terms of dealing with the meaningful problems. The second one, and I think the BII are first to admit this, is they are not independent-they claim to be impartial but they are not independent-and they do not have the authority or any sanctions at their disposal to deal with any breaches of the code beyond, for example, listing it on a website. I do not think those two things together enable anyone to police anything, and I think by their own admission in the evidence they gave they are more of an umpire than a policeman. This industry does not need an umpire; it needs an effective code that is properly policed.
Simon Clarke: If I could add to that, I think the BII had a fairly difficult start, in that it was a poor beginning when they signed up and supported an inadequate code in the first place. Many of the Committee’s recommendations and Government requirements were missed out of that code: AWP machines, upward-only rent review clauses and free-of-tie options were not included in the code at all, hence one of the reasons that the IPC ended up being formed.
Q244 Chair: Could I just intervene with a point, because earlier I think Kate said in effect the issue was about monitoring and exercise of that code, not the code itself. Is the problem a weak code or is it the enforcement of it?
Simon Clarke: It is a twofold problem. We have a primary issue, and that is effectively the rulebook. If the rulebook is no good, then there is not really a great deal of confidence in the mechanism for enforcing it. It is a double-edged sword. We need the right code and the right way of enforcing it, and at the moment we have neither.
Chair: There does seem to be a difference of view on this.
Karl Harrison: The code that we have was written by the BBPA and its members, and it is signed up to by two organisations, the BII and the FLVA, whose negotiating strategy in doing so seemed to be, "Where do I sign?" There was not enough effort put in to arriving at the right code. The IPC has made sensible suggestions about what ought to be in that code, and one of those is a free-of-tie option with an open-market rent review.
Chair: We will be coming to the free-of-tie option.
Karl Harrison: Keeping on your point, at the moment we have a badly and heavily internally regulated and dysfunctional market where it is burdensome for the tenants, and the proposals we have made move towards a proper, efficient market. This was the vision of your predecessors, and it is a vision that we have shared all the way down the road: that a free and fair market is what we want. The proposals we have made will deliver that.
Kate Nicholls: Can I just clarify my opening remarks? I would hate you to infer from my opening comments that I thought the code was strong enough. I think it could go a lot further. What you asked me was: was it an improvement on what had gone before? The answer to that is: if it was implemented it would be an improvement. Is it good enough? No. Could it go further? Yes.
Q245 Ian Murray: This is really a question for all the members of the panel. Would you be happy in keeping the BII as the police officers, if you like, and if not what organisation should be policing this industry and what sanctions should they have? I think Mike you said that perhaps filing would be a sanction that you would look at. What would be the ultimate sanction? Where should we ultimately go with the proper police officers of this market?
Mike Benner: I think the starting point for this is that it does need to be a strengthened code on a statutory footing. Then of course it would be enforceable through the courts. There are other alternatives to that of course. It was mentioned earlier about there being an adjudicator, so it is possible there could be-and CAMRA has suggested it-an independent ombudsman that could be funded in some way by the industry, perhaps via levies, and of course behind that you would then have to have effective sanctions in terms of commercial penalties and proper ability to enforce its rulings. At the moment we do not have any of that from what I can see.
Q246 Mr Ward: In terms of the adequacy of a code, can I ask the same question I asked earlier on about the period of probation? The criteria were set a year or so ago by the Committee. What is your score out of 10 in this probation period we are currently in?
Kate Nicholls: I can take that first. I will probably be more generous than most of my other colleagues. I would give them a cautious two.
Simon Clarke: I would agree with that.
Karl Harrison: I will stay with one.
Mike Benner: I think if you look at-
Chair: Just give us a number.
Mike Benner: I would go with one.
Q247 Mr Ward: Just to move on to the minimum pricing obligations, there were some discussions last week about the BII putting on its website details of all the pub company agreements: availability on discount levels on beer and so on. Is it possible to do that, and would it be beneficial?
Simon Clarke: Could I just clarify whether the question is related to minimum price purchasing obligations?
Q248 Mr Ward: That is the block , but I am talking about the discounts.
Simon Clarke: From a tenant’s point of view-and we have heard the pubcos speaking earlier and Mr Darby mentioning the issues of competition with the discounts that they can achieve-what I can say is, whilst that information might be very interesting to tenants, what we need to know as tenants is the discount we are likely to get, not so much what they are getting. We need to be able to see that in a clear and concise fashion so that we can compare our situation and genuinely look at the difference between being tied and free of tie. If our rents are going to be set amount and are purportedly lower than the commercial rent free of tie, then we would need to see what the price and discounts were likely to be. That is the information we need. We do not necessarily need to know the confidential information that the pub companies have.
Q249 Mr Ward: They can be separated out?
Simon Clarke: Easily. Nine times out of 10 the agreements that they offer will have a rental level, the terms of the agreement and the discount they are offering on that particular agreement.
Karl Harrison: This was pretty well the only specific recommendation from your predecessors in relation to what the BII had to do, and it did not do it.
Q250 Mr Ward: Do you accept Punch’s argument that if they offered free-of-tie arrangements they would be breaking their purchasing agreements with suppliers?
Karl Harrison: I find that fascinating. The idea that we are supposed to accept that some secret agreements that we cannot see ought to dissuade us from moving towards a market that needs to be in place is frankly laughable. In any event, we are talking here about companies that have largely collapsed, and they are trying to defend a business model that has failed them, their shareholders and their tenants. These are companies that have collapsed by 90% in value. If you look at the share price graph for these two companies, one City analyst described them as looking like animals that were born, had one giant heartbeat and died. We are now asked to believe that a secretive, interconnected series of deals that they have struck between themselves ought to dissuade us from doing the right thing. It sounds nonsensical to me.
Q251 Mr Binley: Mr Harrison, aren’t you running the risk of creating a scenario where many more pubs will go to the wall? At the moment we are in a situation where these pubcos exist. It is recognised that they were heavily overleveraged and it is recognised that that caused one of the problems we are specifically talking about. But aren’t you worried that, by making it that much more difficult to trade by undermining that reputation, you might be creating the situation of loss of pubs at a greater extent than we have at the moment?
Karl Harrison: Surely we are not suggesting that the loss of Punch, Taverns and Enterprise Inns is going to create a problem? Surely we cannot be suggesting that. If we look at the three main players, Admiral Taverns is largely in the hands of Lloyds bank. As we have heard, Ian Dyson, the Chief Executive of Punch Taverns, has conceded that the business is not viable in its current structure, so they are floating the tenanted side off with Roger, probably without a paddle. Enterprise Inns: again we have a chief executive paying himself £1.2 million and losing 90% of his shareholders’ funds, including pensioners and everybody else. They are a failure.
The businesses themselves are independent businesses. I operate two free-of-tie pubs. Free-of-tie pubs will survive better than tied pubs. We are in retailing. The joy of retailing is that you can change things on a daytoday basis, and you can move to different suppliers for different services and you can do that on a daytoday basis. We have a rigid, inflexible system, and if I could just conclude very quickly: the proposal we have made for a free-of-tie option is not something that is going to happen in every case over night. This is something that gives the pubcos the opportunity to establish that the services they claim to provide, the benefits they claim to provide, can be provided. If they do not provide them, one assumes that the tenants will exercise the option. If they do provide what they say, one assumes that they won’t.
Q252 Mr Binley: I understand that, and I have been a severe critic of some of the machinations of pubcos, as you know. I was on the previous Committee. You saw that operate. I think that goes back to the Monopolies Commission. I think serious errors were made, quite frankly, which have undermined the business model to the extent that that has damaged the pub network, a major social resource in our country. Whilst I understand major changes need to be made, I am concerned that undermining them too much could add to the destruction of the pub network. Am I being over concerned?
Karl Harrison: You are being far too concerned; they have undermined themselves far more than you, me or anybody else could possibly do. There is no confidence in these companies. They are seen as substantially failed. Real companies have a growth plan. They maybe have a national or international dimension, an internet strategy, all of these things. These companies do not have any of that. Essentially they are basically intermediaries that effectively take commissions and backhanders for providing access to particular properties that services can be sold into. It is not like a real company with serious retail skills, like Wetherspoons or Mitchells & Butlers.
Q253 Chair: Could I just ask you: if these pub companies went out of business, in the debris that would result as a consequence of that, do you think there would be more pubs surviving than appears to be currently the situation?
Karl Harrison: Yes.
Q254 Chair: And on what do you make that assertion?
Karl Harrison: My own experience.
Q255 Chair: Sorry, but we do not know what your experience is; can you define it?
Karl Harrison: I have been trading in the licensed trade for 25 years, and the free-of-tie sector at the moment is the area of growth. Back to the City again, the City is only interested at the moment in the managed and free-of-tie sector. It is not interested in the tenanted and tied side. Every single company that is listed on the stock exchange that is operating tenanted sides, whether it be Alistair’s company, Simon’s company, Ted’s company, are all reporting poor performance in the tenanted side. However that business model is being undermined, I would say that we are not undermining it and your Committee has not undermined it; your Committee is taking things in the right direction. That is a problem they made: they borrowed too much money on a business model that was wrong. Small business should not be impeded or damaged. Enterprise and innovation should not be impeded by this business model. We are not asking for them to disappear; we are asking for a code that is statutory, enforceable and contains a free-of-tie option with an open-market rent review so we can have a real market, and the benefits will flow from that.
Chair: I can do without the background noise, thank you very much.
Q256 Ian Murray: I have two very brief questions if I may. A market value by the nature of the word "market value" means that the market will determine an open and fair value for that. However, is it not the case that, based on the information we have here in terms of list prices, tenant discounts and purchaser discounts, if we took an average property that was doing something around 10 kegs a week, 520 kegs a year, the market values would then be skewed upwards in terms of a value of a property that went from tied to free, and therefore the value of the rent would go from x to y, and potentially some of that £10,000 a year that would have been paid in barrelage would then be added to the rent? What would be your view on that?
Karl Harrison: I am trying to understand the entirety of the question there. Are you asking whether free-of-tie operators can secure the same prices operating free of tie? Is that what you are saying?
Q257 Ian Murray: No; the free of tie would obviously be able to secure better prices I would guess. The point I am making is that the business model for a pubco-or not necessarily a pubco but any tenanted business-is based on the fact of a rent payable by the tenant plus the differential between a list price, the price the tenant pays and the price the pubco buys the product in at, and could that balance of those two be added to a market value rate?
Karl Harrison: Simon is a chartered surveyor and was involved in the process of establishing the new guidance for the RICS, which takes account of this I think.
Simon Clarke: Yes, you are quite right. The valuation model requires the valuer to consider gross profit. Gross profit would be a direct result of the price you are paying for the beer and the price you are selling the beer. Clearly, if you are buying the beer cheaper, free of tie, you are going to make a better gross profit. The end result would be a higher rent, potentially. A really simple example-and I have used it many times-is my own pub. My rent at the moment is around £50,000. I am doing, say, 400 barrels. The pub company is making around about £200 a barrel profit on that. They are getting another £80,000 in revenue on that. We are looking at round about, in these numbers, £130,000 income. If I went free of tie and were able to go free of tie, I would envisage my rent would go up to maybe £65,000 for example-do not hold me to that, Mr Tuppen-but at the same time I would then be able to go out and get my own discounts, and I would expect I could achieve somewhere to the order of £180- to £200-a-barrel discount. My actual income would be significantly better, and yes my rent would go up somewhat, but in the overall scheme of things the revenue that is going to the pub company would diminish. It is the sharing of the profit.
Q258 Ian Murray: The reason I ask that question is, if we use the word "market", any major high street bank at the moment will not lend, in the main, to a small business who wants to purchase or raise capital for a tenanted property, but will for a free of tie.
Simon Clarke: It highlights it to a degree. The closure rate is something you hear about a lot: pubs physically closing. What you do not see anything of is the churn rate of tenants, and the churn rate within the tied estates is huge. Neil Robertson only a few months ago was quoted in The Morning Advertiser saying that one pub company foresaw that the introduction of BDM training would reduce their churn from 65% in 18 months down to possibly 35%. Now that in itself tells you it is the businesses that are closing, not the pubs, in this instance. So in a bank’s situation, why would you lend money to something that almost certainly is going to fail within an 18month to twoyear period?
Q259 Ian Murray: The point being in a slightly less riskaverse banking sector they are turning away from tenanted small businesses.
Simon Clarke: Yes, absolutely.
Karl Harrison: Can I just touch on that point very quickly about bankers? We are talking to banks about lending to tenanted operators, and also discussing that with Neil Robertson and the BII and trying to get some of that to happen.
Q260 Chair: Can you be brief?
Karl Harrison: I will be very, very brief. The banks essentially look at their tie model; the pubco is removing from that particular tenant an excessive amount of money, so they are not going to be able to service the debts that they would be taking on. It is a big issue. So, if the tenants can secure the right price to buy the pub off the pubco such that they can go free of tie, then yes, you are absolutely right-the bank will look to lend to them. That is a growing market, particularly as companies like Punch Taverns are looking to divest themselves of 2,500 pubs.
Q261 Mr Binley: I was a little confused by your argument. You said that your rent would go up, if you are free of tie, from £50,000 to £65,000. My guess is your property is worth about £1 million, perhaps a bit over, and I would have thought that any property company would have wanted a 10% return on that property, making that rent £100,000. So how do you get £65,000?
Simon Clarke: The 65,000 is purely based on the RICS guidance-and this goes to the heart of Mr Zahawi’s-
Q262 Mr Binley: I am coming to that later
Simon Clarke: It requires the valuer to look at the likely fair maintainable trade for a reasonably efficient operator-not necessarily me; I may be good or bad. With a reasonably efficient operator’s turnover, you then apply a gross profit that is relatively easily calculated, knowing how much the price of the beer is and how much you can sell it for. You take costs away from that, hopefully with reference to ALMR’s benchmarking, and you end up with a net profit before rent that is then divided between the parties. The £65,000 would be a simple split of the net profit before rent, which I would suggest, using that system, would be something to the order of about £130,000. If you were going to buy that pub, I would suggest that you would not buy that pub for over £1 million. It would be a situation where you would not be getting 10% from it. If you were to knock the pub down and rebuild it into flats, which is quite often the case, then, yes, you would. There is a pub right opposite me that has just been sold for £1.6 million for redevelopment.
Karl Harrison: Can I simplify it? The capital value of the building is determined by the rent, not the other way round. So, it is what rent you can achieve and then the yield you would apply will arrive at the capital value, and it will probably be about 7.5% as a yield.
Mr Binley: I am happy to have that answer.
Q263 Mr Ward: I would just invite Mr Benner to make a contribution, because you describe the tied pub sales as being economically unviable businesses and would you just like to contribute?
Mike Benner: Well, we have heard quite a lot about this already from Mr Harrison; it is the £6 billion question, isn’t it? I would say that the industry is already at crisis point and we should not be too concerned about unintended consequences from the pubcos disappearing. There are 25 pubs closing every week. Thousands of pubs have closed in the last few years already and we are already seeing a situation where lots of pubs are coming on the market from the pubcos-2,500 or so from Punch Taverns alone, and an accelerated rate of sales from Enterprise Inns. But the key issue of course is at that pub level, and we are still seeing a situation where rents are too high, the wholesale beer prices are too high, the tenants are not making enough money and they are unable to invest in their business. Then they enter this spiral of decline where consumers lose out because the amenity is not there and the pub eventually closes.
In the ALMR’s research it shows that the capex investment in tied pubs is half what it is in freeoftie pubs, which demonstrates the problem. Next week some independent research is coming out that will show that the financial weakness of the tiedpub model is leading to nearly half of licensees still earning less than £15,000 and often that is for a couple. Now, that does not look like a sustainable business model to me, and only by opening up the market and allowing it to operate freely is that going to change.
Q264 Chair: You have just mentioned research-who is releasing this?
Mike Benner: It is the Institute for Public Policy Research.
Q265 Mr Ward: You mentioned a spiral of decline: can we just link that with another question, which is to do with the minimum purchasing obligations, which, as I understand it, is where there is an increase in the price as sales fall. Is that something that is having an impact?
Simon Clarke: Minimum purchase obligations are actually a situation where the tenant is required to purchase a certain amount of beer from their tied supplier on an annual basis. These practically died out voluntarily back in the days when undertakings were given to the European Competition Commission to seek to get through block exemption of vertical agreements. The problem is that they died out then and they have just recently started to become resurrected, and I would suggest that a great deal of the time offered to pubcos and brewers to offer the reforms that the Committee has asked for has been spent seeking ways to circumvent those recommendations. Indeed under the RICS guidance the minimum purchase obligation would be one and it seems to me that that, combined with inflationary increases, which you mentioned earlier, would be a bit of a recipe for disaster in a declining market where the beer volume sales are in decline. It does not portray, to me certainly, that this is a situation where a business partner is offering to share the pain, when they are putting a tenant in the situation where their rent is going to be going up annually and they are going to be penalised if they do not buy beer that potentially they cannot sell.
Q266 Mr Binley: I specifically want to get confirmation or otherwise from Kate, who is Strategic Affairs Director of ALMR, Secretary of IPC. You will know that we have had evidence to the effect that Enterprise Inns state on their example an operating cost of 35%. You will know that it is said they carried out their own survey, which showed costs of between 42% and 51%, and I maintained that that is totally misleading ingoing new tenants who know little about the business to the point of being more than dishonest, and I am choosing my words very carefully. Bearing in mind that your own survey of operating costs was north of 40% by some considerable margin, can you confirm what I have stated just now? Do you know of tenants who have found themselves in that specific situation-being given a cost base of 35% when actually the costs were closer to 50% and certainly over 40%.
Kate Nicholls: Yes, we have cases raised with us on a regular basis. ALMR runs a legal helpline through its offices. We have cases raised with us where they have rent reviews coming in with costs well below that. I think in only 13% of cases have you got an accurate reflection of operating costs in the cases that we have had sent to ALMR. Enterprise Inns is one of the few pub companies who have met us to discuss the benchmarking data that we provide. Last summer I met Rob May to discuss it and he brought with him and shared with me and left with me an extract from Milestone’s openbook accounting from their own tenants, which has the details of the operating costs, to see if we could compare figures to see whether there was any way in which we could collaborate. That data does show operating costs on average for their lowest performing estate of between 42% and 51% of turnover.
Q267 Mr Binley: So the information that was on their last interim accounts showing operating costs of 35% in their example is, to say the least, misleading, and, to say the worst, immensely harmful to the state of the trade?
Kate Nicholls: In five years of doing a benchmarking survey and gathering information from lessees, I have not seen an operating cost as low as that.
Q268 Mr Binley: I am grateful. One final question: the repudiation of that by Mr Tuppen of Enterprise Inns was not as you would understand it? The situation was that his repudiation was incorrect?
Kate Nicholls: I am sure that the information given was given in good faith; I am sure that lots of tenants take it at face value and take it on good faith and make commercial decisions based on that assumption, because it was a public document presented to the City.
Q269 Mr Binley: But it was in your experience, from the information you have had from tenants, incorrect?
Kate Nicholls: Yes.
Mr Binley: I am grateful to you.
Q270 Chair: I would just pursue one angle to this, because we were assured that all this, in effect, was validated by RICSqualified valuers. What is the problem? Do you know?
Kate Nicholls: I do not think the problem is with the existence or otherwise of a national database. We have the national database that we need on the key rental variable. The issue is to do with the acceptance of it and its use and practical application. At the moment the problem is the codes of practice are badly drafted in this area; they do not meet the clear commitment that was given to your predecessor committee to completely abide. So, surveyors and BDMs are able to have regard to the RICS guidance. They do not have to explain why they deviated from it. They do not have to demonstrate that they have read it or used it; they can still come up with an idea and say, "This is what we assume the FMT to be; this is what we assume the operating cost to be." They are not obliged to provide any evidence. The RICS guidance and the codes say there should be reference to the ALMR benchmarking survey or other industry benchmark, but if you want to deviate from it there is no obligation to explain why you have deviated.
Q271 Chair: I am an innocent in this respect. It would seem to me that if you were an RICS-qualified valuer and you had guidance, then any valuation you did would have to be demonstrably in accordance with that guidance? Is this not happening?
Kate Nicholls: If it was my professional reputation on the line, I would want to be sure that I was following guidance to the letter and to the spirit.
Simon Clarke: Could I just add to that? This is one of the issues that I obviously have with Enterprise Inns over the issue of benchmarking. I am told by David Morgan, also a chartered surveyor, that he has put a submission in to you. I do not know the content of that, but I believe that contains many examples where apparently benchmarking has been ignored. I think one of the reasons for the difficulty we have is-and it was explained by Mr Rusholme last week-they are only in a position to enforce it against chartered surveyors, and today is the first day I have actually heard that they had been signed off by chartered surveyors at Enterprise Inns. We have complaints in at the moment with the BII; as Mr Tuppen mentioned earlier I have one in with them at the moment, and I know Mr Morgan does and obviously last week you heard of other examples from Mr Mallen. Now that I know that an RICS surveyor has signed those off I am in a position now to take that to another level with the RICS, which I intend to do.
Q272 Chair: Would you keep us in touch with that particular action?
Simon Clarke: Absolutely.
Chair: I think it is fair to say that arising out of this dialogue Enterprise Inns may give us further information.
Q273 Mr Binley: We heard last week from RICS that there had been no progress on the national register of rents or on the industry costs register. Can I ask you, Kate, as a representative of ALMR, can you update us on the ALMR benchmarking survey and what the pub companies and BBPA’s reaction has been to it? Can I ask: have pub companies worked with you on this?
Kate Nicholls: Okay. Can I take the opportunity to correct some of the misinformation that was given in the previous session about the ALMR benchmarking survey?
Q274 Mr Binley: I think we would be delighted.
Q275 Chair: That is why you are here.
Kate Nicholls: It has been running for five years. We started doing a preliminary analysis in 2006 to set it up, so we just published earlier this week the fifth round of data, so we have quite robust data that goes back. We can provide historical trends and we can provide detailed analysis. Punch does not contribute information to the database. I would be very pleased for them to do so either as Spirit or as the Punch pub company if they have openbook accounting that their tenants are willing to share with us.
Thirdly, I keep saying this-I think I have said it for the past two years-it is not a database with managed operators in it. If it had Mitchells & Butlers and Spirit providing the data I could just about understand why there might be reservations about comparables. The data that is provided is from lessees: individual and multiple. It comes across the whole range of the industry but at its heart are operators of a mixed series of estates: we have freehold, we have tenancy, leasehold, commercial leases to allow us to compare commercial leases with industry leases. I am not quite sure what the problem is in having managed operators in the database, because we could control it and have it separated out in any case, and it does provide a useful comparable. That is the purpose of a benchmarking database: to provide comparable data so you can take your specific case and look at it and say, "Is it fair in the marketplace? Am I just worse at controlling my costs?"
The data is split by size of operator, so you can identify individuals, micro businesses, small businesses, all the way up, and it is split by trading style, so you can look at your cost structure whether you are a wetled community local or a foodled operator and you can provide some benchmarks across there. It is also a sort of general state of the nation survey, so it provides us with some very useful information and trends on the way the market is going, the type of pub operators we have and wet sales versus food in the industry, so you can plot all of that back. So that, in an nutshell, is the ALMR.
The fifth survey that we have done is the most robust and comprehensive to date and we have the biggest participation of individual lessees to date.
Q276 Chair: Just very briefly-you are waxing very eloquent.
Kate Nicholls: Sorry. In terms of relationship with the pubcos and the BBPA, I offer to meet them twice a year. First, just when the survey goes out, to ask people and invite them and say, "Can I come and talk to you about how you can participate in the survey?" Second, when it is published: "Can I please explain to you the nature of the results?" I think the fact that you had all of those misunderstandings about the nature of the survey presented to you is testament to the fact that those discussions have not happened. I can go back through my files and have the details of when I have offered to meet and there has been no meeting.
Chair: Okay. We will not go there for the moment.
Q277 Mr Binley: I will try to be brief but this is very important, because this predecessor committee said that this register should happen. The BBPA knew of your survey, because it has been going for five years; they knew they could get important information relatively quickly and yet they did not approach you.
Kate Nicholls: No, the approaches have all been one way. I have offered on several occasions to explain to them the results.
Q278 Mr Binley: Does that suggest to you there is a deliberate unwillingness not to abide by the instructions of our predecessor committee?
Kate Nicholls: Yes.
Mr Binley: Thank you.
Chair: I would appreciate if there were not prompting from the audience.
Q279 Mr Binley: Should I put that again without prompting?
Kate Nicholls: You would have had the same answer prompted or unprompted.
Mr Binley: I am most grateful.
Kate Nicholls: I did not hear any prompting.
Q280 Dan Jarvis: Just specifically on the area of mediation and dispute resolution, can I just ask you to comment on the relationship between lessees and the pub companies? I think I know what your answer to this is going to be, but are there still instances of an overmuscular approach as was alluded to by the BII a week ago?
Simon Clarke: My definition of that, and I think I speak probably for most of the members of IPC-probably all; I am not sure-is that overmuscular means intimidation, threatening and bullying, which we are seeing on a fairly wholesale basis. The BII has a difficult role to fulfil in that they have got the existing code that is hideously inadequate in our view, and therefore the primary issues that started this inquiry, tenant profitability and abuse of tenants, are not touched in those codes. As a result the BII is, to its credit, referring anybody who comes to them with those complaints to members of IPC-not just Fair Pint-I know the GOMV, Justice for Licensees and the ALMR are all having the same complaints and problems. I think the fact that mediation has been created is very indicative of the fact that the code has a great deal of flaws, and if the code was adequate enough and enforced properly there probably would not be as much need for mediation. The very fact it has been introduced so quickly after the code has been published is, I think, indicative of the absence of conditions within the code.
Q281 Dan Jarvis: Can I follow up by asking you about that mediation: is it enough, in your view, in its current form, and if it is not, what else is needed?
Simon Clarke: If I can just let Karl go on that, because he is probably more experienced in it than I.
Karl Harrison: I have been involved alongside Simon in one of those mediations. As I said at the beginning, I was a member and am now a member of the BIIBAS accreditation committee and, as we said earlier, we have a weak code accredited on a very, very limited basis. So, we are now going beyond enforcing the code because we are having to look at mediation for things that are surrounding the code-some within the code; partially one or the other-and we still have the BII, in good faith, trying to deal with that. Ultimately it is not independent; it claims to be impartial, but it needs to demonstrate that independence.
The mediation I saw was organised by the BII. There was some intention by the pub company involved to arrive at a conclusion. Part of the conclusion was arrived at and immediately following that there was more overmuscular action with the tenant in relation to what I considered, having seen all the details, to be a blatantly false allegation of buying out in breach of contract. So it needs, as we have said and as Mike has indicated, firm enforcement by a truly independent policeman. The BII cannot demonstrate that independence in its current form. It may be able to do so in a different form-I do not know-but it cannot do it at the moment. There is still a connection there that perhaps means that it cannot enforce and it certainly does not have the teeth to do so.
So it is nice to sit around a table and chat about a solution, but ultimately if one party on one side of the table is a small tenant spending their own money to be there-perhaps spending their own money on surveying support or legal support-against a company with many millions at its disposal then there is an imbalance there, and that balance needs to be rectified and put on a more even footing by a proper code. What we have recommended, and what the Committee has done and your predecessors to date, is the right way to go.
Q282 Chair: Earlier I put the question to the previous panel: is one possible answer to this basically what I would call a pub code adjudicator? What is the feeling of the panel?
Simon Clarke: Yes.
Kate Nicholls: If you have a statutory code, if the code is put on a statutory footing, it becomes, without question and without any shadow of doubt, legally enforceable, finally and fully in the courts. The other alternative is to have an ombudsman. I have worked on a self-regulatory scheme and sat on the board of a self-regulatory scheme that does have access to an ombudsman above and beyond the tier of regulation that the BII provides, almost an upper appeal. The key thing is, if you put it on a statutory footing and you put in place a stronger code that contains elements that they must deliver, there is a real commercial deterrent to police your own behaviour and to root out bad practice throughout your company wherever it exists and to root out any abuses. The ultimate threat is that your lessee will walk away and turn to a freeoftie agreement. You will do everything in your power, therefore, to try to remedy your behaviour, your relationship with that lessee, and make sure that both sides get a fair share of the economic benefit. That is all we are asking for; we are not asking for one person to get more than the other, just a fair share.
Q283 Chair: So if I understand you right, your preference is for a legally binding code.
Kate Nicholls: Yes.
Q284 Mr Binley: Not with an adjudicator?
Kate Nicholls: You could have both
Q285 Mr Binley: That is what I was thinking.
Kate Nicholls: It does not have to be either or.
Q286 Chair: But equally you could have a voluntary code with an adjudicator with the ability to enforce?
Kate Nicholls: If you had the voluntary code that we have got at the moment and you put in an adjudicator and enforcement powers, please can I leave you in no doubt: that would not change a thing. The problem is the code is vague, weak, badly drafted and it does not deal with the key commercial elements.
Q287 Chair: Right. Could I slightly amend that? With an amended, strengthened code that was voluntary and an adjudicator, do you think that would work?
Kate Nicholls: Given the length of time that we have all spent discussing this and the fact that we are no further forward than we were in 2004, the only answer is a statutory code. That is the only thing that will change behaviour and deliver meaningful reform.
Q288 Chair: The downside of a statutory code is, of course, the enforcement of it and the expense of enforcement, and that can apply either way. Could not that act as a disincentive in itself for people to want, in effect, to challenge the pub companies?
Kate Nicholls: I do not think it will because, as I say, if you have got a very clear statutory code that everybody is aware of, you have self-policing. It becomes a light-touch regulatory reform and it opens up the relationship to the market forces that are at play and delivers fairness in that way. So I do not see why it should be unduly burdensome.
Q289 Chair: What I am saying is that when you have a statutory code, even though it may be quite clear-and I accept your point that pub companies may well be much more circumspect of any potential breach of that code-in the event of a dispute the tenant is at a much greater financial disadvantage in prosecuting that through courts of law than the pub companies.
Karl Harrison: The legal process includes provisions for mediation in any event, as you know, so there is always an opportunity for parties to mediate and, in fact, as you know, the courts encourage parties to settle and to mediate in advance. That is always an option, and people can continue to discuss. Whether or not that has to be with a formal person who is going to do that, in the form of arbitration or adjudication as you are suggesting, certainly the statutory way forward is the way forward.
Kate Nicholls: I take your point that it is a long process and you need some deep pockets to take things to court, but the other advantage is that, if you do, at the end of it you have a final decision that is robust, binding on all the parties and that everybody can use going forward as precedent. So you only would have to take a small number of test cases in order to get some clarity on some of these key issues, if there are any outstanding key issues.
Q290 Chair: Would you back anybody to do so?
Kate Nicholls: Personally?
Q291 Chair: Your organisations.
Kate Nicholls: If they had a strong case I would do whatever I could to assist in that process. We have done that in the past, where we have taken cases against councils collectively as an industry. We did when I worked with a small group of lessees in Westminster. We did the same thing when we were challenging decisions of the council. That was on licensing and planning, but the point remains that where there is a will, collectively, to get a ruling, to get decision-what small businesses want more than anything else is stability and clarity-if you have got a ruling from the courts you have got that. You have a stable basis on which to build your business, grow forward, invest and deliver a healthy return.
Karl Harrison: The position at the moment is that some of the pub companies-and I am going to single out Enterprise Inns here-are particularly legally heavy handed, so the legal cost issue is there now. I have just been assisting a tenant of Enterprise Inns, trying to resolve a position where, in the final analysis the claim-and this is in the High Court as well-amounted to under £4,000 and Enterprise Inn’s cost claim was £54,000 against the tenant. This is very common; why have a discussion when a High Court Injunction will do? That is one of the problems. So the idea that keeping on a self-regulatory, voluntary basis is of less cost to the tenant I think is probably wrong.
Q292 Simon Kirby: Perhaps I might play devil’s advocate: is there not an argument that the tie actually helps lessees, insofar as that it puts a traderelated variable to what is after all a total rent. Does it not help people in times of difficulty when trade drops, and therefore the overall rent drops?
Karl Harrison: Isn’t that assuming that the dry rent is less than what the open-market rent would be in any event, which in our experience it very often, and probably usually, is not?
Kate Nicholls: Can I just come back on that? That may well be correct, and I am sure that in certain cases the tie is extremely beneficial and helps an individual lessee. That is why nobody is saying abolish it; nobody is saying, "Force these companies to make people free of tie." If the choice is available and the option is there, if they do deliver those benefits nobody will go free of tie.
Mike Benner: Can I add to that as well? In the last session we talked about whether the tied tenant should be no worse off than free-of- tie tenants. Well, surely, if the pubco tie is so great, they should be better off, so that principle should be welcomed. I think that this is a matter of the industry earning the tie, and the best way of them being able to do that is through a genuine freeoftie option. Let the licensees, the entrepreneurs, choose what they want.
Q293 Mr Binley: Just a quick one: there is one area where the tie has relevance and that is in terms of a person being able to start their own business at less cost than might otherwise have been the case. Given that there was a proper relationship between the pub co and the tenant, that is an advantage, isn’t it, but it is no advantage if new, ingoing tenants are being totally misled as to the reality of the situation. Is that the case or would you correct me in any sense?
Kate Nicholls: In a nutshell. The real genuine point of low-cost entry is a brewery tenancy, which is only three years. You are limited as to the risk that you are exposing yourself to. The problem is where you get people signing up to very longterm agreements that are fully repairing and insuring, and therefore expose themselves to a greater degree of risk. It is the balance between risk and reward that is at the heart of this.
Q294 Chair: Thanks very much. Just one question I think that I would like to finish on: going back to the issue of benchmarking, one argument given to us last week for why benchmarking survey had not been expanded was cost. How much does your benchmarking survey cost the ALMR to run?
Kate Nicholls: It costs us £5,000 a year to run.
Q295 Chair: Interesting. Thank you.
Q296 Simon Kirby: On the benchmarking, does it benchmark likely income as well as likely costs?
Kate Nicholls: No; it looks exclusively at costs and it asks for information about costs as a percentage of turnover. We deliberately did it that way to reduce any concerns about commercial confidentiality, about sensitivities. We also had a number of lessees who were very fearful about giving us their data if they were giving us absolute figures of turnover-that it might be used against them. So we put in place a number of elements to reassure those people. So, we ask about their turnover mix, "What proportion of your turnover is wet, dry, accommodation, other, gaming?" but we do not ask for absolute trading information; we just ask for costs.
Q297 Simon Kirby: Why I ask the question is that, from experience but also probably logically, the most difficult thing to assess when you have a business plan is the turnover, because you can have an idea of your likely staffing costs and the rent and the discount you might be able to obtain, but turnover is very difficult unless you are really experienced and you have run pubs or you have run a number of sites before. It is a very difficult thing to say, "Actually, I am not going to achieve that turnover," and that is the difficulty I would imagine people often are faced with.
Kate Nicholls: It is, but it is not what they come to us about. They come to us about the operating costs first and foremost because they know, and the evidence that was presented last week showed, what a big difference it can have on profitability of the business. If you get it wrong by seven percentage points, it is the difference between a £35,000 income and an £11,000 income, and then it does not really matter what your turnover is.
The other point is that, yes, you can ask about FMT, but that does not deal with the full turnover of the business and it depends on from where you are deriving most of your income. The reason we express it as a percentage of turnover is that it helps to make things more understandable. You heard in the last session about tied rents going down, but as a percentage of turnover they are not going down, and it is as a percentage of turnover that is the most relevant. That puts it in context rather than your absolute figure about what your electricity bill is.
Q298 Chair: Right. That concludes our formal questions. Obviously we have had two different panels and I think we might describe it as robust and totally divergent opinions over a whole range of issues. It is the job of the Committee to assess the validity of the points that have been made. I am conscious of the fact that the pub companies will have heard comments made about them at this meeting, and I would repeat what I said earlier: the Committee will take further evidence until the end of the month, and I would guess the pub companies may well want to make some observations about the comments that have been made about them at these meetings. I do make it quite clear that there is an invitation for them to do so, because they will have not had a chance to respond to the individual points that have been made here publicly.
On that note, can I thank you? And again, if you wish to submit any further evidence-I have a feeling that you have not had a chance to cover one or two points that you would like to-please feel free to do so. But can I thank you for coming and helping us with our deliberations?